Ramesh wanted to renew his FD and visited his bank. At the bank, he was sold a policy with promises of superior features than fixed deposit. Ramesh was sold with features as below:

  • You will have a better return than fixed deposit
  • Return will be tax-free whereas FD returns are taxable
  • You will also have risk cover

However, Ramesh was not told the following:

  • Returns are not guaranteed and would depend on the market or on the performance of the Insurance company
  • Returns can be tax-free only if the life cover is more than 10 time of premium paid. But the option of 10 times cover would impact the returns.
  • Mostly all single premium policy offer 1.25 times of premium paid. Thus proceeds also become taxable
  • Capital in fixed deposit is liquid and can be withdrawn.
  • Minimum tenure of single premium is 10 year. Early surrender would have a cost.

Why Ramesh was sold an Insurance? The obvious answer lies in the commission to the seller. If Ramesh is unlucky then a regular premium policy is sold as a single premium. This is done because the regular premium policy has higher commission than the commission on a single premium.

In such case, a reference is given to the IRDA ruling that first-year premium is refunded after 5 years. However, the client is not told about the charges and a minimal return promised. When the client does not pay the second year premium then the money is taken in a surrendered fund with a minimal return of 4 %.

It is better to opt for Mutual Fund in place of Fixed Deposit