You are 34 years old and have been diagnosed with cancer. Your doctor tells you grimly that you have 7 months to live. You don’t have any next of kin – but you need cash now. Suppose you have bought a policy from one of the life insurance companies (classic endowment) and wish to surrender it, what do you do?
Go to the life insurance company and say “I wish to surrender this plan please”. They then follow a very complicated path and tell you how much they will pay you. This is called surrender value.
Beware, this is a black box and if you are not an actuary, do not even attempt to understand it. To make things simple let us accept that this could be a ridiculously low figure. If you have paid Rs 100,000 as a premium for say 7 years (it is a 27-year plan) you think you should get back at least Rs 6 lakh, right?
Wrong, completely wrong. They are perfectly capable of telling you ‘Sorry we will pay you only Rs 4.3 lakh’. Sometimes even lower. No questions can be asked, because the company has a black box. If you are not happy with the price you should be able to go and sell it in the market, right?
No. You cannot sell, it can only be given back to the issuer (welcome to the protected world of life insurance). In the UK and USA you could just walk to a life broker and sell the policy. I, in my personal capacity, may be willing to pay Rs 5.36 lakh – and keep the policy. I may have to pay the premium for the next 5 years, and if this person kicks the bucket..well I make money quickly.
India had no competition in Life Insurance, so the great Indian insurance company made sure that no viaticals market was created.
The Viaticals
This is a contract where ‘the seller’ assigns his/her life insurance beneficiary rights to an investor (the buyer) for a lump sum payment today. Mostly the seller is terminally ill and the buyer hopes to get a good return (yes, sounds morbid) as the policy holder dies.
This is a clear case of reverse life insurance. This can be used to provide some cash for the person who has nobody who needs that money after he dies, but has a big need for cash now. After all, what’s the point of having your life insurance go to someone who does not matter? You might as well use it yourself.
I can also understand the ‘ethical’ question - discussion about regulating controversial markets and the effect of such regulations. The US has regulations for viatical transactions, with many of these regulations involving price floors. You also don’t want people to take fake policies and use it for cheating some poor people – and knocking them off!
Yes, tough call for the Regulator, but the IRDA should not be moralistic about such products. They should just put the safety rails – a formula for pricing, ensure that the sick person gets the money, that the insurance company pays the Sum Assured and bonus to the third party who has funded the policy holder when he or she needed it. That will be the day!