In 2012, Santosh Anagol and Shawn Cole of Harvard Business School conducted a study that only confirmed what anecdotal evidence has pointed to all along – that Life Insurance buyers in India would do well to follow the age-old principle of “Caveat Emptor” or “Let the Buyer Beware”. The two researchers, rather unsurprisingly, concluded that life insurance agents in India “overwhelmingly recommend unsuitable products, which provide high commissions, and cater to the beliefs of uninformed consumers, even when those beliefs are wrong”
What this effectively means is that instead of educating you and correcting your beliefs as a relatively less informed Life Insurance consumer, most agents will play along with your oft loophole-ridden beliefs instead - just to saddle you with a policy that earns them a sizeable commission.
This ugly truth was further highlighted when a group of researchers at IGIDR (Indira Gandhi Institute of Development Research) got together to estimate the losses accrued to customers between 2004 and 2012, on account of mis-selling of Life Insurance by agents. They arrived at a staggering estimate of Rs. 1.5 lakh crore (1.5 trillion)!
Good intentions of life insurance companies notwithstanding -- it would appear that a multitude of factors, most certainly led by the high quantum of commissions payable to agents as well as the significant ‘policy to policy’ variance in pay-outs, serve to distort the objectivity of ‘advice’ dispensed by most Life Insurance agents in our country.
And what’s more, with the behemoth LIC reigning supreme and exerting significant influence over government and regulatory policy alike, it may be overoptimistic to expect significant outside support in terms of the consumer protection when it comes to all matters Life Insurance related. Fortunately for you, then, the Lion’s share of regrettable Life Insurance related mistakes can be sidestepped by running through this simple checklist before you sign above the dotted line. For best results – be resolute in your approach to NOT move forward unless you’ve ticked off all the boxes.
A simple, yet powerful pre-Life Insurance purchase checklist
1. I have undertaken a quiz to compute my HLV (Human Life Value)
2. There’s a genuine need for me enhance my life cover, keeping my dependents in mind
3. I am buying this policy for the right reason; that is: to enhance my life cover and for no other purpose (such as investment, tax saving, or the like)
4. I have understood what kind of policy this is, that is: pure risk, unit linked, traditional (regular premium) or traditional (single premium)
5. I have asked my agent how much commission he/she is earning from the sale of this policy
6. If this is a traditional plan, I have understood the IRR (Internal Rate of Return) that I will earn over the policy term in a best case and worst case scenario
7. I have clearly understood the lock-ins, surrender values, and exit costs associated with this policy
8. I have understood all the charges and costs associated with this policy and have them with me in written form
9. I am confident that there’s no better way to replicate the combined life cover and savings/investment benefit that this policy offers
Unbelievably, this simple nine-question checklist can act as your saviour when it comes to avoiding nearly all life insurance related traps. Use it with discipline, and you’ll be doing your personal finances a big favour.
