Buy Insurance to Cover Risks, Not for Returns

Proper insurance is key part of any good financial planning, but the 'Indian' mindset, fixated on returns, prevents many from seeking the right cover, says Madhu T     Why is it so difficult for Indians to understand the importance of buying a proper life insurance cover, wonders an agitated seasoned financial advisor. He is fuming that one of his favourite clients has just bought a child plan. "He called me and told me he has bought a children's policy. He is really quick to grasp concepts and diligently acts on our advice. I just couldn't believe that he would so something like this," says the advisor. "We must have discussed so many times about the importance of adequate life insurance cover and term plans."  Almost every financial advisor can narrate at least one story where a client bought the wrong insurance product. Unit-linked insurance plans (Ulips) used to top the list of "wrong insurance product" list two years ago. However, after the insurance regulator, Insurance Regulatory and Development Authority (Irda), tightened the screws on Ulips in 2010 with a slew of regulatory changes, conventional products (or endowment plans, in insurance parlance) have become the hot favourite among insurance customers. This is because the insurance companies have cleverly shifted attention to regular endowment plans by offering attractive commissions to their sales force, say advisors.  And the numbers clearly indicate the shift in customer preference. According to the Irda annual report of 2010-11, life insurance companies have underwritten . 1,26,381 crore as first-year premium, a measure of new business secured during the year. The first-year premium was . 1,09,894 crore in 2009-10. Of this, 37.38% of the total premium was underwritten in the linked segment, while 62.62% of the business was in the non-linked segment. The figure was 43.52% and 56.48%, respectively, in 2009-10.  CIRCLE OF LIFE  "The current scene is very similar to the one before the opening up of the insurance industry, when LIC used to mostly sell conventional products. After the opening up of the industry, private insurers initially pushed Ulips aggressively. However, they have started focusing on conventional products after the regulatory changes and the lacklustre performance of Ulips because of the poor stock market," says D Sundararajan, investment consultant, Trendy Investment, a wealth management firm.  "It is quite sad that even today there is a clear lack of education among customers about most insurance products. In fact, most insurance products are sold between January and March. It is clearly sold as a tax-saving and investment product rather than as a tool for long-term protection," he says. Of course, a small segment of the population, especially the young working class, has woken up to the charm of pure life covers, or term plans, in 2012. Term plans got a fresh life during the year after insurance companies started offering cheaper versions online, but experts believe most individuals still don't understand the real purpose of a life insurance cover.  "Most people still fall for the age-old sales pitch of insurance being a tax-saving plus investment instrument. They also fall for false claims of assured returns, especially when the stock market is doing badly," says Amar Pandit, certified financial planner, My Financial Advisor, a wealth management firm.  "Typically, traditional products deduct 35% from the first-year premium, 7.5% from the second and third-year premiums and 5% from the next year's premium. Then you have mortality charges and fund management charges and so on. So, how can they offer 9% or 10% assured returns? Since these products invest mostly in debt, it would be almost impossible," he points out. While these charges vary according to companies and products, most endowment policies are estimated to deliver returns of around 5% to 7%. Also, unlike Ulips, charges deducted from your premium are not disclosed upfront. This means you have no idea of the share of your premium that is actually invested.  INSURING LIFE  The idea behind buying life insurance is simple. If something happens to you,your dependants should be able to maintain their lifestyle from the proceeds from your insurance cover. And the only way most people can buy an adequate cover is through a term cover. If you die during the term of the policy, your dependants will get the insured amount. If you outlive the policy, you would not get any money.  "Most people focus on what they will get on maturity of the plan. I always tell them that is a huge mistake and maturity proceeds shouldn't be the reason to buy an insurance cover. One should always think what if something happens before maturity – only then will you understand the real value of insurance," says Pandit. Naturally, many financial advisors blame insurance companies and their agents for the mess. However, agents blame the "Indian" mindset.  "It is very difficult to convince most people about term insurance. They invariably get disappointed the moment they learn that though it is very cheap, it wouldn't give them anything on maturity," says an insurance agent, who doesn't want to be named. "Most people don't care about the cost factor. They are very happy with products that will give them money on maturity or at regular intervals."  Sundararajan believes it is time individuals take responsibility for their actions. "People should go to an insurance company to buy insurance cover, not investment product. I think everyone should keep this in mind. It will automatically help them stay focused on their insurance needs," says Sundararajan.  madhu.tnair@timesgroup.com