In an earlier piece, we spoke about five things to keep in mind when buying life insurance. But we must warn you again and again not to trust your insurance agent.
Your insurance agent may be your friend or relative. But remember, it is just a business for them and they are out to make money on you. Your best interests will not be in their mind.
They shirk term insurance policies
For starters, you will never find them selling you a term insurance policy. This is the cheapest form of life insurance. Let's say you take a 25-year term insurance policy. And you have to pay Rs 1,500 every year towards this policy. If you die during this 25-year term, your nominee will get the amount you are insured for. If you live, no one gets anything.
The agents get the least amount of commissions on these policies, so they will never try selling them.
Being the cheapest form of life insurance, they will lose out on the lucrative commissions they get on other policies when they sell you such a cover.
They live on commissions
Each insurance product will have its own commission specifications. But the trend is that, in the first year, the agent's commission is the highest. It decreases for the next three years and drops even more after that.
So, in the very first year, your agent will get around 15% to 45% of your premium as commission. In the following three years, it will drop to between 5% and 15%. After that, it will be between 2.5% and 7.5%.
Generally, the upfront commission (amount paid in the first year) is the highest and then the trailing commissions (those paid every year) are much less. In some cases, where the upfront commission could even touch 50% of the premium, there may be no trailing commission.
For all the years that you pay a premium, the agent will get a commission. So the agent will try his best to get you to take a policy where you pay a substantial premium for a long time.
There is no free lunch
However obliging your agent appears to be, he/ she has an underlying motive.
Your agent will be keen on selling you a policy on which he/ she gets the best commission. And he/ she will keep telling you that his/ her company offers the best policies.
That is why it is best that you visit an independent financial planner who is not making profits based on what he sells you. His advice will be objective.
Or, do some homework on your own. Call up the agents of a few companies and tell them to come over with some proposals and policies. You can even do a fair amount of checking online.