Let me begin this article with an incident that happened to me during my recent trip to India over the New Year’s time. My Uncle who is an LIC Agent was talking to me about some new policy that would be very useful for me and my future. Since he is a well-wisher, I spent some time and listened to him. The policy details were as follows:
• We pay Rs. 50,000 every year for 20 years.
• At the end of 20 years, LIC will pay us around 10 lakhs when the policy matures
• Subsequently, every year they will pay us around 50,000 rupees (For as long as we are alive)
• And, when we actually die, our survivor (wife or kids) will get a lumpsum which will be more than 10 lakhs.
Note: The exact number will vary based on your age, no. Of years of policy duration etc. The above is just an illustration.
I told him that I will think about it and get back to him. When I thought about it, it looked like a good deal. Assuming i will live until 70 years, below is my expected returns from this policy.
• 10 lakhs at the end of 20 years (Since this is LIC, my capital/investment is guaranteed. So, first good thing)
• Am gonna get around Rs. 50,000 for nearly 20 years, which will work out to nearly 10 lakhs
• When something happens to me, my survivors will get an additional 10 lakhs or more
So, for an Insurance Policy where I am paying 10 lakhs to LIC, they are repaying us nearly 30 lakhs over the next 40 odd years. Sounds like a good deal, doesnt it?
Unfortunately, the story doesnt end here. During my vacation, I met a close friend who was contemplating on taking the same policy from a different agent. I was like WOW!!! And by the “Curiosity Killed The Cat“ philisophy, both of us wanted to know the benefits offered to the other guy... I was astonished to hear the following from my friend:
• We pay Rs. 50,000 every year for 20 years. (Same as Me)
• At the end of 20 years, LIC will pay us around 20 lakhs when the policy matures (Double of our Investment)
• Subsequently, every year they will pay us around 1 lakh rupees (For as long as we are alive)
• And, when we actually die, our survivor (wife or kids) will get a lumpsum which will be more than 25 lakhs.
Can you guess what my initial reaction was?
As expected, it was “WTF!!! How is this possible? “
Then I called up my uncle and told him how can this be possible? Two people paying the same premium, for the same policy must get the same benefits right? Thats what I asked him. My Uncle coolly asked me, ask your friend if his agent wanted him to take a Medical Test. I did and my friend said, Yes. My uncle said, my dear nephew, medical tests are not required for Engineers & Doctors for Insurance Policies of upto Rs. 12 lakh value. Since in this case, your friend is being asked to undergo a medical test, I am sure that he is offering him a policy of value much higher than yours. Just double your premium and the benefits will roughly match the numbers that your friend told you. During signing of the policy, the agent may tell your friend that he mis-heard him about the policy premium part. Moreover, I will give you a signed document from me that, whatever numbers I proposed would be paid for by LIC at the stipulated timelines. Ask the other guy if he can do the same. After saying this he cut the call.
When I explained all this to my friend (He is a well educated Engineer with over 6 years of Experience in the IT Industry) he said that, maybe my uncle doesnt know much about the policy and maybe the other guy wasnt lying to him. After a long struggle, I convinced him to call up his agent and inquire about the written agreement part. Can you guess what the Agent said?
“Sir, you mis-heard me during our discussion sir. The policy premium is Rs. 95000 per year. Also, returns from Policies cannot be Guaranteed by me. LIC decides what money it pays you. Investments carry an inherent risk which may affect the returns. So, I cannot give any written commitments“.
My friend was disheartened when he heard this. There are multiple flaws in what this agent told my friend:
1. He misinformed my friend with benefits pertaining to a 95000 rupees premium as being available for a 50000 rupee premium
2. All LIC Policy Premiums that we pay (Unless it is an ULIP that states that it will invest in the Indian Stock Market) are used by LIC to grant loans. The rate of returns on the investments are on an average around 7-8% per annum. If the loan rates are high in a few years, the bonus that gets accrued against the policy holders name may go up, but the returns guaranteed by LIC are in the range of around this 7-8% mark and it will not go up or down. LIC does provide a minimum guarantee as returns for each policy and that can be provided by the agent as proof of returns to the policy holder
3. Debt Instruments always carry the risk of default by the borrower. But, since LIC is owned and backed by the Government of India, all money is 100% safe and hence there is actually no risk on the returns
As you can see, the agent mislead my friend into thinking that the returns of a simple policy would be equivalent to that of a stock market related instrument thereby trying to gain extra business. He suppressed the facts and refused to divulge the details as well.
If I hadnt gone to india for the New Year of 2012, I wouldnt have met my friend and he would have been conned into taking up this policy on the back of incorrect information. And my gullible friend wouldve got the surprise of his life 20 years down the lane when the policy actually matures and it is time for LIC to pay-up...
Ok, now that story is over, I would like to apologize for this long story. Unfortunately, this is required to depict the kind of misselling that is rampant in the Indian Insurance Industry.
What is the Cause of all this Mis-Selling?
Well, my dear readers, the reasons are multifold.
1. Lack of Implmentation of the Enforcements from the IRDA (Insurance Regulatory & Development Agency) of India. Even though laws are very clear on this kind of misselling and states that it can lead to fines and cancellation of Insurance Agent’s license, agents still happily missell products to customers.
2. Greed on the behalf of the Insurance Agent – An Agent is someone that we trust when take the insurance policy or investment decision and he/she is bound to consider our interests as priority while suggesting products. Unfortunately, agents consider the commission/fee they will receive from the insurance company if they complete the deal and sell only those products that are profitable for them. The investors interest takes a back seat
3. A policy is usually 15 or 20 years in tenure. So, by the time the policy matures and the policy holder receives his shock, the agent would’ve either retired or even moved out of town. Even if they are in town and the policy holder manages to catch hold of them, no action can be taken because, the policy document clearly explains all the details and the agent will say “You must have read all the terms and conditions carefully, it is not my fault“
What can we do to avoid this kind of situation?
Finally we have come to the section which is the whole purpose of this article. As investors we must be more diligent and careful while taking investment/insurance decisions. Below are some tips to help you in this regard:
1. Always read all the terms and conditions clearly and fully
2. Never Assume Anything. When in doubt use google. In this Internet Era, almost everything is available in the internet. Just google the name of the policy or investment on the web and check out what others have to say. In all probabilities you will find useful information that may help in your decision
3. Never believe everything your agent says. After all, it is a business for him and he is going to earn a fee/commission based on the policy/investment product he sells you. So, he is going to care more about the money he is going to make out of the transaction and care less about the benefits you are going to get. Hence, it is our responsibility to ask for all relevant details and validate the same
4. If something sounds too good to be true (like you will get your money doubled in 3 years or get 50 lakhs at the end of 20 years for an investment of 10 or 15 lakhs) it is probably not true
5. Ask all things in writing with the signature of the agent. If the agent promises you exorbitant returns (which surpass the average 7-8% returns offered by normal insurance policies) then ask him to sign a document and guarantee/confirm that, this is actually what the insurance company will give you. If the agent is telling the truth, then he will have no problems doing it. But, if he is trying to mis-sell something that isnt as good as he is saying, he may find a reason to avoid this topic
6. Ask experts. There are hundreds and thousands of financial experts in the web. If you ask around, you may find out that a close friend or associate is an expert and may guide you in the right path. Always identify and locate such experts and request their guidance when in doubt regarding an investment or insurance decision.
You can always leave a comment in my blog if you have any such queries and i will try my best to search and advise you. After all, the purpose of this blog is to help the investor population of this great nation...
Happy Investing & Insuring yourselves!!!!!