Policy buyers should always understand the purpose of buying life insurance. There are many agents, brokers and even bank staff who sell life insurance policies intending to help buyers choose suitable policies for themselves as per their need, want and lifestyle changes.
However, there are also some agents, brokers and bank managers who try to sell life insurance by misrepresenting the facts and features of a policy. Therefore, buyers should always be aware of the facts and ways in which the policy is mis-sold to them.
Here are some of the common sales pitches that they may use to lure you to invest in them, and what they mean.
ALTERNATIVE TO MFS
The promise of getting higher returns on unit-linked insurance plans (Ulips) is one of the instances of misselling. Most often, when people ask for good returns on their investment, sales agents try to sell Ulips as an alternative to mutual funds.
The common sales pitch an agent makes by showing a benefit illustration is that the product will fetch nearly 8% return per annum (pa) on their investments. This way, people tend to believe that one can get better and guaranteed returns on Ulip while comparing it with mutual funds.
For instance, when the market is bullish, an equity fund exposure through Ulips can give you reasonably good returns at the end of the fifth year, and so on.
However, you must know that the returns on Ulips also depend on the underlying performance of each asset class or the fund option. There is no guarantee that the fund will give a specific return nor is the fund value an assured amount.
Also, in many cases, people are not aware of the fact that they are being overpromised returns. “Insurance agents sell policies claiming 8% returns pa, but the actual XIRR is around 3-4% pa only,” said Mrin Agarwal, founder director, Finsafe India.
Moreover, for Ulips to be profitable, it almost takes a minimum of 8-10 years since there are many charges and front-loaded fees. Besides, if the markets are bearish, it can take a much longer time to get your investment profitable.
BETTER THAN FDs
Today, under the open architecture model where even banks can sell life insurance products, it becomes easy for them to target bank customers, especially senior citizens, to sell insurance policies instead of fixed deposits (FDs).
Senior citizens who retire often approach bank managers and ask them to park some lump sum amount in FDs. However, the manager easily convinces the retiree to buy insurance by showing him or her the benefit illustration with 8% return pa. Moreover, the post-tax returns, when comparing to FDs, also lure senior citizens to invest in insurance products.
However, the real question here is—should you buy life insurance after retirement? FDs being a debt instrument earn a fixed interest rate while Ulips are market-linked, and the returns are not guaranteed. Therefore, to create more wealth after retirement, senior citizens should first understand the risk in financial products before making any investments.
“As a retiree, one must be very careful while committing money. The portfolio during retirement years should be in a combination of products which either offer safety, accessibility or regular payouts. Ulips do not possess any of these features,” said Prableen Bajpai, founder, FinFix Research & Analytics.
“Additionally, insurance also becomes expensive as one ages,” she added.
You must understand that life insurance should be bought with the perspective to first ensure the financial security of your family in case of death of the policy buyer and then look into other benefits.