Insurance: All that is wrong with it and you!

In its report, the committee brings out the facts:

The 13 month persistency rate for insurance companies ranged between 41 – 76 percent in 2013-14. In the case of LIC for example, the 61st month persistency in 2013-14 was just 44 percent. This means that less than half of the policies sold in FY 2009 were retained. (emphasis is mine)

In other words, more than 50% of the policies were abandoned by investors because they were mis-sold those policies.

What led to this continued loot over several years?

The Bose committee lays down several reasons. I will summaries the key ones here.

1. Mis-selling was done by insurance agents who sold only those policies that earned them high commissions and not the ones which were relevant to the investors’ needs.
   

   ---

2. It almost accuses the insurance companies of building products that are good for the business but not the investor.
   

   ---

3. Traditional products such as money back and endowment plans represent the most of this nonsense.
   

   ---

4. They load it with high upfront commissions so as to get the agents push these products to you.
   

   ---

5. It also points to the lack of adequate and clear disclosures about the policy. The costs are cloaked under several layers and jargon. There is no clear break up of insurance premium – what portion goes into providing the risk cover (sum assured) and which part towards investments?
   

   ---

6. Even the estimated returns for that matter are represented not as a percent of the investment but as a percent of the sum assured. The real returns in several cases turn out to be lower than the rate of inflation. So, basically you are losing money.
   

   ---

7. Terms such as bonus have been misused to lure you with the idea of something additional while that may not be the case. You need to know what is the total return you will get on what you invest. There are no free lunches.

Now I think that list is only partially true.

The investor is equally responsible for letting this happen.

All that is wrong with your approach

There is a full racket of looters running in the name of providing insurance. The ones being looted are small investors like you and me and leading the racket is none other than your favourite insurance company. You get the hint, right?

The insurance agent too is out there to make a kill. But I ask what stops you from acquiring the knowledge to ward off such agents and make the right decisions.

Actually, it is your tendency to look for quick gains that makes you easy targets to the unscrupulous agents.

Why do you get swayed by the product that would ‘double the money in 3 years‘?

I would put it harshly. You let this loot happen.

Selecting the right investment is not rocket science. You cannot cite lack of mathematical proficiency. All you need is just a knowledge of basic maths.

There are no excuses. It’s your money after all.

Your money is your responsibility

While noting the shortcomings and areas of improvement, the Bose committee has also made several recommendation on costs, returns and disclosures, some of them sweeping ones, which once implemented by the product providers will make financial products specially traditional insurance policies easy to understand, compare and buy.

But that does not absolve you, my dear friend, from equipping yourself, through knowledge and reflection, to ask the right questions and to prevent yourself from falling prey to yet another bad insurance product.

The first and the last responsibility of your money lies with you.

Once you equip yourself, you need not engage an insurance agent. Almost every insurance company offers its products directly through its website. When you buy directly with them, bypassing the agent, you can save on commission costs which can result in a lower premium. 

So, if you are willing to take things under your control, here is a quick list to empower and equip yourself to make the right decisions about insurance (links included):

1. Start with the basics of money. Understand concepts like inflation and compounding and how they impact your investments and your goals.
   

   ---

2. Know how to calculate your life insurance requirement. The reason you take insurance is to replace an income or to replace a financial loss. How is your family going to take care of itself when you are not there?
   

   ---

3. Don’t be swayed by your emotions, your fear and greed. And it is not an easy task at all. Not just with our money but fear and greed impact our decisions in almost every thing in our lives. Think about it!
   

   ---

4. Is returns the only thing on your mind? Beware. Returns is not the holy grail. The best, the maximum, highest returns usually means taking up a equally high risk too. When you have to evaluate a financial product, think about how it helps you in meeting your goals.
   

   ---

5. Empowered with knowledge ask the right questions to your agent/advisor, the tough questions. About costs, returns, commissions, everything that you need to know. Read your application before signing on the dotted line. You can win only with questions. You may not have the jargon on your side nor the selling skills. But you can ask questions that can force out the seller to share information that truly matters for you to make your decision. Ask them.

6. ---

   Do not buy insurance for tax benefit alone.Somehow, tax benefits drive our decision to buy most investments that we do. Well, it is great if tax benefits are there but to see that as the primary purpose is harmful for your financial health.

7. ---

   Do not buy insurance for investment. Buy insurance for protection against financial loss only. Period. There are simple products that fulfil in this need. So, in life insurance, term insurance is the only thing you should go for.

Are you ready?

Between you and me: What insurance policies do you have? What was your motive in buying them? Did you buy it on trust or you asked some tough questions? I would love to read you feedback and questions in the comments.