Five Life Insurance Sales Traps To Watch Out For

While it’s a fact that a well-thought-out Life Insurance portfolio is the cornerstone of a good financial plan, some products offered by the industry are just not worthy of consideration. Here are five questionable pitches doing the rounds these days. If you hear any of them, give the plan (and the agent) a wide berth! 

“Plan ABC will give you a guaranteed return of X per cent, which is an excellent cushion against the present market volatility” 

Wrong because: No Life Insurance plan, even a traditional one, guarantees any return. In fact, ‘returns’ from traditional plans are opaquely represented as an annual bonus, calculated as a percentage of sum assured, which can be very confusing and misleading. This annual bonus is contingent upon the performance of the insurer. ULIP’s, of course, is market-linked and their NAV’s fluctuate just as much as any other market-linked instrument.  

“Plan ABC is better than Mutual Funds because its returns are tax-free u/s 10(10D)” 

Wrong because: if it’s a traditional plan in question, it’s an apples-to-oranges comparison. Traditional plans are structurally incapable of delivering anything more than 5-6 per cent annualised returns over long time frames, so their tax efficiency really becomes a moot point. If it’s a ULIP in question, well – there’s probably slightly higher merit to the argument; but their tax efficiency doesn’t necessarily make them superior to Mutual Funds when you take their charges, poor 5-year liquidity, inbuilt deduction of units as mortality costs, and relative underperformance compared to top mutual funds into the account. 

“Traditional Plan ABC is best for your child’s education because it guarantees cash flows at critical points in time” 

Wrong because: First, these plans will do not take inflation into account. Education costs are escalating at 7-10 per cent per annum in India, and what costs Rs. 1 Lakh per year today will cost a whole lot more a few years down the line. Second, if you actually plot these cash flows into a simple excel sheet, you’ll discover that the returns (computed as XIRR) will actually be sub-6%; which, you’ve got to admit, is an abysmal growth rate for a long-term investment. In fact, given a choice between a ULIP and a traditional plan for your child’s education, a top-performing ULIP is a whole lot more superior – but your agent will probably not suggest it as it nets him a much lower commission! 

“ULIP Plan ABC is excellent because it’s newly launched, and its funds have low NAV’s” 

Wrong because: it's factually incorrect that a low NAV is ‘cheaper’ and hence better. In fact, the reverse is applicable. A ULIP with a long-term track record of market-beating performance may have high NAV’s but is likely to continue performing better than a newly launched ULIP with ‘lower NAV’s’. Ultimately, NAV’s mean precious little, as future NAV growth in both the new and old ULIP (in percentage terms) will depend solely on how the underlying securities within the funds’ portfolios perform in the future. 

“Plan ABC is worth considering because it offers you up to X free switches in a year” 

Wrong because: this is a moot point. You really don’t want to be switching around your funds (in a ULIP) so much anyway. In fact, publicizing the ‘free switches’ feature too much encourages clients to time the market and move in and out of funds in the fruitless endeavour to generate better returns by doing so. This, more often than not, works to their detriment. One switch a year to smartly rebalance one’s portfolio to their target asset allocation is more than enough, thank you!