(I grew up as an avid reader of Reader's Digest- The source of knowledge and some stimulating stories. I am delighted that the July issue of RD carries an article of mine from Moneylife, with some re-writing and comments from the Editors. )
The Elusive Pure Insurance
By R. BALAKRISHNAN From Moneylife
68 | july 2014 | reader’s digest
It has emerged, from the recent reports and exposés on banks, that insurance is one of the conduits
for money laundering, along with real estate, precious metals, gems and jewellery. The insurance industry, as it is structured the world over, is actually an investment manager more than a risk manager.
My memory goes back to my early days when uncles and cousins sold me “endowment” policies on which they made handsome commissions, year on year. And after I stopped subscribing to their con games, they simply stopped servicing me, secure in the assurance that as long as I paid my premiums, the commission would go to them. Those dear ones have stolen some of my wealth.
The industry has come a long way thereafter. It indulged in another con game in the 2000s, when it sold tens of thousands of crores of unit-linked insurance plans (ULIPs) that created a big dent in the average person’s savings by inflicting massive losses on them. All this has led to a slowdown in the insurance business. The industry has now raised alarm bells that it is not growing, as if this is a national tragedy.
Well, to me, it is the first sign of financial wisdom dawning upon investors who have been shown the ghost at the graveyard and milked of their bank balances that have gone to enrich the agents. Life insurance is needed for the lowest-income strata of society—a segment that cannot afford to pay the premiums. The State could provide a minimum cover of a few lakhs of rupees—at the cost of the national exchequer. I will not crib about this subsidy. If one takes a pure insurance product, most of us would need to spend under a thousand rupees a month, for a reasonable cover. Once you grow rich, you can simply stop paying, like medical insurance premiums. Insurance companies will try and avoid selling pure term policies. One can take any kind of “investment” policy for even a newborn. Now, try asking your agent to issue a “pure” term policy for your child. The agent will say that the insured has to be at least 18. If the kid was good enough for an investment insurance policy, why is a term insurance policy denied?
I will offer a real-life experience. I went to HDFC Life, through my banking relationship manager, and asked for a “pure” term policy for my children who are over 18. His face dropped, since commissions are very low compared to an endowment or a ULIP, but he humoured me. He collected details from me and said that he would get back the next day.The following day, he wanted to know about my children’s “income.” I mentioned that they are students and, as a parent, I would be paying the premiums till they start earning and continue with the policy, if they want to.
Agents told me that, to take a term policy, the “insured” has to have “income”! No matter how much I argued, they would not relent. They even refused to give it to me in writing, admitting that this was one of the requirements.
I continued arguing with them: What if someone takes a policy and then loses his job? They simply refused to budge. However, since then, the HDFC Life guy has made a couple of abortive attempts to sell ULIPs and SIPs for my children. For ULIP and SIPs, it does not matter where the money comes from. Next, I went to an LIC agent, who said that he will get back to me about a pure term policy. A year later, I’m still waiting for that call.
I tried to buy an insurance product that is pure risk—no money back if the insured person survives—which is the only insurance that a person needs apart from medical insurance. For medical insurance, there is no insistence that the person who has to be insured has to be a salaried person.
Almost one-fourth of the total assets of the insurance industry are accounted for by ULIPs. If you add back the commissions and administrative expenses, the figure would be even higher. The life insurance industry collects over one lakh crore rupees annually in “first premium” receipts. Of this, the premiums for term policies are not disclosed but I suspect they may not be even five percent. With so much mis-selling (labelling something as insurance and selling investment products qualifies as mis-selling in my dictionary), I have often wondered whether we would be better off without this industry.
REPRINTED FROM MONEYLIFE, THE PERSONAL FINANCE MAGAZINE. © MONEYLIFE / R. BALAKRISHNAN
NOW, BYPASS THE AGENT! BUY TERM INSURANCE
As a rule, keep your insurance needs separate from your investment needs. Life insurance must be taken purely to cover the risk of death: The potential financial loss arising out a family member’s passing away can be compensated to a great extent if he or she had taken life insurance.
Most Indians take life insurance policies that give returns—indeed they are swayed by those earnings. What they are seldom sold is “Term” insurance, which is pure insurance with seemingly no benefits during the insured person’s lifetime. But what you may not realize is the big benefit that term insurance really offers during your lifetime: very low cost to you in the regular premiums you pay the insurance company to stay insured. Term insurance will cost you only a fraction of what you pay for ULIPs or other insurance schemes. So what you save here may be invested in fixed deposits, or better still, in a good equity mutual fund or directly in the shares of good companies. This way, you build wealth, without sharing your hard-earned money with the insurance agent, and cover risk at the same time.Insurance agents get very little commission when you take term insurance,whereas they get a huge amount taken from your premium/investment when you buy ULIPs, for instance. So they are often not interested in selling you term insurance and will sweet-talk you into the “returns” you get with other products (schemes) and “mis-sell” only those products that fetch them good commissions.
We now live in the age of the internet, when you no longer need to deal directly with agents, brokers, bankers and the like—if you bought something online. You can now buy term insurance directly from an insurance company’s website. So the agent’s disinterest no longer matters.
Reader’s Digest checked with insurance companies and found out that: You normally need to be between ages 18 and 55 to be given term insurance. The cover may extend till 65 or 75, by which time you’re unlikely to have dependents. If you took term insurance online for a large cover (usually above Rs75 lakh) and you are 45 or older, you will be asked to undergo a medical examination. Actually, it is best to undergo a medical exam and declare all existing illnesses—and family med history—before taking any life (or medical) insurance, since the insurance industry is notorious for repudiating claims on the flimsiest of grounds, and these are usually medical grounds. the editors