From being insured to being cheated

Here comes the months  of February and March when  army of insurance agents goes in the overdrive. They have a sure shot formula to save tax! They know that you must have not planned your tax saving for the financial  year. That is enough. Now you are the gullible person who can be persuaded to the ‘total beneficial’ world of insurance products. Your vulnerability increase with your delay in tax saving.

Insurance agents are very smart and well trained. They will represent a policy in such a way that many people think that with a small investment they are going to get a huge money and they get very impressed by the presentation and believe that without analysing or investigating about the same.

There are many reasons of mis selling of insurance products from both the ends. But I would say due to lack of interest, knowledge and social /emotional pressure, people mostly fall in to such traps.

It is not only the insurance agents but bankers are leading the game . Having access to client accounts it is very easy for them to know and influence the account holder to buy the product.

Check these two real time examples. I shall not name the person or bank but i know them personally

Case 1: NRI aged 80 years old walks into one of the private banks account enquiry. The banker treats him well with a great cup of coffee. In an emotional touch persuades him to make a Fixed deposit of Rs 5,00,000 in the name of his grandson. 

Old guy gets carried away emotionally and signs the paper and leave for his residence country. Banker has smartly got the insurance policy papers signed in the name of the grandson along with ECS form for subsequent year payments.

Best of all the policy is issued in demat form. Policy documents never reach the investor.The investor account debited every year for Rs 5,00,000 of which he is unaware and by the time he realises it is too late.

Case 2:  This is even more interesting. One of the big four CA audit firm director goes to bank for foreign exchange. He is issued an insurance plan for Rs 20,00,000 as FD for five years. It is only in next year he realises when he gets premium notice that he has been sold insurance. The bank had the standard answer" Sir the person who sold you is no more working with us"

There can be an unending list to these cases and the blog shall become too long. However I can only write about flaws in various plans and why one should not go for them.

1.  Traditional Life Insurance plans

 Traditional insurance plans are opaque, have hidden cost structures and have historically provided poor returns.

Under such plans, you are aware of the death and maturity benefits upfront i.e. maturity amount is guaranteed upfront. So, you know upfront how much you are going to pay (in premium) and what you are going to get at maturity/death.

lets take an example. I shall not like to take the name of any plan but this is existing plan with one of private insurance company.

Even if we assume bonus at 8% which is never the case the CAGR returns post charges are not more then 4 to 5%

Most traditional plans manage an internal rate of return of just 3-6 per cent a year, less than the prevailing bank fixed-deposit rates. So, if you are a long-term investor, mutual funds combined with a term plan will serve your finances goals better.

Agents are pushing traditional plans as commissions are higher than on other plans.Commission in above case is 35%for first year and 3% on renewal premiums. Anyone who buys such a plan to counter volatility does so for the wrong reason.

UNIT LINKED INSURANCE PLANS

A unit linked plan combines life insurance with an investment. A part of the premiums you pay goes towards what is called the 'mortality charge' that gives you a life cover. The rest of the premium goes into a fund in your name. This fund is usually invested in the equity market. Your investment corpus is then fully determined by how this fund does, and by what further charges are applied by the insurance company to manage this fund. - 

ULIP funds invest in equity, debt, or a mix of the two. In this, they are very similar to mutual funds. However, the charges that ULIPs levy on various aspects of premium allocation and fund management are often far higher than mutual funds. Thus, even if the two funds do similarly in the market, your returns on ULIPs are poorer.

For instance, mutual funds charge no entry load - so every Rupee of your investment goes into the fund. In contrast, a ULIP charges anywhere between 5% to 20%. So, for every Rs. 100 that you pay as premium, only between 95% and 90% goes to the fund. These charges are especially high in the first three years of your policy. Thus, even if the ULIP fund does well, your returns often stay negative. Most of this money has gone to the pocket of your agent or bank who sold you the policy. No wonder they were pushing the product so hard!

check the illustration below.Specifies all charges along with commission and insurance company charges. Are you shown this?

Best of ULIP funds have not given returns of more than 13% for past ten years. Whereas Funds like Franklin Prima, HDFC  & Birla have given returns of 20% and above and that too with complete liquidity

ULIPs hide this problem through a complicated reporting system. Unlike mutual funds, you will find it difficult to get a single page summary of what you have invested till date and what it is worth today. By the time you realise the enormity of the fraud, it would be several years.

Although the commission has come down in ULIP Plans but if you reject a traditional plan then next choice shall be ULIP & not Term

TERM PLANS

Term insurance plan is necessity for an individual who has dependents or a family. It is a proven fact that a term plan offers the most 'value for money' proposition. It is the basic form of life insurance where a fixed sum assured is paid on the death of the policyholder.

Most of us reject term insurance as we feel that premium paid is wasted if no death happens

However in any of the above plans we are paying the same charges just that the window dressing of statements do not show them

Amount of insurance depends on lifestyle and annual expenses. However generally annual income multiplied by no. of years of working should be the amount of cover

The term of the policy is equally important. A cover that ends when you are in your 50s won't be of much help when you would need it most. Buying a new plan at that age is very costly. Take a plan that extends till the end of your working life. 

How to fight the wrong selling and cheating in insurance

Although IRDA has laid down various guidelines & clamped down on banks for selling wrongly it is still happening. Only yesterday banker of one of my investor walked into his office & requested Rs 1 lac cheque for traditional plan for target completion. Not giving him all details that he shall have to pay this every year for next 20 years.

In case of mutual funds SEBI has been very aggressive. Removal of entry load, colours of the application forms,communication of brokerage received by IFA to investors are some of them.

I was sent to Standard Life  head quarters Edinburgh for training. The rules are very clear. At the time insurance or any financial product is sold the financial consultant is obliged to give in writing the remuneration he is earning of the product.

SOLUTIONS

• IRDA increases the free look in period from 15 days to 2 months. Insurance companies generally hold back policy papers for 15 days so that policy holder unable to act post that

• IRDA should make it mandatory for insurance agents including banks to communicate commission paid in bold letters

• IRDA should instruct insurance companies to give simple illustration of the plan showing all charges in a simplified format so that a non financial investor can also understand it

• On issue of first premium cheque the insurer should be bound to send an SMS & mail to policy holder specifying it is an insurance plan

• Before the policy is converted to demat form the physical policy document should be signed by policy holder

• The policy holder also should not buy plans in emotions or to keep good relations with his account manager. Every year account manager will change

• Insurance should always be pure insurance. Do not mix investment with insurance

• The banker acting as insurance agent should have permanent details of the employee selling insurance and should be mentioned on policy document. This shall take away excuse from bank that the one who sold has left

• For tax planning Equity linked Saving Scheme is much better option. Returns over 15% over period of 5 years

To end I shall say I am not against ULIP or any other insurance plan as long as you are aware of the facts. Else along with material loss you shall go through the emotional stress of being rejected.

"Fun is like life insurance; the older you get, the more it costs. Kin Hubbard"