A ₹1.2 lakh premium, a pre-filled form and a 50 bps rate cut
A 45-year-old schoolteacher deposits ₹6 lakh in fresh fixed deposits every two years at a district cooperative bank that acts as a corporate agent for two insurers. She holds ₹14 lakh in fixed deposits earning 7.1%, has no health cover, holds ₹2 lakh cover under PMJJBY, and has two children aged 12 and 9. Her horizon is ten years and she describes her need as 'high returns with full safety'. The bank's target sheet rewards a unit-linked plan illustrated at 12%, and the relationship manager has pre-filled a proposal form showing annual premium of ₹1.2 lakh for ten years, with the customer's signature to be obtained 'later'. A term-plus-PPF-and-debt alternative has also been prepared. In the same week the RBI cuts the repo rate by 50 basis points and the 10-year G-sec yield falls from 7.2% to 6.7%. The branch's insurance target for the quarter is 22% short with eleven days left.
1. Advise on the product mix using the rupee numbers, and say what the illustrated 12% return may and may not be used for.
Read the worked answer
Start with the numbers. Ten annual premiums of ₹1.2 lakh commit ₹12 lakh, which is 60% of her ₹20 lakh investible corpus, locked for a decade with exit charges in the early years. That is not a 'returns' question; it is a liquidity and protection question.
Protection first, because it is missing. She has no health cover and only ₹2 lakh under PMJJBY - inadequate for a family of four, and PMJJBY cover ceases when she attains 50, so term cover must be arranged now while she is 45 and insurable. With children aged 9 and 12, she needs cover running at least until the younger child is independent.
Then the horizon. Ten years with two school-going children means the corpus must survive a medical event and an education outflow; an emergency fund and a debt/PPF core are appropriate.
The 12% illustration. It is an illustration, not a promise, and ULIP returns are market-linked. Illustrations are shown at prescribed twin rates and the higher one is a projection, not an entitlement. It may be used to show how compounding works; it may not be used as a comparative 'return' against a 7.1% FD. A ULIP is defensible only out of genuine surplus after protection and the emergency fund, and only if she accepts that the fund value can fall.
2. Explain what the fall in the 10-year yield from 7.2% to 6.7% does to her existing and proposed holdings, and what it implies for guaranteed savings products.
Read the worked answer
Price effect on what she already holds. Bond prices move inversely to yields. A 50 bps fall in yield raises the price of existing bonds and of the debt-oriented holdings she already owns, so the net asset value of a debt fund or the mark-to-market value of a bond portfolio rises. Longer duration means a bigger price gain - a rough duration-times-yield-change estimate puts a 5-year duration portfolio about 2.5% up.
Reinvestment effect. The coupons and the maturing deposits get reinvested at about 6.7% instead of 7.2%. Her 7.1% fixed deposits will reset lower at renewal. Over a ten-year horizon the reinvestment effect usually dominates the one-time price gain, so 'rates fell, so buy debt' is only half the reasoning.
Implication for guaranteed savings products. Insurers price non-par guaranteed products off prevailing yields. When yields fall, new business guarantees tend to be repriced downward, so a product quoting a high guaranteed rate today may not be available on the same terms later - but she must compare the guarantee against the insurer's solvency, the surrender terms and the actual IRR, not the headline. The correct exam judgement: falling yields make a suitable long-term guaranteed product more attractive for a safety-first investor, and make a projection-based 12% illustration less defensible, not more.
3. The relationship manager wants the signature 'later'. Identify the compliance failures, and set out the process you would follow as the officer handling the file.
Read the worked answer
Failures. A proposal form must be completed and signed by the proposer, who must understand what is being bought; a pre-filled form signed afterwards is not a signed proposal, it is a signed blank. If the risk details, the premium and the fund choice were entered by the RM, the customer has not made a proposal, and the insurer has not been given the facts it is underwriting. Add three further problems: the plan was selected from a target sheet rather than from a documented suitability assessment; the commission and benefit structure has not been disclosed to her; and the corporate agent can only place business with the insurers it holds agency for, so a 'better' product from outside that panel cannot be sold without an agency arrangement.
Process. Stop the submission today and record that instruction in writing. Do a documented need analysis with her present: income, dependants, existing cover including PMJJBY, liabilities, horizon. Give her the benefit illustration and the commission disclosure, and let her complete the form in her own hand. Do not let the quarter's 22% shortfall enter the conversation; if it has already entered, that is the mis-selling finding.
Escalation. Report the case to the branch compliance officer and the corporate agent's designated principal officer, in writing, with dates. If the policy has already been issued on the pre-filled form, tell her about the free-look period in writing so she can cancel, and keep proof that she was told. Do not sit on the file until the eleven days run out - the target pressure is exactly what an inquiry will look for.