What Your Life Insurance Agent Isn’t Telling You

It’s a sad truth that life insurance continues to be one of the most mis-sold financial instruments in our country. From being sold life insurance as “fixed deposits” to being misinformed about future returns, policy buyers have seen it all over the years. The key lies in awareness. Begin by knowing about these six things that your agent may not be telling you before you sign above the dotted line.

They receive a sizeable commission from your ‘investment’

Although commission rates vary depending upon the type of policy sold, it’s likely that your agent is earning anything ranging from 20% to even 90% of your first-year premium as their commission. Unfortunately, this may create a conflict of interest between agents and clients. If you find your agent pushing you to purchase one type of policy though your common sense may be pointing you in a different direction, probe your agent to justify his recommendation. 

The long-term returns in traditional policies are very low

Traditional plans are structurally incapable of delivering high returns. Even those policies that might appear lucrative to the untrained eye tend to lose their sheen when subjected to some degree of scrutiny and evaluation. After doing the math, you’ll in all likelihood discover that your traditional plan will end up providing you with an annualized return ranging from 4 – 6% per annum over a long period of time. Definitely not worth it from the returns standpoint!

You may need a different policy

There are really three kinds of policies, with each one fulfilling a different need. Term Plans fulfil the need for a high life cover, ULIP’s fulfil the need for growing your money while bundling insurance and investments into one ‘convenient’ package (although their efficacy is questionable) and Traditional Plans really only fulfil the need for “low but guaranteed returns, coupled with a sliver of life cover thrown into the mix”. All of them fulfil the secondary need for saving taxes. Which one are you aiming for? Be sure that your agent isn’t pushing a certain type of policy which isn’t in line with your unique needs.

You really don’t need to insure your children!

Although this one’s a no brainer, we’re surprised at the sheer number of people who ‘insure’ their kids, thinking that they’re doing THEM a favour! Insuring your kid’s life means that you (or the nominee) will stand to gain if your child meets with an unfortunate eventuality – a senseless step to take.  Yet, lakhs of policies are sold each year in the name of “taking out a policy for your kids” – and it’s a well know fact that Life Insurance is sold, and not bought, in our country. A recent Harvard study also concluded that most agents in India are more than happy to allow you to hang on to your preconceived notions about Life Insurance, however faulty, in order to push a sale through.  Make sure you insure YOURSELF and make your kids the nominee. Doesn’t that make more sense?

There are multiple charges involved in ULIP’s

ULIP’s (Unit Linked Insurance Plans) have multiple charges -  don’t be taken aback, should you discover them on your policy statement later. There are administration charges, switching costs, fund management charges, and commissions involved, just to name a few. There’s a fair chance that your Advisor hasn’t explained ULIP charges to you fully. Make sure you go through the policy brochure carefully yourself.

Falsifying information may lead to a claim rejection later

Here’s the thing- it’s pointless to falsify information on your proposal form. Things like your family medical history, or your smoking and drinking habits are easy to falsify, but may lead to a rejection on your claim, after you die. Insurance companies operate on the principle of ‘utmost good faith’, and holding back material information is in direct violation of this principle. A rejected claim in your absence can cause serious strife to the family members you’ve left behind. Your agent may be filling out false information simply to have the policy issued (as this is his primary objective). Make sure you read the filled-out proposal form carefully yourself – or better yet, fill out the form by your own hand.

This is probably a long-term commitment, with prohibitively high surrender (exit) charges

Did your Agent tell you how many minimum premiums you need to pay? And what happens if you stop paying? Life Insurance policies are typically long term commitments, and not fulfilling the payment in time can lead to your policy getting lapsed (if you die while your policy is lapsed, your family gets nothing). Surrendering your policy before a certain number of years may not even be an option – and if it indeed is, it might lead to a massive cut in the money you get back. 

There’s a free look period

Here’s the good news – IRDA stipulates that you can change your mind within 15 days of the policy issuance, and you’ll get your money back, no questions asked! This is known as ‘free look’ and your Advisor probably hasn’t told you about this. If you bought a policy within the past couple of weeks, you’ve got the golden opportunity to subject it to a higher degree of scrutiny and double check whether it really fulfils your needs or not.