New Mis-Selling Strategies

As a regular writer & educator on different aspects of Investing, last week i received a call from my old client.

Being a lady, she had concern for her nephew, who was having business & was requiring immediate loan for business purposes.

The nephew had received a call from a reputed lending company & were insisting to buy traditional life insurance policy for getting the loan.

She asked for my help.

Friends, i regularly educate through various forums & blogs.

These revenue greedy companies go at any level for promoting their products. They are least bothered about client & his family as insurance is a contract signed by the client to pay premium for the complete term.

If any death occurs, the death claim or at maturity, the maturity amount is paid to the assignee i.e the lending company.

Analyse, you have taken a loan of 5 lakhs without any financial documents, you don’t have to pay EMI, just pay insurance premium of 60000/- every year for next 10 years.

At maturity after 15 years, the lending company, who is the holder of insurance policy will receive the maturity amount which will not be paid to you.

This is a viscous circle of mis-selling of life insurance policies.

Purpose of Insurance:- “Insurance is a means of protecting financial loss”

Small business owners, new businesses, vendors, housewife’s, salaried employees with additional business are soft targets of these companies.

My advise– Stay away from such offers, invest wisely.

PS: I have complete recording of the above mentioned sales call. If anyone needs to check it, pls comment.

Kaustubh Deole

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Use the Magic word & be Rich

Today, every single product is positioned as need based solution. Can you deny the need to save for child’s education, self retirement, safeguard family’s health & build wealth in long term? It is difficult to see the advantages of any investment when approached by a good salesman.

The world has evolved to a global state & so do any company or salesman. I would rather term them all as HAWKERS. They position the product so well that customers fall for sales pitch & buy it.

Game plan of HAWKERS: IF you have child, you require Child Plan. If you have family, you must have medical insurance. You also need Retirement Plan.

Result: You buy costly child Ulips & guaranteed plans, complex medical policies, inflexible pension plans. They push you to diversify across Stocks, gold, property, bonds, bank FD, PPF & other complex options. If you can’t afford a new home, bigger car, or foreign holiday, they will get you to leverage on future income.

You take a home loan, a car loan, a personal loan & you also collect few credit cards in bargain. This is sure shot recipe for financial worries. Use the magic word to safeguard your finances against such perils, make you rich & protect you from friends offering free advice, wealth managers, money quacks, banks, insurance companies, bank relationship managers, insurance agents who are trying to sell you something or other.

Magic word: No, Nahi, Nako, Na, Venda, Nahim, Illa, Illai.

‘NO’ is a very powerful word. Use it ruthlessly. Say ‘NO’ to the relative who wants to sell you an endowment insurance policy. Turn down bank executive who is pushing a pension plan. Refuse the offer of free add-on card from Credit Card Company. Don’t agree to buy child plan that costs a bomb.

Action Plan: Keep your financial life as simple as possible.

• One term insurance plan to cover your life risk.
• SIP’s in 4-5 well chosen diversified equity funds & debt.
• A simple no frills medical insurance for your family.

Kaustubh Deole

Complete Break – Up of Your Life Insurance Premium

The premium of a life insurance policy comprises of various charges put together. Some charges are common, a few vary on the basis of the type of policy, e.g:- Term, ULIP, Endowment etc…

Savings

Endowment Plans guarantee a maturity benefit after the policy tenure. To cater to this, a portion of the premium is invested in various avenues such as bonds, government securities, and GILT and money market instruments. This is not really a charge but a contribution that is made by the policy holder towards building a maturity corpus, deducted from the premium.

ULIP – Unit Linked Investment Plan

• Mortality Charges

The most important part, mortality charges are what you would be paying the insurer, for the cover you get in return. Considered as the actual cost of your insurance, it is a vital part of the premium (around 15%). This mortality charge is calculated by insurance companies by using what is known as a “Life-Mortality table”, prescribed by the IRDA. The calculation is based on the average Indian life expectancy ratio. It also considers gender, age, profession, place of residence and overall profile of the insured for calculation. The younger and healthier you are, mortality charges work out lower.

Mortality charges are higher in riskier investment based insurance policies such as ULIPs in comparison to Plain Vanilla Term Plans.

• Fund Management Charges

The fund management charges are typically applicable to an investment insurance policy such as a Unit Linked or Endowment Plan. For managing and investing your money in a particular fund, a fee is charged by the insurance company. The amount is anywhere between 1% to 2.5%, of the Assets Under Management (AUM). Fund management charge greatly depends on the type of fund chosen. The more aggressive the fund manager’s role in the portfolio, the higher the charge, in comparison to a low risk debt fund.  This charge is adjusted in the daily Net Asset Value of the fund.

• Policy Administration Charges

For the insurance company’s expenses towards paperwork,  maintenance and administration, an amount known as policy administration charges (PAC) is levied. Chargeable on a monthly basis, this is a flat rate that varies from insurer to insurer, and policy to policy. On an average it is around 0.5% of the annual premium chargeable per month.

• Premium Allocation Charge

Premium Allocation Charges are very typically associated with Unit Linked Plans. Though termed premium allocation, it actually has nothing to do with allocations. It is that charge that goes towards, any commission/ service charge for the insurance agent. It is deducted from your premium before the balance is invested in the fund of your choice.  Premium allocation charges are highest in the first policy year. It is deducted upfront from the premium paid on a yearly or monthly basis, depending on your policy.

• Goods & Service Tax Charge

Mandated and declared by the government which is currently at 18% Goods & Service Tax (GST) is applicable on all charges such as fund management charge, premium allocation, mortality.

• Other Charges

These below mentioned charges are levied along with your premium in case you opt for it.

• Rider charges

If you seek a more comprehensive cover and opt for a rider such as a personal accident cover or critical illness benefit along with your life cover, you are charges an additional premium amount. The cost depends upon on the rider you choose.

• Switch Charges

If you opt to switch over from one fund type to another in your ULIP policy, you may be charged for doing so. This charge is levied when the switch is actually made at; is a flat rate.

 

To Summarize

The Break – Up of insurance plan depends purely on the type of policy it is.

Pure Vanilla Term Plans have a premium comprising of mortality, administration and service tax only. As term plan does not have any maturity corpus, there is no requirement on the part of the insurance company to manage any portfolio. It is for this reason, term plans work as a cost effective insurance policy.

On the other hand, unit linked plans, top the scale when it comes to high premiums. Considering the investment component in the policy; it requires more management and administration, thus making it an expensive option.