Until a year ago, all insurance agents were busy selling Unit-Linked Insurance Plans (Ulips) as the God's gift to savers, despite their comparatively low returns.
In reality, Ulips were God's gift to agents, with their commissions being 100% of the first annual premium! Then, IRDA came down hard on these insurance-cum-investment plans and capped agents' commission on these.
One would have thought this would make agents go back to selling insurance covers - the basic term plans. But, they are now focused on selling other complex insurance-cum-investment products like money-back and endowment plans.
The commission rate on these products is no different from that on plain-vanilla term plans - typically, up to 30% of the first-year premium, 7-8% of the second-year premium and 4-5% of the premium during the rest of the policy term. However, since the premiums for complex products are many times more than those for term plans, agents make much more commission when they sell insurance-cum-investment products.
And, they have a whole range of arguments to convince you why you should buy these products. Here’s how you counter their arguments:
Pitch one: 'This is a savings product which can be surrendered after three years for a special value.'
Your Question: Why three years? If I put my money in a fixed deposit or other debt instruments, I can exit anytime for a small fee of less than 1%.
What you should know: Surrendering an investment-cum-investment policy will lead to significant losses, which the agent may not be eager to tell you. Surrendering a policy within three years will give you nothing. After three years, you get 30% of the premium paid minus the first-year premium plus partial bonus. 'Surrender value' is the term for what a policyholder gets if he terminates a policy or stops paying the premium before the term ends.
Pitch two: You will get assured returns with bonus.
Your Question: What will be the rate of return after bonus?
What you should know: "Invest in any debt product that gives you higher returns, apart from the liquidity," says financial planner, Pankaj Mathpal (see the accompanying story). At present, the rate of return insurance-cum-investment products give is 5.5-6% - much less than even the post-tax returns of many debt instruments.
For instance, SBI's one-year fixed-deposit rate stands at 7.5%.
For the person even in the highest income tax bracket, the post-tax return will be 5.25% after taxation of 33% on returns. And, even if you were to just recover the premiums, it is loss because money lying idle in banks would have earned at least 4% interest (savings bank rate).
Image: Sachin Tendulkar helps a child to bat during the promotional event for the Aviva insurance group in Mumbai on September 6, 2008.