When we go on one of those BRO roads in the border areas, we often encounter the road signs warning us : DRINKING AND DRIVING, DON’T MIX. I want to give out a similar warning to all of the faujis: INSURANCE AND INVESTMENT: DON’T MIX!! I will just quote a recent anecdote to substantiate my point.
One of my NDA course-mate, an Air Force Gp Capt, is shortly quitting the services. Since his insurance cover will be almost down to zero when he leaves, he decided to go in for an insurance to cover his life-risk last week. An LIC agent convinced him to take a ‘good’ policy which will NOT ONLY GIVE GOOD COVER BUT VERY GOOD ‘RETURNS’ TOO. The policy, called ‘Jeevan Anand’ was subscribed for him. He is to pay Rs 60,000/- premium per year for a cover of Rs 7.5 Lakhs. The policy is for duration of 17 years, at the end of which he is to get back double the sum assured (sum assured + bonus, likely to be same as sum assured), ie, Rs 15 Lakhs. It was, thus, projected as a win-win situation for him as he was going to be insured through and through, while he gets back 1.5 times of the premium paid by him if he survives.
When he narrated this to me, I assured him that it was a win-win situation all the way – for his agent, but not for him. His agent was to get a commission of 25% of the premium (Rs 15,000/-) on his policy in the first year, 7.5% (Rs 4500/-) in the 2nd year, and 5% (Rs 3000/-) per year for the balance of the years. Thus, the agent gets a total of Rs 64,000/- in commission (not counting the inflation adjusted value of the present money) due to this single policy. Obviously, his interest is to push such policies which fetch him good commission than the low-commission one which are actually beneficial to you.
To illustrate my point, I gave him a straight example of a pure Term Insurance product. Had he gone in for LIC’s Anmol Jeevan-1 policy, the same cover for the same period of time would have cost him a mere Rs 8,510 per year!! If something happens to him, his survivors get the sum assured of Rs 7.5 Lakhs + the bonus accruing on it which depends on the length of time for which he is in the scheme, same as the scheme sold to him. If nothing happens to him, he gets nothing – something like car insurance. But then he saves Rs 51,490/- per year. This amount, if invested for 17 years in a very safe place like the PPF or his DSOPF on a monthly basis (easier on the pocket and better too), fetches him Rs 19,91,000/- and Rs 30,06,000/- if put in very good 5-Star rated mutual funds (assumed return a very conservative 12% per year) with minimal risk associated with them.
However, the agents will NEVER ever mention term insurance (LIC’s Anmol Jeevan-1 is term insurance policy) to their gullible clients since they get hardly any commission on it. However, term insurance is the way insurance was supposed to be, till the insurance companies got greedy and made it complicated by combining it with all sorts of ‘returns-back’ products. Now, even the clients have got so used to it that they themselves ask – how much returns will they get from that policy, without realising the honey-trap they are walking into.
Tailpiece: If you do have to go in for insurance, take only Term Insurance (LIC’s Anmol Jeevan, ICICI’s Pure Protect, etc). Balance of the money, of which there will be plenty saved, can go into much superior investment products.
Remember, combining insurance with investment is actually, willingly taking worst of both the worlds!!
I think what you say is very relevant. We all have got duped by such agents some time or the other in life. Thanks for making us aware.
ReplyDeleteI ditto the comment by Ajay. Can we have some more posts on things of relevance to us like how much to save, various saving options, how good is our DSOP etc
ReplyDeleteI have a question here? Is there an age limit to start a term policy? I am 67 .
ReplyDeleteSorry for the delay in replying to your question.
ReplyDeleteNormally companies are chary of giving a term plans extending beyond 55-60 years of age. Even beyond 40 years of age, they make the person undergo all sorts of medical tests. Hence, starting a plan at 67 years of age is almost a no-go.
But more that that, the fundamental question is - why do you want an insurance at that age? Generally, the liabilities are over or about to get over and there are no dependents to look after in the strict sense. The life insurance is done to protect a risk arising out of a financial difficulty in case of the insured's untimely demise. These conditions are likely to be already over at your age. I would be able to comment better or suggest an alternative in case I am given more details. If confidentiality is desired, the same may be mailed to me at contactus@humfauji.com