Max Life Insurance has conducted “India’s Retirement Index” study based on an extensive urban survey ( 1816 respondents) . Here is the link.
I am just taking an important finding from the study. To a question asked to the respondent ” Hpw long will the savings last into retirement ? ” .
– Only 18 % say Entire retired life
– 27 % say ” 10 years and above”
– 30 % – 5 to 10 years
– 26 % – 5 years
In other words, majority ( 56%) of the respondents fear that they will run out of savings within 10 years of retirement. Given the rising life expectancy, for most the retirement life is expected to be longer than 10 years. For some it may be a lot longer.
Now, why have they landed up in such a situation. It is a combination of all of these factors
1. Inadequate savings during their working/ earning life
2 Started saving late for retirement and so lost the benefit of compounding
3. Choosing wrong investment avenues
The first two are clearly an individual’s responsibility. Even the third one is an individual’s choice but I will try to qualify that by elaborating how an individual gets deceived by the system unwittingly.
As per the same study, 67% of the respondents feel that “Life Insurance policies” are the best investment product for retirement.
LIC is by far the market leader in the Life Insurance space and it is a rare Indian who does not have an LIC policy.
I have seen how young employees and others get sucked into buying LIC policies. LIC policy is often bought by a push from a colleague whose relative is an agent or some relative or a friendly uncle who is a parent’s friend. The policies are chosen based on how much savings are possible monthly or annually. Often the tax benefit is shown as the immediate carrot.
Once the policy gets in motion, the premium is paid periodically. The policyholder in the meanwhile has lot of demands on his/her monthly income. He/she is just happy paying the premia with some hope that a long term nest egg is getting created. At the time of buying the policy, the sum assured or the amounts to be received on maturity or periodic moneybacks look attractive. But when they are received, they no longer seem big or even adequate for the financial goal.
How Life Insurance policies or LIC have let us down ? Prima facie, there is nothing wrong with LIC. It provides decent customer service. It honours the claims. It has a wide network of offices through which its products are sold and policy holders are serviced. Its online services are good and comparable with most private insurance companies.
Where, LIC has failed big is in giving decent returns to its policy holders. Most schemes have yields only between 4-6 % per annum. In an inflationary economy like India’s, with average inflation being higher than 6 % p.a per annum, the real return on the savings made through LIC has been negative.
LIC is either a bad investor or it does not share the returns with its policy holders.
LIC is one of the biggest investors in the Indian stock markets. The rolling returns for 20 years of BSE SENSEX in the last 5 years is between 11%-12 %. By that yardstick, LIC’s investments in equity should have yielded 11-12 % p.a or higher. If it is generating lower return on its equity portfolio, it means that it is using considerations other than policyholder’s interest in its decision making. Its owner the formidable Govt of India directs LIC to buy PSU stocks or sick banks like IDBI Bank to bail the government out. LIC is also called to intervene when there is a big correction in the market.
Periodically, LIC management announces that they have booked big profits on their equity investments. But there is no transparency in their accounts. If they are making good returns, they are clearly not sharing it with the policy holders. Maybe, they are just giving it to their owner, the Government of India. LIC is a pet of the Govt of India.
Whichever be the party in power, the importance of LIC for the government is next only to the RBI… When LIC goes public, I wonder how they would increase transparency about their business and accounts.
Where the policyholders have gone wrong ?
By choosing LIC policies for retirement. They believed that LIC policies were long term savings cum insurance cum tax saving instruments. The money being saved will take care of their retirement By giving inadequate returns, LIC has systematically derailed the retirement plans of lakhs of Indians. You cannot even blame the LIC because they never promised high returns.
- Posted by G.Mohan on his Facebook Page on 17th December