Insurance is a financial product that is sold on managing unknown risks. However, thanks to aggressive practices and high incentives, over the years insurance sales pitches have gone from pragmatic to perilous. Telecallers use all the tricks in the book, like minimum commitment, maximum returns and regular return of profits, to lure you. The insurance salespeople at most banks are smarter and paint an extremely rosy picture of the policy to get your premium. This is why customers have to be doubly sure. No matter who is making the sales pitch, caveat emptor applies when you are buying your insurance policy. Let us look at five sales pitches that you should stay away from.
1. ULIP with no downside
Unit Linked Investment Plans (ULIPs) are plans that combine insurance with investment mostly in the stock market. With most conservative investors running in the opposite direction when they hear words like ‘stocks’, ‘share’ or ‘market’, some insurance sellers use pitches that combine ULIPs with a fixed return or no downside! No investor loves losses, even though losses are as common as profits. The value of a ULIP is linked to an asset that moves up or down. Hence, a ULIP can never have fixed return. There will always be a downside if the market moves down. A ULIP with no downside does not exist! If you hear such an insurance sales pitch, never talk to them again.
2. Invest for 3 years and get life-long protection
When a customer says that they cannot pay the insurance premium regularly for a long tenure, some insurance sellers may tell you that pay for just 3 years. This is a total lie. There is no insurance policy, except single premium policies which have very high ticket size, where you pay a small amount once and enjoy cover lifelong. If there was indeed an insurance policy where you can pay for 3 or 5 years to get lifelong protection, i.e. 40-50 years, why would insurance companies take the pain of asking you to pay every year? Any traditional policy where you pay a small amount will logically give you a small amount of protection or for a small period of time. There are no free lunches in life and especially not in insurance.
3. Cheaper than term insurance
Since customers have started demanding term insurance, many insurance sellers are in a quandary. Term insurance is typically the cheapest insurance cover available. This is because if you do not die in the policy period, the entire money is forfeited. This is why term insurance policies offer high sum assured at a low premium. Do not trust a sales pitch that tells you that there is an endowment or money back policy which is cheaper than term insurance. Any element of return of premium money is a cost for the insurer. In case of term insurance, there is no return of money. Hence, there cannot be a policy which is cheaper than term insurance unless the insurance company wants to actually make losses.
4. One insurance policy for all needs
Since many customers have previously bought many insurance policies, they become cautious about buying a new one. When insurance people try to sell them a new one, it is a dead end. To bypass this problem, some unscrupulous sellers often tell customers that buy this insurance policy because this is a 3-in-1 or 4-in-1 product. While combination products sound great, the truth is any 2-in-1 combination means 50% focus on two objectives. A 3-in-1 product consequently means 33% focus on three objectives. While from a marketing point of view it is easy to sell a multi-objective insurance policy, you may be actually buying a benefit that you do not need. Buying what you do not need is a waste of resources. Be focused on your objective/goal and buy a policy that meets that goal 100%.
5. Guaranteed return of 12%
There was a time when public provident fund used to offer 12% return annually. That was also a time when bank deposits used to offer a high rate of interest. Over the last many years, those returns have dwindled. While PPF at present offers less than 8% return, even the most aggressive banks offer no more than 7.5% in FDs to non-senior citizens. In such a scenario, if an insurance policy gives you guaranteed return of 10-12%, will you buy it? Our suggestion is don’t buy such a policy because there is no traditional policy that can give that level of return. Only ULIPs can offer such returns, but there is no guarantee. Double-digit returns cannot be guaranteed at a time when the loans are being given in single digits. Most traditional insurance policies can, at present, guarantee 4-6% guaranteed returns and that too after continuing the policy for over 7-10 years.
(By Anil Rego, Founder and CEO, Right Horizons)