The new regulations coming into effect from September 1, 2010 in the insurance industry is most certainly a welcome change. But in the short-run, it is leading to considerable mis-selling by agents. In fact, it has become a menace that is peaking now, as the ‘D-date’ (read: Dooms-date for agents selling only ULIPs) draws to a close.
Here are four examples that explicate this menace:
- A friend recently lamented on Facebook that his client was pushed a ULIP as the ‘offer was closing soon’. The poor client was unable to figure out whom the offer was ‘closing’ for. In reality it was for the agent. The client thought it was for him.
- Last week, my aunt (aged 54) walked into HDFC Bank to make a fixed deposit. Within minutes, the personal banker convinced her into buying what he termed as a ‘brilliant investment plan’ from ICICI Prudential Life Insurance. Under this plan, if she parked Rs 1 lakh each year, for the next three years, she would get back Rs 3.70 lakh (70% guaranteed return). What he did not explain was that 70% of the first year’s premium is guaranteed only after 15 years. Two days later she narrated this episode to me. I explained to her that in order to get back Rs 3.70 lakh after three years the bank would need to guarantee a return of over 20% p.a., which is impossible. She immediately understood that she had been mis-sold the investment plan. She did a stop payment of her cheque. The banker even came to her residence after two days, pleading her to put in at least Rs 15,000 per annum. Thankfully, she had learnt her lesson. Ironically, she even received the documents for the policy she had not paid for. Such is the rush to sell policies.
- On Aug 25, I got a call from an agent extolling the virtues of the ‘latest, guaranteed return’ product from Tata AIG Life Insurance where I would receive 100% of the first years’ premium after five years (it is a ‘short-term product’) plus a 7.5% p.a. guaranteed return over the next five years. He refused to provide the guarantee in writing and kept saying that their brochure said so. Even the senior manager kept ranting the same thing and refused to connect me their branch manager. I realised that both of them were victims of ignorance. They did not even realise they were ‘mis-selling’ the product.
- On Aug 29, employees (not agents) from Kotak Life Insurance called me for a guaranteed return product. Invest Rs 1 lakh today and get back Rs 2.5 lakh after 3 years. The absurdity went to the extent that the money would be invested in the Common Wealth Games (of all places, and how no one knew). I spoke with their Senior Sales Manager and their Business Manager, both of who confirmed that the product was genuine and it would ‘close at 1800 hrs today’. The level of ignorance (I hope and presume) is appalling. I have filed a complaint on their website.
These instances clearly show that ‘half-baked information’ is being provided to unaware investors. Sometimes, the agent too is ignorant. Their knowledge is limited to the numbers that they have been told by their seniors.
The regulatory changes notwithstanding, it always helps to be aware rather than have blind faith on agents who are (more often than not) only concerned about the commissions they would earn on the products they sell. Here are a few things to remember while buying insurance:
I. Be sure what you are looking for – life cover or investment. You cannot get the best of both in one product. ULIPs are investment products that provide negligible insurance.
II. If you have decided to buy insurance for the purpose of insuring yourself, go for a term plan. It provides the maximum cover at the lowest premium. For instance, a 30-year old can get a cover of Rs 1 crore for less than Rs 10,000.
III. ULIPs work best as long term (15-20 year) products. Not as three year products.
IV. Any ‘guaranteed return’ will come to you only if you stay invested for 10-15 years and not before that.
V. Ideally, you must not mix insurance with investment. Keep them separate.
VI. Always ask for a detailed break up of costs over the policy years – agent’s commission, administration costs, etc.
VII. Don’t make a rushed decision, especially if your agent tells you that the offer is closing soon. By all means, avoid that product. In most cases, it means a cheaper product is coming in. Look at the rush by agents to close ULIP deals before September 1, 2010. The new regulations (which come in on Sept. 1) will provide you with cheaper and more transparent products.
VIII. If you do not receive your policy within seven to 10 days of submitting the form, call your insurance company (and not the agent). There is a 15 day free-look period in all ULIPs within which you can return the policy and get back most (if not all) of the premium paid by you.
IX. Always fill in the entire form yourself or get it filled (by the agent) in your presence. Do not sign and leave it for the agent to fill in, later.
X. When you receive the policy, cross-check the policy document with the form that you filled in.
XI. Insurance is a long-term contract and not a ‘short-term get rich’ scheme. Never go in for a three-to-five insurance product.
Evaluate the need for insurance, evaluate the products and go for it only if it makes sense in every way.