02 August, 2010

Are you buying insurance? Be aware of these…

Insurance Salesmen have been master sellers – that’s an acknowledged fact. They have been selling an intangible product quite successfully for decades, after broaching a subject the customer does not want to hear – death. While their legerdemain is appreciated, they also have their fair share of detractors. They tend to stick on like limpets and keep following up for many moons. Customers take these in their stride. Problems arise when misselling/ misrepresentation & sales spiels, bordering on lies or worse still actual lies are used while engaging with clients.
Customers need to be careful here and need to understand when they are being taken for a spin in a buggy. Here are some tricks you will readily recognize and some that are clearly new.
1. You just sign here, we’ll fill the rest – To start with, this is not really a trick. Many well-meaning insurance agents genuinely want to make the process simple, for their customers. The trouble starts when the agent fills in even the medical related information and mentions that the client is in perfect health. For small Sum Assured, the policy will also get issued based on the declaration of good health. So, if the client has some problems which are not mentioned in the form, it then can cause problems later on. Lesson – fill the form accurately, yourself.
2. The churn that earns ( for them ) – Agents are chasing business all the time. There is always the urge to harvest business from existing customers. But existing clients may not always have money to invest in new business. That’s when some agents resort to the churn game. They urge customers to surrender an existing product ( read ULIP ) and invest in another ( again ULIP ). Insurance products have a front loaded charge structure, customers pay the charges all over again and the agents enjoy their commissions. Lesson – Clarify for yourselves, if you need to cancel your policy at all… and if you need to get into another similar policy.
3. First two ( monthly ) premiums will be paid… – This is a magic word insurance agents use to “soften” their clients. The lure of something free is too hard to resist that customers sign up after putting up just a token resistance. Tax savings is another masterkey used along with the first lure to sign up clients. Lesson – Look at the gift horse, in it’s mouth… examine the product you are getting into. You will still have to pay the rest of the premiums.
4. You get fantastic returns; insurance is a bonus – ULIPs have given good returns over longer tenures… as has equity / MF Schemes. Insurance agents hype up the product and position insurance as a kind of a freebie. Fact is that, you will have to pay for your insurance. ULIP returns does not include any charges. If charges are factored in, the returns will be far less alluring, especially in the initial years. Lesson – Don’t get carried away by returns alone; factor in the charges and then see if it makes sense.
5. The product is getting discontinued – Customers keep listening to this at regular intervals. Just before the end of June, the agents were urging their customers to take the policy ( pension plans ) before insurance becomes mandatory! Now, agents are telling their clients to go for a policy before 1st September, 2010 as then there will be a five year lock-in period. What they do not tell them is that the charges will be much lower in the new products and surrender will be possible, even after a year, at 12.5 -15% charges ( which keep going down ). Lesson – Find out the correct situation before putting in your money.
6. Take this on your child / wife - If they find that the earning member cannot be insured, agents typically suggest that the insurance policy be taken on the spouse / child. They also justify saying that the premiums could be lower for child / spouse! But the point is, the earning member is the one who should be insured. No point insuring the spouse and child. It is a waste of money as the insurance premium paid, however small, serves no useful purpose. Lesson – If you are looking for investment only, don’t succumb to such sales pitches.
7. Sovereign guarantee – LIC agents have been using this. Guarantee in a traditional product is only for the Sum Assured. Every insurance company ( including private players ) guarantees the payout of the Sum Assured. It is only the bonus payout that is not guaranteed. For ULIPs, this anyway does not apply. Lesson – This is just much ado about nothing.
8. LIC will be around; it has government support – I do not know where this is coming from. Being around for 50 years does not guarantee that the company will be there for the next 50 years. If being big is an advantage, AIG did not find any. If being a government company is an advantage, ask the customers of erstwhile UTI and how much they lost when it unraveled. UTI, IDBI, ICICI – all government owned companies then - had various kinds of bonds and other assured return products. They withdrew midway leaving those who have invested in their schemes, in the lurch. Where was the government support there? Lesson – It’s pure apple sauce to think that a Government supported entity alone will survive or their products come with some special assurance that is not there in others.
9. The art of packaging – There are very cleverly packaged schemes , attractively named like Jeevan Arundhati, Jeevan Kuber or something like these, which are nothing but several LIC products put together. These are not LIC plans. They are conjured-up plans by putting together a few insurance products of LIC . Also, interestingly, the payouts which come in at various points are assumed to be invested in NSC, PPF, RBI Bonds etc. Also, they take the income-tax 80C advantages , which most people anyway have exhausted in other ways. Then they calculate the returns and inform you that this amazing product will return 8 or 8.5%!. Don’t be misled by this. The higher returns are because of these other products, income tax savings assumptions & not through the insurance that you are buying. Lesson – Find out what you are getting into. Clearly understand the product before signing up.
10. Returns as high as 30% - IRDA mandates that benefit illustrations show a return using 6% & 10%. But this is followed in the breach. You will find fancy illustrations, assuming 16%, 24%, 30%... If confronted, they explain that it is to give the customer an “realistic picture” as to what they will get if the returns are such and such! I thought IRDA came up with it’s diktat, to precisely to stop conning clients, luring them with the promise of fancy returns. You would have thought some low level agents do it. No. Many high level banks do it. The most recent one I came across is from a private bank that people would like to trust because they are “conservative”. Lesson - Anything that looks too good to be true is probably not. Beware!
As a customer, a basic level of Financial Awareness and literacy would be absolutely essential. Reading up, visiting appropriate sites, starting to read the brochures that you have till now junked without a second look, will help. If all this is beyond your ken, take the help of a genuine investment consultant or Financial Planner. Anyone can sport these tags today and finding a genuine consultant is again a challenge. That is why, people just go to their banks to renew their FDs, instead of worrying about complex financial products. But when they do go to the banks, they get sold insurance, MF schemes and lots of others they cannot even articulate. That brings them to square one. A bit like snakes and ladders, what?!

A version of this was published under the title "Come into my parlour" in August 2010 edition in Money Today

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