Retirement Planning for Senior Citizens| RetyrSmart



5 ways senior citizens can avoid being mis-sold an insurance policy
economictimes.indiatimes.com

To avoid being scammed out of their hard-earned money, here are insurance products senior citizens should steer clear of at all cost.

1. Don't buy 'guaranteed return' policies

In the first place, senior citizens should not buy life insurance since they don't need it. Life cover ensures that the family doesn't suffer financially if one dies, and is needed only till one is working, to replace the income. "As 90% of Indians don't work after retiring, they don't need it," says Financial Adviser Pankaaj Maalde.

However, most unsuspecting seniors are sold 'guaranteed return' plans, or traditional plans - a mix of insurance and investment - as these offer a maturity corpus at the end of the term. It doesn't work for them because not only is the term long, over 10 years, but the returns are extremely low, around 5%. The premium, on the other hand, is very high. By the time they realise they have been sold the wrong product, it's too late. "There is usually no surrender value if the policy is returned within three years and, even after this, it is extremely low," says Amar Pandit, CFA and Founder of HappynessFactory.in.

2. If you have been mis-sold insurance...

If you realise you have been a victim of misselling during the free-look period, return the plan. If however, this period is over, in case of traditional plans, you can either make it a paid-up policy or surrender it. For the former, you should have paid the premium for at least three years for policies with a term of more than 10 years and, for a lower term, the premium should have been paid for two years.

The cover will be reduced in line with the premium paid, while the maturity proceeds, till the time the premium is paid, along with bonus, will be given at the end of the term. If it is closed before three years, you will lose all the money. After three years, surrender charges will be applicable. For Ulips, the premium can be stopped before fi ve years and the policy lapses. The investment is shifted to a Discontinuance Policy Fund, where it earns 3.5-4%, and can be claimed after five years.

3. Don't buy insurance products at the bank

Senior citizens should avoid making investment decisions at banks, where insurance products are sold due to the bancassurance tie-ups with insurance companies. "This is where most mis-selling of insurance products takes place," says Maalde.

Senior citizens are soft targets because they are typically flush with post-retirement funds, are looking to make investments, and are ill-informed about investing avenues. Nothing is given in writing by the bank official whom the retiree trusts, signatures are taken on policy documents, and the insurance product is sold as an investment promising high returns. Often, the policy document is sent after the free-look period and the bank refuses to take responsibility since the signatures are on the document and there is no proof of mis-selling

4. Don't buy single premium plans

Ulips and traditional plans have three modes of premium payment - regular, limited period and single. The last involves making a single payment for the entire term and is expectedly a large sum. The single premium Ulips are usually mis-sold as fixed deposits with higher returns and tax advantage.

For these, insurers keep the sum assured at 1.25 times the single premium for those below 45 years and 1.1 times for those above 45 years. What this means is that for senior citizens, this invariably breaches the requirement of the premium being 10% of the sum assured for the maturity proceeds to be tax-free. Hence, the single premium Ulip plans should certainly be avoided.

5. Don't buy Ulips

Ulips are also traditional life plans, but instead of safe debt instruments, these invest in mutual funds and, hence, their returns are much higher. "However, these too have high costs that eat into the investment. Besides, they have a lock-in period of five years before which they cannot be exited," says Pandit.

Since seniors are usually looking for regular income after retirement, it does not suit them even though the maturity proceeds are tax-free and the investment is eligible for Section 80C deduction. "Importantly, what most seniors don't realise is that the premium should be 10% of the sum assured to qualify for tax benefi ts," says Maalde. For policies bought after 1 April 2012, if it is more than 10%, only a maximum of 10% is eligible for deduction under Section 80C, and the maturity proceeds are added to income and taxed at applicable rates.........