What are 100-year term plans?

Whole life plans are being mis-sold as term plans because insurers and agents are unable to earn margins

Upfront fees abolished. Total expense ratios reduced. Commissions slashed. These kinds of headlines have become common nowadays with mutual funds. And the National Pension Scheme (NPS) has always been a low-cost investment product. Even in other financial products such as retail loans, though slowly, the movement is towards more transparency. Even health insurance, which is one of the leading causes of disputes pending in the consumer courts, seems to look at reducing the dispute areas, especially in the definition of pre-existing disease. The only financial product that has defiantly bucked this trend towards more openness and lower costs is life insurance.  

There are many studies and internal committees that have pointed out how life insurance policies are mis-sold by  banks and other life insurance distributors. Despite this, a large number of endowment, money back policies continue to be sold. The good news: The growth rate of such sales have come down due to increasing financial awareness among people, and the rise in the sales of term insurance – a pure insurance product. Tragically, now some companies/agents are pushing whole life plans by calling them term plans. To understand the difference, let’s understand  the two products. 

The primary function of a life Insurance plan is to pay out a lump sum to the insured person’s family in the event of his death. This amount helps replace the income that the insured would earn had he been alive. An insurance policy that allows this income to be replaced is called a term insurance policy. The trouble is these policies don’t leave fat margins on the table for either insurers or agents.

In comparison, a whole life plan requires payment of premium throughout one’s lifetime and the sum assured is paid on death to the family members. In both term plans and whole life plans, the insured never gets any money. It is only the nominee who gets the money. Whole life plans were devised in the USA to beat the high estate duties prevalent there, but they have no function in India where there are no estate duties. The new marketing gimmick is 100-year term plans, which are whole life plans. It supposedly ticks all the right boxes. First, it carries the coveted ‘term plan’ tag, and it is virtually certain that there will be a payout after your death. 

The issue is that the premium is much higher than what it would be if you just covered yourself till the earning age (let us say 60 years). So a young person at the age of 30 years will pay almost double the premium for a term plan till 100 years than what he would have paid had he been covered till 60 years. The additional premium earns you a very poor return should you continue to live till 80-85 years. 

The regulator should step in and ensure that such plans are not allowed to misuse the term ‘term plans”. But until the regulator takes action, it is incumbent upon us not to be taken in by such marketing glitz and mis-selling. There is no such thing as a free lunch.

The writer is a Sebi-registered investment advisor