Are you in your early 20s? Are you earning a good pay packet? If yes, then it will be rare for you to have not heard of an entity called the 'insurance agent'.
Believe me this is not an exaggeration. For these people have so thoroughly invaded your lives and memory that your life would be miserable without their advice.
Right from what could be a good insurance policy for you and your uncle to how should you plan for your kids and which policies to buy for that purpose, they have answers to all your insurance queries and problems.
However, I would like to bring about a few of the myths and the actual reality associated with the way the insurance agents play with your emotions.
False truths
Myth: My insurance agent is genuinely concerned about my well-being.
Reality: Your insurance agent is genuinely concerned about her/his well-being.
Myth: He is genuinely concerned about my well being, that's why s/ he never charges me, but is happy on the commissions paid by the insurance company.
Reality: S/ he mostly sells you policies, where the commission is higher -- and incidentally, the insurance company pays commissions from your premium.
Myth: My agent told me that insurance policies are also great investments.
Reality: That is far from truth!
If you have a question, they have the solution
I am stunned by the audacity of some life insurance agents, who have a standard format ready. All they do is just change the name of the policies that they hawk every time, thus referring to the person who has asked the question, and giving the same answer.
If they have sold policy 'A' to your neighbour then it will be policy 'B' for you. That is, the features of the policy sold will remain the same with a mere change in the name.
What's more, if you go to some of the well-known banks, there again you will find the same thing. All these relationship managers are trained to sell unit linked insurance plans, ULIPS that are in vogue because of the great returns posted by the Indian equity markets!
To understand the disadvantages of ULIPs, read 'Why ULIP is not the best insurance product'.
Why? Obviously, because commissions here are very high.
And the debate for and against ULIPs is a never-ending one. I on my part, would like to stay away from the debate for the time being, but would like to show how the numbers game is played between selling ULIPs and term insurance!
Insurance policies have been sold (or rather bought by you) in India more with the objective of tax saving and investments.
For some strange reason, there are emotions attached to insurance policies -- usually parents buy policies for their children (with the dual objective of saving tax, and feeling good that they have done something for their child), so children feel like continuing with these policies, although these, sometimes, make absolutely no financial sense.
Policies give two types of returns -- guaranteed and non-guaranteed.
Insurance policies give bonuses to policyholders. These are given from profits earned by the insurance company and hence these policies are called as participating policies. The rates at which these interim bonuses, final additional bonus, loyalty bonus, etc are given are pre-decided and hence are known as guaranteed returns).
The Insurance Regulatory Authority of India, IRDA, which regulates the insurance sector, allows insurance companies to calculate the non-guaranteed benefits with the projected investment rate of return of 6 per cent and 10 per cent.
That is, when the agent comes to you (flashing a false smile, and saying you have reduced weight) with a table prepared to meet 'your' needs, s/ he has got columns such as scenario 1 and scenario 2, which are based upon the assumption that the investment will grow @ 6 per cent and 10 per cent respectively.
The moment s/ he is done with this, s/ he shows to you how ULIP schemes have given 40-60 per cent returns in the last 3-5 years. So s/ he convinces you to go for a mix of insurance policy and investments (read: ULIPs), rather than a mutual fund.
Between the devil and the deep sea?
Are you wondering then as to what you should do in such a situation?
Always keep in mind that these non-guaranteed returns are only indicative. Even if some policies have given 40 per cent returns, still that is history. And, of course, you should not make your decisions based on A scheme or any particular ULIP's past track record.
No doubt, insurance is a necessary cost. Don't ignore it but for god's sake, keep it as low as possible.
Now, would you go for a policy, which gives you a cover of Rs 2 lakhs by paying a premium of Rs 10,000 for 25 years, or the one that gives you a cover of Rs 8 lakhs for Rs 2,000 premium for 25 years?
The problem is no agent will ask you such a question -- because s/ he knows what your answer will be, and s/ he wouldn't like that!
Why waste your money, Sir/Madam?
So instead you are told that you should go for the Rs 10,000 policy, as your investment can grow @ 40 per cent, as historically it has been (see the subtle shift from the 6-10 per cent range to 40 per cent historical returns). Plus you also get insurance, says the agent, as if it were the icing on the cake.
Then comes another whopper of a statement: you need to pay premium only for the first 3 years. By this time you are bowled over by your insurance agent: wow investment + premiums only for 3 years + a 40 per cent returns + insurance as well.
Understand there is nothing concrete in this -- even 6 per cent is NOT GUARANTEED, not to talk about 40 per cent. You are conned by word like premiums only for 3 years, 40 per cent returns and investment along with insurance.
However, who cares for such details? By now you have totally forgotten about insurance and are discussing with your insurance agent things related to investments. But isn't it insurance that you wanted from this agent in the first place?
These policies (ULIPs) are high commission policies, with commissions ranging from 25 per cent to even 35 per cent of your premium going into the agents' pocket. So if you pay Rs 10,000 as premium you are paying Rs 2,500 as commission (so much for free advice!).
Always be on your toes
In case you were to stay alert and ask her/ him about term plans like the one mentioned above, where you pay Rs 2,000 premium per year for a Rs 8 lakh cover, the first counterpoint will be: you will not get anything in return if you survive the term of your policy. The second salvo will be: you will have to pay premiums throughout the term.
As food for thought, just imagine the peace of mind you will have when you have Rs 8 lakh life cover for the next 25 years as against a cover of Rs 2 lakhs.
Also try to calculate how much money would you make GUARANTEED, if you invest the Rs 8,000 (which you save by not going for the policy, which your agent was suggesting, but a term plan, as 'yours truly' suggests!) every year in a fixed deposit, even at 4 per cent per annum!
I can assure you that not only will your life cover be far higher, but your investment will also be higher and more importantly guaranteed in case of this option!
The author runs a Nagpur-based finance advisory Money Bee Investments. He can be reached at moneybee.finplan@gmail.com.
Disclaimer:
This article is for information purposes only. Please consult your financial advisor before taking decision based upon this article. Money Bee Investments or any person/s related to it, directly or indirectly will not be liable under any circumstances, for losses incurred due to decisions taken on the basis of this article. Numbers arrived at are based upon some assumptions, these may vary for each individual, depending upon assumptions made. There is a chance of capital loss while investing in equities.