LIC Direct, an alternate distribution route from Life Insurance Corporation of India (LIC), is sending promotional emails with a pitch about India joining the club of developed countries in a few years. As a developed country, interest rates in India after 20 years can be 2% to 4%, it claims. The offer is to buy Jeevan Akshay VI, which has current annuity rates of 7% to 8%. If the interest rates were really going to fall to such lows, LIC should not be taking the risk of locking the customer at high annuity rates of 7% to 8%. Has Insurance Regulatory and Development Authority (IRDA) approved the LIC advertisement?
LICs sales pitch is mis-selling through false advertisement by fear-mongering about interest rates. The email talks about prevalent interest rates in some developed countries to be 2% to 4%. While it may be true at this time, it does not have to be always true. In the U.S, Fixed Deposits (FD) interest rate for 10 out of last 20 years has given 5% to little over 7% p.a. returns. So, LIC is really making false and misleading statements. That apart, future interest rates in India will depend on lot of factors including inflationary expectations, taxes, risks of investment, consumption, liquidity and so on. Asserting that India is expected to join the club of developed countries in a few years is preposterous.
Annuity products give customer fixed returns every year for a lifetime. E.g. A person of age 50 years making a one-time payment of Rs1 lakh to buy Jeevan Akshay VI product will get 7% p.a., which is Rs7,000 per year for lifetime. The insurance company takes the risk of interest rate movements and longevity of the annuitant. Increase in the longevity of Indians and market interest rate’s downward movement means higher risk for an insurance company. If the market interest rates were to drop to 2% to 4%, the annuitant getting 7% to 8% will continue to do so till his lifetime. In that case, LIC should not be taking the risk of offering 7% to 8% annuity as it will make huge losses when market interest rate is only 2% to 4%.
Jeevan Akshay VI, an annuity product, offers 6.89% to 7.48% lifetime lock-in rate for a customer of age 30 to 80 years respectively. Online purchase of the product gives a rebate of 1% by way of increase in the annuity rate. Annuity is taxable in India. The specified rates are for option of purchase price is returned to the beneficiary after the death of the annuitant.
