Did you buy your insurance policy, or was it sold to you?
Are you aware that insurance is one of the most mis-sold products in the financial world? So mis-sold in fact, that it is said that ‘Insurance is not bought’ it is sold’?
And it is not only being sold by insurance brokers, but also by your bank, by biased financial advisors, and by anyone who has an eye on the hefty commissions paid by insurance companies for selling these products.
If you yourself have faced any such circumstance where an insurance policy has been forcefully and convincingly sold to you than you can definitely access the truth in such statements, but if you have not faced anything like this yet, you must read on to arm yourself against this situation.
Just to make sure that you do not face any such circumstance in future, we at PersonalFN would like to share with you the case of an individual who was the greatest victim we have encountered till date, of gross mis-selling of insurance.
We say ‘great victim’ because this unfortunate individual had been practically targeted by insurance brokers due to his high net worth and high annual income. When he came to PersonalFN to build his financial plan, this individual had over 50 insurance policies for himself, his wife and two kids - more policies than at least 5 families would collectively have.
Let’s go straight into the details of the case.
Name : Mr. Great Victim (Name changed to protect privacy)
Age : 45 years
Income : 65 lakhs p.a. (approx.)
No. of Insurance Policies : 53
Annual Insurance Premium : 23 lakhs (approx.)
Details of policies:
|Sr. No||Type of Policies||No. of Policies|
|5||Whole Life Endowment||6|
|6||Whole Life Pension Plan||1|
This gentleman was sold 18 ULIPs, 12 Endowment Plans, 8 Money Back policies, 7 Whole Life Pension Plans, 6 Whole Life Endowment Plans and 1 Whole Life Pension Plan. He did not actually need any of these policies, but was convinced by the insurance agents that he did need them.
What he actually needed was a simple, straightforward Term plan – of which he had 1, but it was insufficient for the cover that he required.
If you look at the types of policies he has, you can clearly see that his insurance portfolio contains almost 99% of the policies from an investment perspective rather than protection purpose.
Almost 50% of his insurance portfolio contains UNIT LINKED insurance products and the rest was either Endowment or Money Back policies.
Also, since all the ULIPs were sold to him before Sept 01, 2010, he had to pay hefty hidden charges associated with these policies and further adding insult to the injury, his UNIT LINKED insurance products could not even recover the charges associated with them despite markets climbing. His Fund Value was far less than the amount of premium paid towards these policies. His ULIPs were in a loss.
His other major premium outgo was on his Endowment and Money Back policies which he had been sold 10-15 years ago, barring a few of them which were recently bought. Some of them were even older than 10-15 years and now they were almost on the verge of maturity.
He was getting an annualized return of around 5-7% p.a. on Endowment policies (over the entire 15-20 year tenure of the policies) and around 4-6% p.a. on Money Back Policies (with a similar tenure). In some of his money back policies there were negative returns as well.
Considering that all the policies he was holding were for atleast a 10-15 year tenure, some for a 20 year tenure or longer, a return of between 4 and 7% p.a. is so low that it does not even match inflation. This means that as the years pass, his money was actually eroding in value, giving him negative real returns.
There was a single redeeming factor in the insurance portfolio.
That was his Term Plan.
Coincidentally, the term plan was also the only insurance policy that this gentleman bought himself, without any agent prompting and pushing him to buy it.
This is the only policy that will take care of his family in case of his unfortunate demise.
Analysing all these 53 life insurance policies of a single person was a big undertaking, but an even bigger undertaking was to explain to our client that his entire insurance portfolio contained only 1 worthwhile policy. He had to take specific action on each of the remaining policies as they were neither providing enough insurance cover nor were they serving the purpose of investment successfully.
It was a big shock for him to see himself in such a mess but it was our duty to tell him what was best for him even though it had shaken him up a bit.
When he was ready to drop those policies which were not good for him, he was a bit upset about losing some money by dropping those policies at the time, but at the same time he was happy as it will certainly help him to avoid future losses.
2 Simple steps should you follow when taking Life Insurance:
If you want to avoid the situation of Mr. Victim, there are 2 very simple steps you can follow:
- Check your insurance requirement – insurance should be taken to protect your family and you – choose a regular term plan for life cover and a good health plan to cover your family and yourself up to the amount that you require.
- If an agent comes along telling you that you should definitely take a particular policy and enumerating all its various features, stop him. Ask him to first disclose the commission that his company earns if you buy the product. Compare that to what his company earns if you buy a simple term plan – you will see why they would much rather sell you anything but a term plan. Remember, an insurance agent is only doing his job. It is your job to be knowledgeable and aware.
If you seek professional assistance where assessing your insurance portfolio and insurance requirements is concerned, make sure that your financial planner is completely unbiased and does not depend on commissions that he will earn when making recommendations to you. If you would like your insurance portfolio to be assessed as part of your financial plan, you can call us at 022-61361200. It is only an unbiased advisor who will guide you in the right direction. Carrying out a brief Insurance Planning for yourself as part of your larger financial plan, is the best way to assess your insurance requirement and decide the type of insurance product you should go for.
You might be surprised at what you have been (mis) sold.
Also remember, insurance planning is part of overall holistic financial planning, and it is advisable to build a financial plan at the earliest, to make the most of the time you have left to achieve your life goals and dreams, such as your own retirement, your children’s educations and marriages, that house purchase, those vacations and anything else you have your heart set on.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm.