This is the fifth call I have received since morning from an insurance company”, I quipped to my colleague Ritesh. Ritesh in turn looked up from his work and nonchalantly responded, ‘What’s new? I too have received numerous calls today.” Most of us have experienced such calls and their frequency has been increasing ever since the mutual fund distributor business folded up in August 2009. Additionally, to counter stiff competition, insurance agents have quite a few tricks up their sleeve. Some of these are:  

Same Product, Different Nomenclature: The agent always has tough targets to meet and hence has to constantly hunt for business. If new business becomes a problem, the existing clients get approached. That is when you get calls to surrender your four-year-old ULIP and to put it in another ULIP or ULIP-based pension plan. The big problem here is that insurance product charges are front-loaded and you would have just completed paying most of the charges in the first product and now you would start off with the second one.

Returns Of 6 & 10 Per Cent In Traditional Insurance: Recently I found that a colleague of mine had opted for Jeeven Saral, a traditional policy of the LIC. However, the agent had given an illustration with 6 and 10 per cent returns which is supposed to be used for ULIP policies. In traditional policies, return of 10 per cent is unrealistic.

New Products That Are Not Necessarily Insurance Policies: Ever heard of Jeevan Amrit or Jeevan Sadhana? These are not LIC plans. They are plans created by putting together a few of the insurance products of LIC. Also, the payouts coming at various points are assumed to be invested in national savings certificates, PPF, RBI bonds, etc. The agents calculate the returns and tell you that their Jeeven Amrit or Sadhana gives 8-10 per cent returns. Don’t be misled by this. The higher returns are because of these other products, not insurance. Sadly, many of us fall for it.

Child Insurance: There are products for the benefit of the child who has been insured. It’s ridiculous since the child is a dependant and insurance on the child is of no practical use. Yet, these kinds of products are sold and are bought by affectionate and emotional parents. 

Sovereign Guarantee: This is a ploy used by LIC agents who keep talking about sovereign guarantee. It’s not only LIC but every insurance company which guarantees the payout of the sum assured. It is only the bonus payout that is not guaranteed. For ULIPs, this anyway does not apply. Hence, sovereign guarantee is an incorrect terminology.

To buy insurance products, a basic level of financial literacy is a must. Studying the policies and doing some basic research is a good idea too. If one is not sure, get an unbiased opinion from someone who knows about insurance. Else, it becomes a costly mistake. Mistakes can be expensive. Ask the guy who was speaking on the mobile while crossing the road instead of looking at the car in front of him. You could argue that this was a careless mistake. But what about the mistakes we make after long deliberation, wrong assumptions, and calculations leading to the wrong choices? 

Insurance is a cost. As to whether one would want to incur this cost or not, and to what amount, is a matter of personal choice. And since it is a cost, the obvious thing to do is minimise the cost without sacrificing the basic life cover. This is where the mistakes begin to happen. Pure protection policies, where one doesn’t get anything back if one survives the policy term, are the ideal choice for the above objective. But psychologically, it is difficult for people to pay up hard cash for an intangible product. So they go in for insurance products with returns. Hence, money-back and endowment (and of late unit linked insurance plans or ULIPs) type of policies are taken. However they forget the following:

• The amount that they would otherwise pay in a term policy also gets deducted from these so-called protection and investment policies. And only the net amount gets invested. 

• The administrative costs are high. 

• The corpus is invested in very safe instruments. Therefore, the returns from such policies are usually very low - usually in the range of 5-7 per cent per annum. 

Hence, a person would be better off taking a term policy to get the life cover and investing the balance premium amount in PPF where he can earn 8 per cent per annum returns (assuming he wants no risk of investing in equity, where the returns can be much higher). Ignorance such as this is used to the hilt by canny insurance agents.