Rising markets and aggressive marketing has reduced the difference between the investment and insurance in recent times. There are many who come across this fact and sometimes even fall prey to the aggressive marketing tactics. The blame is thumped on aggressive marketing strategies of the insurance distributors but there is an element of greed on the part of the buyer that can be held responsible for the incidence of mis-selling.
Typically, we hear that the market is rising and is scaling greater peaks and we also hear that some friend, who has invested in some scheme, ends up making a killing in the market. Subsequently, we call up the agent from whom the scheme is bought and end up investing accordingly. However, it should work in a different manner.
You need to first try to identify your needs and on the need-based analysis find out products that satisfy your needs. The mantra to remember is ?buy something what is required and not what is fashionable.? In the world of personal finance this mantra makes a real big difference. Though this has been discussed umpteen times, many of us forget and land up in a mess.
Once you zero in on what to buy and have options in front of you, there is a need to practise utmost caution. If you intend to invest in a mutual fund, there are chances that you are offered a ULIP. Both the products have their own set of benefits. However, as a customer you should be provided with what you want to buy and not what the distributor wants to sell for higher commissions. The things are little more complicated when it comes to buying insurance products. There are many checkpoints that as an insurance buyer you have to take note of. Things start when an insurance distributor approaches you with an illustration. In most cases these illustrations influence your decision of buying the product. Study the illustration carefully. The advisors sometimes quickly go down to the numbers at the bottom printed in bold, denoting returns. And if you don?t take the trouble to go through the details of the process of computing the returns, chances are that the things are miles away from reality.
While going through the illustration, check the term, sum assured, age and asset allocation assumed in the illustration. Things change widely, if a variance exists. Higher the age, higher will be the mortality charges. There are plans that offer premium discounts for higher sum assured and longer terms. Hence you need to check if all these parameters expressed in sales illustrations are in line with yours. The next key thing to watch out for is the benefits. The returns are broadly of two types- guaranteed and market linked. The guaranteed returns are paid to you irrespective of the market conditions. On the other hand, the market-linked returns are projected. You need to go into the details of such ?non-guaranteed? returns. The rate at which the returns are calculated should be understood clearly.
Equities typically offer 15-20% returns in the long run. Long run does not mean a timeframe of one year as many of us mistake, having the statutory provisions of long-term capital gains back in mind. Long term should be something ranging from 5 to 10 years. For the last four years many schemes have offered a CAGR in excess of 35%. Now on, if you are investing you need to ?rationalise? the expectations. The same should be fairly factored in the sales illustration.
Also, most of the times, the sales illustrations assume linear growth. In the real world this may not happen. There are times when you may come across negative returns from asset classes. Keep this in mind if you are investing for a relatively smaller time frame like three years. This is material in case of short-term investments; if the market offers substantially negative returns in the last year of the plan and in the prior years the market has rewarded you below your expectations, it leaves less in your kitty.
Do check the exit charges, if any, which may not be mentioned while computing your returns. Consider a case, where you come across a benefit illustration for a term of 20 years, and the advisor is telling you that you are entitled to an exit option at the end of three years. If you are considering that option, do ask if there is an exit charge, as this will eat into the returns.
Spend some time working on the investment amount in the illustration and your ability to invest. Ensure that your ?investment amount? not the premium and the amount mentioned in the illustration is the same. Chances are that you end up looking at an illustration where Rs 100,000 is invested in the first year and you pay a premium of Rs 1,00,000 thinking that you will get similar returns. But when you receive the actual policy the actual sum invested in the market is way below Rs 1,00,000 thanks to the ?allocation factor?. Needless to say the returns projections dwindle.
You must ask for the ?minimum premium payable? in the scheme. If you are investing Rs 1,00,000 and the scheme asks for a minimum premium payable of Rs 20,000, do invest Rs 20,000 initially. Invest rest as a ?top up?. The top up fetches higher allocation. In other words, the first 20,000 will have an allocation of say, 80% or in rupee terms only 16,000 will be invested. For the top-up, allocation is as high as 99% or in rupee terms a sum of 79,200 will be invested. In totality you get Rs 95,200 if you go by top-up route focussing on minimum premium payable.
However, if you pay Rs 100,000 as a first premium then you will see Rs 80,000 being invested in the market. In rupee terms, it is a loss of 15,200 at the very start of the plan. Factor in the compounding returns over the plan term, and you may have a fair understanding of the magnitude of loss or gains imbibed in the factor of minimum premium payable or top up. One disclosure here- higher allocation charges and lower allocation are primarily an outcome of higher commission paid.
With the above-mentioned tips you must ask your advisor to come up with an illustration that duly factors in the minimum premium payable and offers you the benefits of ?top-up?. One last word of caution- the illustration is for the purpose of explaining the benefits and does not guarantee anything unless otherwise specified. This is actually a reproduction of the statutory statement mentioned in most of the sales or benefit illustration. But it means a lot and the smart ones do not need any further explanation.