Saturday, August 18, 2012

Bad News for Insurance Investors and Agents

Oh yes, you read the title right “Bad News for Insurance Investors”. You may be wondering over the fact that I have used the term “Insurance Investor”. If you have read the other insurance related posts in this blog, I have always been an ardent advisor of the fact that Insurance and Investment are two different entities and should not be clubbed. But, now I have used the term Insurance Investor which is kind of misleading isn’t it?

Don’t be confused my dear friend. The purpose of this article is to share some bad news for all those Indian citizens who have taken Insurance Policies as Investment options.

Why this Article

This article was written for multiple reasons:
1. Indians are one of the very few people who actually buy Insurance policies for Investment
2. Our fathers bought LIC Policies as investments, they advised us to do the same and still feel that Endowment Policies from Life Insurance Companies are the best investment options
3. Insurance Sellers (Agents) are notorious creatures who have been selling all the products that are beneficial to them (while it should’ve been beneficial to us) by wrongly stating the facts.
4. The IRDA wants to ensure that the interest of the normal insurance investor is protected

So, what is this Bad News for Investors?

The Insurance Regulatory and Development Authority (IRDA) has proposed certain changes to Endowment life insurance policies which will greatly affect the common investor who buys insurance products for investment. The Bad News is:

Bad News No. 1: Going forward, big annual bonuses will no longer be paid out.

Why: IRDA has proposed that a minimum death benefit must be set on Endowment Insurance Plans. This means that, in order to accommodate this minimum death benefit the insurance company will be forced to cut-back on the annual bonuses to the policy holders

Impact on Agents: One of the main selling points for Endowment Policies from the Agents mouth is the fact that we will get big fat loyalty bonuses every year for investing. So, if this is not going to happen, their biggest trump card is trumped out…

Impact on Investors: The Bonuses are the reason why the overall returns of Endowment policies try to creep upwards around the 6-7% range. So, if bonuses are cut-back, then the eventual returns from your endowment policy could be lesser than 6%.

Bad News No. 2: Insurance Premiums are set to go up

Why: As a result of the above news, Insurance Cos will be forced to set minimum death benefits for their customers. The current premium rates are not at that level. So, in order to accommodate the higher final values the premium will have to be hiked by the Insurance Co's (Unless they want to go bankrupt)

Impact on Agents: Not Much. Instead of the earlier X amount premium they are going to ask the customer to pay up X + Y amount.

Impact on Investors: The Annual Premium for the same policy with the same maturity amount is set to go up significantly and it will vary based on various factors like the Investors Age, Insurance Co, Policy Term etc

Is this Really Bad News?

Actually speaking – From the Customer point of view, No. This is in fact good news for the customer who buys these policies for the purpose of Insurance. Since the amount of insurance he gets out of these policies is higher, it will be beneficial for his family after their time. So, isn’t this good news? If we think from only the insurance stand point of these policies?

What is this Minimum Death Benefit?

This is the minimum amount an Insurance Company has to pay the policy holder in case of an untimely death when the policy is in force. The number will be calculated as follows:

For individuals who were less than 45 years old when they signed up for the policy:

Of the following – whichever is higher will be paid

1. 10 times the annual premium or
2. Half the Annual premium multiplied by the policy term or
3. 105% of all the annual premiums paid

For individuals who were older than 45 years when they signed up for the policy:

Of the following – whichever is higher will be paid
1. 7 times the annual premium or
2. 25% of the Annual premium multiplied by the policy term or
3. 105% of all the annual premiums paid

What is this Bad News for Agents?

The IRDA has proposed upper limits a.k.a caps on the commission paid out to agents for selling endowment policies. Endowment policies are one of the highest commission paying policies available for agents and hence they sell it like hot cakes. The IRDA has suggested that:
a. For all policies with tenure of 5 to 9 years, the first year commission cannot be more than 14% of the annual premium
b. For all policies with tenure of 10 to 14 years, the first year commission cannot be more than 28% of the annual premium and
c. For all policies with tenure of 15 years or more, the first year commission cannot be more than 40% of the annual premium

Why: IRDA Feel that misselling of insurance products happens predominantly due to the commission that agents earn by selling a particular policy. So, by establishing an upper limit on the money an agent earns by selling a particular policy, IRDA aims at reducing this misselling.

Impact on Agents: Commission Income is the only income that Agents get by selling a particular policy. So, if the commission they get out of selling a particular product is less, they will probably not advise a customer to buy it, if it wont be beneficial to the customer

Impact on Investors: The commission is actually paid from the money we pay as premium. So, lesser the commission that is paid, the more the actual money from our premium that gets invested. So, this means that a bigger portion of our money will get invested and hence a slightly higher returns can be expected.

Final Verdict:

I have said this numerous times and will say it again – Insurance Products are taken for the benefit/use of our family members after our death. If you want to use the money you pay as premium towards your policy before your time, invest that money in other investment options like Shares, Mutual Funds, Bank Deposits etc.

Did you know the average returns an Endowment Policy gives to its customers? You will be shocked to know the fact that it is only 6% on average. This is at least 2% less than a Bank Fixed Deposit and other investments like Shares or Mutual Funds may give you even double digit returns.

So, if you are satisfied with below average returns (Only 6%) then please go ahead and Invest in Endowment Life Insurance Policies.

Happy Insuring Yourselves!!!

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