Don’t mix insurance with investment

ToI 23/4/10

The recent regulatory spat over unit-linked insurance plans (Ulips) has projected insurance companies and their sales force as the villains of the piece.

However, financial experts say there is another player who is equally to blame for: the average insurance buyer in India who always wants “something’’ from the insurance policy on maturity. They say this rigid mindset of earning some return from an insurance plan is the main reason why insurance products with investment component continue to sell the most in the country. Irrespective of the outcome of the Ulip controversy, this mindset is unlikely to change quickly, experts add.

“I have noticed that people always want something from their insurance policy on maturity and they rarely understand their insurance requirements,’’ says Suresh Jain, an agent of Life Insurance Corporation of India (LIC), who has been selling insurance for almost three decades. “It is very difficult to convince these people about their actual insurance needs because they stick to their point. This is the main reason why they prefer endowment, money back and Ulips over term insurance,’’ he says. “Very few people are willing to forgo the premium like they would in a motor or medical insurance policy where they won’t get anything if there is no accident or hospitalisation during the period,’’ says Sajag Sanghvi, a certified financial planner. “Only people, who understand the concept of insurance, agree to go for term cover.’’

Term plans are pure insurance products which are the cheapest and the best way to buy a large insurance cover. However, many people refuse to buy them because they don’t get any money from term plans at the end of the term (or maturity in insurance parlance). Instead, they prefer insurance products with savings or an investment element such as traditional endowment or money-back plan or more sophisticated stock market-linked Ulips. These products pay back the premium with returns earned from investment at the end of the chosen term.

According to financial experts, this mindset of “mixing’’ insurance with investment is the main reason why some agents find it easy to peddle risky products like Ulips without giving the full detail or misrepresenting facts. “I was trying to sell a term plan to a lower-middle class worker recently and he curtly told me he doesn’t want to die to get something from his insurance policy. He asked me to give him a plan where he has to pay premium only for three years and he would get huge returns after 10 years,’’ says an insurance agent, who doesn’t want to be named. “Clearly, the man was sold on Ulips where there is provision of not paying premium after three years, provided there is enough money in his investment account,’’ the agent says.

Investment advisors can recount such countless episodes of their failed attempts at trying to sell pure insurance products. That is why many of them believe that irrespective of the outcome of the Sebi-IRDA tussle, most insurance buyers would continue to shun pure insurance products and root for insurance plans with savings or investment element in it. `There is nothing wrong with it, but they should clearly understand the risks involved. For example, we don’t recommend Ulips unless the person is ready to take risk and also ready to stay invested for at least 15 years because the charges are higher,’’ says Sanghvi. “Similarly, if a person doesn’t want to take any risk, we ask him to opt for traditional endowment plan.’’

ULIP Villain
Financial planners blame the average insurance buyer in India for the mis-selling and polularity of ULIPs. The buyers always wants “something’’ from the insurance policy on maturity.

Term plans are pure insurance products which are the cheapest and the best way to buy a large insurance cover.

However, many people refuse to buy them because they don’t get any money from term plans at the end of the term.

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