Be Wary Of Insurance Agents

Insurance agents serve as intermediaries between companies and policyholders, helping individuals with the policy details and processing. However, policyholders need to be on their guard, lest unscrupulous agents take them for a ride, advises Jay Sampat

Many of us rely on our insurance agents to look out for us in matters regarding our policies, but can we be sure they are serving our interests and not their own? Often, agents look to sell a product without taking the time to get to know the client, determine his/her true needs and make a recommendation that is in the client’s – not the agent’s – best interests. What is really on an agent’s mind when he/she pushes more expensive whole life insurance instead of term insurance?

Insurance agents have stiff targets. In order to achieve them, they have quite a few tricks up their sleeve. Some of these are:

1. Insistence on children’s insurance – There are products for the benefit of the child, where the child is the insured. This is ridiculous, as the child is a dependant and insurance on the child is of no practical use. Yet, these kinds of products are sold and are bought by emotional parents.
2. Sovereign guarantee – LIC agents harp a lot on this one. In fact, not only LIC but all insurance companies guarantee the payout of the sum assured. It is only the bonus payout that is not guaranteed. For ULIPs, this anyway does not apply. Hence, sovereign guarantee is incorrect terminology.
3. Old wine in a new bottle – Given the stiff targets agents have, they approach existing clients if new business becomes a problem. That is when you get calls to surrender the six year-old ULIP (unit-linked insurance plan) and to put it in another ULIP or ULIP-based pension plan. The big problem here is that insurance product charges are front loaded and while you would have just completed paying most of the charges in the first product, now you would start off with the second one.
4. Six and 10 per cent returns in traditional insurance – Recently, I learned that a colleague of mine had gone for a traditional LIC policy. However, the agent had given an illustration with six and 10 per cent returns, which is supposed to be used for ULIP policies. In traditional policies, 10 per cent returns are unrealistic. Hence, one needs to undertake adequate due diligence before signing up.
5. New products that are not necessarily insurance – Often, insurance companies combine different types of products apart from insurance (National Savings Certificate, Public Provident Fund, RBI Bonds, etc.) to create a particular payout cycle. Agents then calculate the returns and tell you that their recommended plan yields eight to 10 per cent. Don’t be misled by this. The higher returns are because of these other products, not the insurance plan itself.

If you are new to the field of insurance, you may not have sound knowledge of the various policies and their benefits. In such cases, you must not depend blindly on your agent. For instance, an agent may recommend buying a life insurance policy which will protect you only till the age of 55 and this may not match your financial goals. Thus, doing some basic research is a good idea. If you are not sure, get an unbiased opinion. Else, it becomes a costly mistake which lingers around for years.

Insurance is a cost. Whether and to what extent one would want to incur this cost is a matter of personal choice. The seemingly obvious thing to do is to minimise the cost without sacrificing the cover. This is where mistakes begin to happen. Pure-protection policies, where one doesn't get anything back if one survives the policy term, are the ideal choice for this objective.

But psychologically, it is difficult for people to pay hard cash for an intangible product. So, they go in for insurance products with returns such as moneyback, endowment and Unit Linked Insurance Plans. However, what they forget is:

• The amount that they would otherwise pay in a term policy also gets deducted from these so-called protection and investment policies, and only the net amount gets invested.
• The administrative costs are high.
• The corpus is invested in very safe instruments. Therefore, the returns from such policies are usually very low – i.e. five to seven per cent p.a.

Insurance agents use customers’ ignorance to the maximum while dealing with them. Hence, individuals are better off taking a term policy to get life cover and investing the balance premium amount in say PPF, where they can earn eight per cent p.a. returns (assuming they do not want the risk of investing in equity).