Don't fall for fancy frills in life insurance covers

How many of you would use a mobile phone predominantly as a calculator? I guess, not many. In fact, you would be wondering if there would be anyone in this world who would answer in the affirmative to this question. Now, if I were to offer a phone without SMS or address book facility, but with a scientific calculator functionality attached, would you still buy it? Not really. Surprisingly, in the world of financial products and services, it is not the case.

Assume the margin for the distributor in selling calculator-enabled mobiles were 10 times that of selling plain vanilla mobiles phones. What would he do in such a case? Most likely, he would only sell phones that had a calculator feature attached — whether or not the customer wanted it. He would wax eloquent about the advanced nature of the calculation facility. Only if a knowledgeable customer insists, would he even show him / her the ‘simple’ phone.

An unwary customer would be subjected to a barrage of ‘features’ and ‘benefits’, without educating her on the real costs extracted by the company and distributor in providing these features. She would be shown unrealistic projections and growth rates of her corpus.

The blatant falsehoods in many of these claims would come forth only years later, by which time the agent would have long gone. The main objective of insurance, which is what the plan is meant for, would typically be given a go-by.

Welcome to the world of financial services. We all know that we need life insurance, much as we have now come to need mobile phones. Now, life insurance in itself is a complete product, where the company takes a premium from the customer, and pays a lumpsum to the family in the unfortunate event of the customer’s demise.

Almost every single life insurance company has this insurance scheme — called a ‘term plan’. But for the distributor or insurance agent, this is not where the juice is.

The high-margin business for an agent is what is called unit-linked insurance plan or Ulip. Here, investment is the ‘calculator’ of our analogy, the red herring thrown in to confuse the customer. The agent would sell Ulip as a great investment plan, which also provides insurance.

Never mind, that it only provides lip service to insurance, just as a phone without SMS or address book would be useless as a mobile phone! Also, never mind that there are better investment plans available in the market (like good standalone scientific calculators) at a much lower price than Ulip.

There is no breach of law here. After all, it is the customer who has the responsibility of reading the fine print and being knowledgeable about various products and associated costs. The distributor would only work to maximise his income; the customer should try and protect her interests.

Thus, if she goes to a mobile store (insurance), then might as well buy a simple and effective mobile phone (term insurance policy at competitive rates). It is worth going to the adjacent shop (electronics) to buy the calculator with desired features (the investment plan). An agent who claims to fill both spaces through his product, only ends up filling his own coffers instead, at the cost of the customer.

Swapnil Pawar, Director PARK Financial Advisors