Money Blog

Below are mentioned some points to consider when you are buying insurance which your insurance agent wouldn’t tell you.

Insurance is a need

Insurance is not a product or service. Insurance is not sold in shops or markets. We do not require it in our daily life like other products and services. Insurance is a need, which must be understood by an individual, and it requires an expert who can explain the need of insurance to a person. Therefore it is not easy to sell insurance policies. There is no established market, the demand has to be created by the insurers by explaining the need of insurance to their prospects.

In India the business of insurance is regulated by Insurance Regulation and Development Authority of India (IRDA). As per the regulations of IRDA, only qualified insurance agents licensed by various insurance companies can sell insurance policies.

Insurance agents have to qualify an examination conducted by IRDA before they start soliciting their clients. Insurance is an arduous subject and the object of IRDA is to impart the requisite knowledge and skills in the qualifying insurance agents so that they can handle the complex matter of insurance professionally.

As per the professional ethics and code of conduct imbibed in the insurance agents, they are expected to disclose all relevant facts about the insurance policies and to work in the interests of their clients. But some insurance agents might be inspired by some other reasons and they might not work in the interest of their clients. We are discussing hereunder some points where you have to be cautious, certain things, which your advisors might not be inclined to tell you.

Know about the Insurance Company and not only its policy
Your insurance advisor may directly start explaining you the policies offered by the insurance company. It is always better to know about the insurance company, its standing, its track record and experience in the field of insurance. An insurance agent can sell policies of only one insurance company, therefore he will try to convince you that the company he is working for, is the best in the industry. You may explore through internet or some other source in case you are not convinced with the reputation of the company.

Expenses of the schemes
When you are investing somewhere you have a right to know about every thing that will happen with your money. When you are paying premium of your policy, you should know that how much of it will be actually invested and how much will be used for expenses and the kind of expenses. In insurance business, the agent’s commissions are very high. It may go upto 40 to 45 percent of your premium in the first year and 2.5 to 7.5 percent in the consecutive years. Then there are administrative expenses, marketing expenses to name a few. In a traditional plan generally 30 to 35 percent of your first premium is invested.

Surrender value of your policy
While buying insurance people generally do not ask for surrender value of their policies. You might need to redeem your investments for some urgent cause in future. You must know the surrender value of the policy you are buying. In case you want to take a loan against your insurance policy, the amount of loan is based on the surrender value of the policy. Generally the cost of redemption of an insurance policy is very high as compared to other investments, therefore your insurance advisor might not discuss this aspect of insurance policy unless you specifically ask about it.

Portfolio of your investment
Before putting your money in a policy or scheme you ought to know the portfolio in which your money will be invested. This is essential because the portfolio of the policy must be in consonance with your risk appetite. If you believe in high risk high return you may opt for a ULIP with 80% exposure in equities. If you want to make risk free investments you may go for an endowment or whole life plan where you get almost guaranteed returns.

Agent’s recommendation may be based on maximizing his commissions
It is very difficult to sell insurance and therefore the reward is also very high. Insurance agents do get very high commissions. It may range from 2% to 45%. In unit linked schemes the commissions are generally low as compared to traditional plans where the commissions may go up to 45%. In case you are willing to invest Rs. 1,00,000 on your insurance premium, he may earn in the range of Rs. 2000 to Rs. 45000 and thereafter on every renewal he may keep getting commissions. His recommendations may be biased depending upon the commissions on various policies. You have to decide yourself after considering various schemes of different insurance companies.

Decide on the sum assured and not on the premium
An insurance agent generally asks you how much do you want to invest on premium? You should rather decide on how much sum you want your nominee to get in case of some mishap. It is the sum assured which should be decided first and then the premium may be adjusted by increasing or decreasing the term of plan or by considering various policiy options.