(This appeared in the recent issue of MoneyLife)
My mutual fund distributor friend is very disturbed. He has carefully nurtured clients who are regular investors in to mutual funds. My friend has an insurance distribution business, but does not sell insurance investment products. Of late, he is extremely upset.
What is happening is that his customers are being poached by the insurance agents. The clients used to regularly invest moneys in Fixed Maturity Plans of mutual funds. Now, a few of them have used the money meant for that, to invest into ‘Single Premium” insurance (investment) product, which has a ‘guaranteed’ return. The effective returns work out to around four or five percent per annum! My friend tries to explain this to the clients, but in vain. The client has been bamboozled in to a five year insurance cover. The client has also not been told that there is a very high probability that any returns he gets from a single premium product would be subjected to income tax.
My friend explained the dynamics to me. Apparently, these single premium products are being sold by the come lately Certified Financial Planners masquerading as “Independent Financial Advisors”. The old insurance agents do not push this product since traditional ULIP’s give them a fatter income.
The insurance companies have been pushing their case with the IFA’s in the following manner:
“If you put the money in to mutual fund FMP’s your earnings are going to be not more than 0.40 percent per annum on the amount invested. And each year, you will have to live with the vagaries of the market, the customers’ preferences at varying point etc. Assuming you are able to convince the customer each year, you will make a total of two percent over five years. In other words, from a fifty lakh customer, you will make a lakh of rupees over five years. You have to live with the fund house performance, follow up each year and the other routine headaches.
Instead, you sell our single premium product. Firstly, there is a ‘guaranteed’ return. Your first effort is in convincing the client. Once you do that, look at what you make. You get a first year commission of around two to three percent and an annual commission of two percent. So, you make a total of at least twelve percent! In other words, you will make six lakh rupees! And once you have taken the cheque out of the customer, you can forget him. No servicing, no worrying about NAV, no after sales service. In fact, once he has given you the cheque, you do not even have to take his calls, unless he has more money to invest.
So now, you decide which you want to push.”
This argument is solid. The agent sees the light of the day. Where is a lakh of rupees as compared to ten or twelve lakh rupees?
Single premium products are absolutely useless. In the past, I remember having put money in to products like Bima Nivesh of LIC simply because it was a nine to ten percent post tax return. Now, unless the premium is not over twenty percent of amount insured, the tax man is going to chase you. And no one gives this out as a risk. All the agent says is ‘tax benefits” as per law. This is highly ambiguous and will easily fool someone. And insurance agents, being what they are, will shove in their body if you give them an inch.
If an IFA has to be a genuine one, there cannot be any product in insurance other than a Term Policy that will be sold. All the other products are investment products, which pick the pockets of an investor. And for Term policies, you get a fantastic price if you go online and take it directly, without an agent. Of course, the agent will scare you. He will say that in case of a claim, there will be no one to help you. Think. It is very likely that you may live longer than the agent. And in any case, after a few years, the agent vanishes. You have to, in any case, run to make the payment yourself. I had a running exchange of mails with Metlife telling them to send an agent to give service. I told them that I am unhappy with the agent and to stop paying his commission. No use. For them, the agent is God. The agent stopped servicing me inspite of reminders and requests. In spite of this, Metlife continues to pay commission (I presume) to the agent. In no other profession (maybe some government jobs are like this) can you earn without doing anything for it. What a shame!