Money Blog

What is insurance?
We all have a life and every asset used by us has a life. We own an asset with an expectation that we will be able to enjoy its benefits till the end of its life. However there is always a risk associated with the life of an asset or in other words there is an uncertainty whether the asset will complete its life of will perish, or become non functional before the expiry of its life. The concept of insurance emanated from the human desire to hedge this risk or uncertainty with respect to the life of the asset. Insurance is an arrangement whereby a number of people using similar assets pool in a small portion the cost of asset to indemnify some of them whose asset does not complete its life. In simple words insurance is sharing of risk by many people who are subjected to the similar risk.

The business of insurance
Earlier this kind of arrangements were made among small groups but with the passage of time, as the number of interested people increased, the need of intermediaries was felt who could manage these arrangements at a larger scale. It emerged as a business opportunity and a number of companies across the world started the business of insurance at commercial levels.

Life and Non Life Insurance
A human life is also an income-generating asset and it also needs protection against unfortunate and unwarranted happenings like early death, sickness for a long time, amputation of limbs, etc. The insurance companies realized this fact and commenced the business of insuring lives of people along with other assets and later on the insurance business was divided in two branches Life Insurance and Non-Life Insurance as life was the most precious asset for anyone, it had to be separated from all other assets.

Purpose of Insurance
From what you’ve read above, it may be safely concluded that insurance is a cost of hedging the risk or uncertainty associated with the asset. Where there is no uncertainty or risk, there can be no insurance. We pay an insurance premium to the insurance company and the insurance company takes the risk on itself. Hence the real purpose of insurance is to hedge the risk on the asset at the cost of a nominal premium. Insurance is always an expense, which we incur to safeguard the life of our asset.

What people do not consider while buying insurance
With the growth in the insurance industry and becuase of fierce competition in this field, the insurance companies are coming out with new and innovative insurance products to lure their customers, and in this race and in order to convince their prospects, they tend to combine insurance products with investment products and tie up riders with main policies. Your insurance advisor would be more keen on selling an investment rather than an insurance, because he believes that he might be able to sell an investment to you by showing the returns coming out of it, rather than a pure insurance which will be a cost of the risk on your life.

What actually happens when you buy an investment cum insurance plan, is that the insurance company will invest a small portion of your premium towards the risk cover of your life and rest of the premium, after deducting various administrative and other costs, will be invested in securities as specified in the plan you opted for.

Now, this is something, which you could do yourself. Instead of the above investment if you would have taken a term plan (a pure insurance policy) of the same sum assured and invested rest of your money in some mutual fund or Government securities, what ever you would have opted in the above insurance cum investment plan, the total returns would be much higher as compared to the above case. You save a lot of money which would have gone in the form of agent’s commission (commissions in insurance industry are very high as compared to the commissions in other investments) and also the administrative costs of insurance companies are much higher than the administrative costs of other investments viz. mutual funds, government securities, post office investments, etc. Generally in a traditional insurance policy about 35 percent of your first premium is actually invested and rest of the money is used in expenses. On the other hand, in a mutual fund generally about 90-93 percent of your investment is invested and rest of the money is used for the costs of the scheme. The broker’s commission in a mutual fund ranges from 2 to 3.5 percent. People, generally, do not consider all these facts before buying an insurance policy and this is something, which you can never expect to learn from your insurance advisor. He will always try to convince you on the basis of long-term yields of your investments.

Also while buying an insurance policy, people generally do not look at the surrender value. You may have an urgent need in future and you may decide to redeem all your investments, you might not get anything in most of the policies if you surrender them within first three years and in case you surrender at the end of 10th year you may get the principal back, don’t expect any returns. Whereas in case of other investments the redemption costs are very low.

Insurance is an expense and not an investment
We must realize that nothing comes free in this world. If you want to hedge the risk on your life there is a cost of it, which is charged, in the form of insurance premium. Always buy an insurance policy as an insurance policy and don’t be taken away by the tied up investment plans or riders. Be informed about all aspects of your policy. You have a right to know, not only the returns of your investment plan, but also the costs and expenses associated with it. And don’t forget to look at the surrender value of your policy.

Various Types of Life Insurance Policies available in India
There are a number of insurance plans available in the market and the companies are coming out with more innovative and customized insurance plans. All these plans are combination of two basic plans, first - Term Assurance and second - Pure Endowment, representing the two basic objectives for which insurance is generally bought first - death and second - old age, respectively. Now we will discuss various types of insurance plans.

Term Assurance Plan
In this type of plan, a fixed premium is paid for a fixed term for a sum assured and if the assured life does not come to an end after the expiry of the term the policy comes to an end and the insured or his nominee do not get anything. On the other hand, in case of death of the person isnured, the total sum assured becomes payable to the nominee and the policy expires thereafter. Since there is no return in this type of plan, the amount of premium is very low which is utilized for the pure risk cover. This type of plan is ideal for a person who just wants to insure his life and does not want to make an investment. For example Mr. Y takes a term plan on his life for a term of 20 years for a sum assured of Rs. 1,00,000 and the premium is Rs. 1000 per annum. Mr. Y will have to pay the premium till the expiry of the term or his death, whichever is earlier and in case he dies in the third year, Rs. 1,00,000 become payable to the nominee of Mr. Y and thereafter no premium is to be paid.

Term Assurance Plan with return of premiums
In this type of insurance policy, the premium is higher than the pure term assurance policy as the interest earned on the premiums is utilized to keep the policy alive. Here the premiums paid by the insured are paid back at the end of the term if the insured survives the term.

Convertible Term Assurance Plan
In this type of insurance plan, a term assurance plan can be converted into an endowment or whole life plan at the end of selected term of 5, 6, 7 or 10 years. The insured has to exercise the choice of conversion before at least two years of the expiry of the term. In case the option is not exercised till the end of the plan then the plan ends as a pure term assurance plan.

Pure Endowment Plan
In a pure endowment plan, the premium is to be paid till death of the insured and the sum assured becomes payable at the death of the insured.

Whole Life Plan
In this type of plan, the premiums are to be paid during the whole life of the assured or till the age of 85 which ever is earlier. The sum assured is paid on death or on attaining the age of 85 whichever is earlier.

Limited Period Whole Life
Limited period whole life plans are devised in such a way that the premium is paid up to a selected term only and thereafter the cover remains alive till rest of the life. For example Mr. Y takes a limited period whole life plan, where he selects the premium payment term to be 15 years and he starts his policy at the age of 30. He pays premium till the age of 45 and the sum assured becomes payable together with the profits to his nominee at the end of his life or on attaining the age of 85.

ULIP
This is a combination of life insurance with mutual fund. In the traditional plans the returns are very less. Generally the returns are in the range of 4 to 8 percent. The insurers devised these kinds of plans for high-risk high return seeking individuals. Here a portion is invested towards insurance of life and rest of the money is invested in shares and securities as per the choice of portfolio indicated at the time of purchase of plan. The portfolio mix could be a combination of 20% equity and 80% debt, or 60% equity and 40% debt, or some other combination as may be devised by the fund manager. There is also an option of switching between two different portfolios, which may be exercised during the continuation of the policy and as per the terms stipulated in the plan.

Annuities
Annuities are reverse of life insurance as the payment in a life insurance policy starts at the time of death and in case of an annuity it ends at the time of death. Under this scheme a capital sum is paid either in one go or in installments to the insurance company and the insurance company in return promises to make a series of payments to the insured till the end of his life.

Retirement Plans
Under retirement plans the insured keeps on paying the premium till the pre specified age of retirement and on attaining the age of retirement the insurer starts paying him a fixed amount every month or every quarter till the death of the insured.

Critical Illness Plan
There are certain critical diseases, which reduce the earning potential of an individual to a major extent, and the expenses of recovering from such diseases are very high. Such critical diseases put the family in financial crises, which is not much less than the loss of an earning member, therefore critical illness insurance plans are covered under life insurance. Under this plan a fixed premium is paid for a fixed term and the insurance company gives a cover under pre defined critical diseases like cancer, heart diseases, etc. and upon confirmation of any of the pre defined diseases a lump sum payment is made to the insured. And if during the term the insured does not suffer from any such disease he does not get anything. This is a type of pure term insurance, the only difference being the event of payment of sum assured.

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.

Career of an Insurance Agent

Are you fed up with your same monotonous routine jobs, that round the clock service and office politics on that? We all want to have our own business, who wants bosses? There are certain factors that keep us from kicking the job and creating our own enterprise. One, there is always a risk associated with new business, two, there is a gestation period, it takes some time to break even and to make it profitable, three, a lot of capital is required.

Can there be a vocation or business without these factors or risks, can there be a business where we can slowly switch from our job, with out getting into a financial crisis. The answer of course is yes. If we actually look out for such options, we’ll get them and one among the many of such options is the business of insurance agent. You can start it as a part time vocation and slowly when the income generated from your new vocation crosses your salary then you may write your resignation letter.

But there are two sides of a coin, it requires some skills and aptitude and there are some merits and demerits of this business, it may or may not suit your personality and skills. Now let’s have a deep insight into the profile of an insurance agent and then you may be in a position to decide whether it suits you or not.

Handsome commissions

Insurance is not bought it has to be sold. The job of an insurance agent is to sell something which does not have a demand, you have to create a need of it, therefore selling insurance is not very easy. And that is why an insurance agent is handsomely remunerated for the tough job. The commissions in life insurance are very high. In traditional plans the commissions are in the range of 30 to 40 percent of the premiums collected. Such commissions are not paid in any other business. Further more, besides these high commissions on the first premium, an insurance agent also gets reasonable commissions every time the policy is renewed. The commissions from second year of policy till the end of the term are generally in the range of 2 to 7.5 percent. And the beauty of this recurring business is that if you have sold a policy of 20 years term you will keep on getting your commissions till the end of term, means you get income for 20 years on just one sale. This is a kind of royalty income, which you keep on getting every year. And this is the major attraction of this business. So an insurance agent can plan his retirement much earlier than other professionals. If he works till the age of 40 and collects good premium during his career, he may keep on getting renewal commissions for he attains the age of 60.

A good part time business

If you are not very sure of its results you may take it part time. You can devote 2-3 hours after your office or on sundays to meet people or you may start selling your products from your office circle. And when you are convinced that you can make a good business out of it, you may take it full time. So the business of an insurance agent is flexible, it has no timings, you may do it at your convenience.

No capital requirement

In this business you do not require any capital to invest and it takes a very small working capital, to be used for telephones, conveyance, etc. You do not have to bear the cost of running and maintaining an office as initially you can operate from your home also.

One man show

This is a business that you have to do on your own. You cannot delegate and you cannot scale it up as it depends completely on your personal skills. And becoming an insurance agent is not difficult therefore, if you think of hiring a help, then the guy you are hiring for generating business for you, will take his own agency in case he is able to sell insurance. This is and will always remain one-man show. However, now a days corporate agents are there, insurance brokers are also there, they all are doing this business at large scale, but there are not many of them. Generally an insurance agent works alone.

Public perception of an insurance agent is not very good

You need to have a good social circle. This is a kind of business where most of it is procured from personal relations. If you have a good social circle, you may be able to push your products. Again, selling insurance is not easy, you have to chase a person from his home to his office to sell him your product, and generally it leads to spoiling of your relations, as those persons who do not want to buy insurance will start avoiding you. However, if you are dedicated to your job, these hurdles will look very small.

Low conversion ratio

When you actually jump into selling insurance, you will realize that the conversion ratio is very low. If you contact 100 people only 10 to 15 will listen to your illustrations and out of these 10-15, only 3 or 4 will actually buy a policy. Sometimes this becomes very frustrating, but you have to linger on to your job. So it takes utmost dedication and patience to be successful in this career.

You can do business with one insurance company only

As per the regulations of IRDA, an insurance agent can sell policies of only one insurance company. In case some other company comes out with some good product, you still have to sell products of your company, which becomes a bit difficult at times. Secondly you will not be able to compete with insurance brokers, who can sell products of all insurance companies.

The job of an insurance agent requires real dedication and hard work with patience. The commissions are undoubtedly high and if you really possess those skills which are required to push insurance products, you can make a lot of money out of it.