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12 Favourite Sales Pitches Of A Life Insurance Agent And why you should not believe them! By Sunil Dhawan

"Introduction:" Introduction: It is widely believed that life insurance is never bought but it is always sold. That's not really true, since most of us really do need life insurance to protect those who are financially dependant on us.  But it is the type of life insurance policy and how much you buy where the saying holds true.

"Unethical sales practices aren't new..." Unethical sales practices aren't new and not restricted to any one industry.  The classic customer warning, "caveat emptor," dates to ancient Rome. The phrase "ethical selling" quickly is becoming just an oxymoron. Someone who buys a wrong Unit linked insurance plan is hurt a lot more than someone who buys a fake cannon camera for Rsxx. The various sales pitches as discussed below may not be exercised by all of those in the profession, however, an understanding of them may help you in dealing more effectively the next time someone comes calling.

"The unit-linked insurance plans..." The unit-linked insurance plans are believed to be transparent and it has become it forte to a large extent. The various charges and their application are explicitly revealed in the brochures and also the various investment avenues wherein your funds are going to be invested are disclosed. When everything is overboard, then how come, the industry is plagued with mis-selling? Perhaps, the communication that takes place between the agent and you is leading to such mis-selling practices. Its not that something is represented wrongly but a lot many times, there is concealment of facts. Below, we look at some of these sales pitches that may fall under the norms of mis-selling.

The pitch: “Ulips are mutual funds with free insurance.” The reality: Nothing is free. Ulips charge for the insurance cover through a cost called ‘mortality charge’. Mutual funds are a pure investment instrument whereas a Ulip bundles life cover with investment. Both give you options to invest in debt and equity products and target less or more risk-bearing returns. What to do: Determine what works for you. Funds are for those who can systematically invest on their own, Ulips for those who need regular nudges.

The pitch: “ Our funds have given very high returns last year” The reality: Equity Ulips have done in the past three years because the markets have done well. Ask for return history in comparison to their benchmarks. The BSE 100 has given annualised return of 57.35% last year and 50.72% over the last three years, as on 31 Oct 2007. What to do: Check the return the agent is pushing against the above returns.

The pitch: “Invest for just three years and still keep the plan alive.” The reality: Most Ulips have an option to stop paying premiums after the first three. The plan will continue, but you do pay for it. The cost of the life cover will come from your invested money through redemption of units to pay for the mortality charge each year. These charges will eat into your total returns in the long term. What to do: If you want life cover with investment, do NOT take ‘holidays’ in premium payments unless hard strapped for funds.

The pitch – “The NAV of the existing fund has moved up a lot, so buy this new plan and sell the old.” The reality: The agent is maximising his commission. You are losing not just your long term objective but also the benefit of compounding by doing this. There is no correlation between low NAV of the fund and its potential returns. Worse, you are incurring a huge cost in buying a new plan, as most of these plans are front-loaded (first year commission is as high as 20-30 per cent and then it falls) in charges. What to do: Continue with your old plan. Say NO to churn.

The pitch: “You may withdraw after five years.” The reality: This is a common pitch for those who are looking to save taxes by investing through Ulips. If it is indeed a shorter term investment you are making, you will find equity funds much cheaper at a front load cost of just 1.25 per cent compared to the 20-30 per cent that Ulips charge. What to do: Decide your holding period before you invest.

The pitch: “Ours is the plan with lowest charge.” The reality: Ulips have many charges. You don’t know which charge the agent is talking about. Most investors know about the Premium Allocation Charge (PAC) so many recent launches have come with Ulips with low or nil PAC. This however, has been taken care of by increasing or charging the cost under a different expense head called the policy administration charge. Unlike the PAC that is directly visible being applied on the premium that one pays, the policy administration charge gets charged to the fund value and hence goes unnoticed. Some plans have low or Nil front-end charge. Instead, the cost is taken care of by the policy administration charge that gets adjusted from the fund value and hence goes unnoticed. What to do: Ask for an internal rate of return of the produce and compare with others in the market. If the agent does not know IRR, find one who does.

The pitch: “You can buy a single premium bond from us.” The reality: The plan you buy from a life insurance company by making a single lump sum payment is not a bond but a life insurance policy. There is no assurance or guaranteed return on these single premium Ulip unlike a bond. Also, make sure to keep the sum assured equal to 5 times or 500 percent of your invested amount so as to get tax-free amount on maturity. Generally there is an option to keep it at 125 percent of investment amount and the agent may let you choose it for higher returns. (as less mortality is deducted) What to do: There are no guarantees in a Ulip.

The pitch: “Pay for 3 years and get Rs 20 lakh after 16 years.” The reality: Returns from all unit linked insurance plans are totally subject to market fluctuations. Even high returns from the past cannot be taken for granted as there uncertainty attached to the movements of both debt and equity markets. The insurance regulatory and development authority (IRDA) has specified that all projections to be discussed with the customers need to be at 6 or 10 percent growth rate. What to do: Ask for the internal rate of return of the plan. The stock  market can give 15-17 per cent in the long run per year. Anything promised over that is hype.

The pitch: There is zero return from a term plan. The reality: Buying pure term insurance plan, that is, insurance in its purest form, is harder at times. The agents are not willingly ready to ‘sell’ such a plan to you. The reason being the lower premium amounts and hence lower commission earnings. The modus opearndi: Term plan premium multiplied by term is the money lost. Had the same funds be invested even for shorter period in a Ulip would come with huge returns over same period. There is life cover also during this period. The above logic may not hold true in all cases. What to do: Buy a high value term plan if you need a large life cover.

The pitch: You may reduce the premium from the 2nd year onwards. The reality: There are certain Ulips that do not ask for same premium amount to be invested every year. One may reduce the premium from second year onwards. By doing so, one you are treating the Ulip as an investment instrument and two, you keep a shorter-term view in your plan. Both are dangerous when it come to buying a Ulip. With inflows into the fund reducing there is as much pressure on the fund to take care of mortality charges so that the plan continues with life coverage. What to do: Increase, not decrease your contribution, if you are targeting a long term corpus.

The pitch:  On death, the insurance company pays the premium. The reality: There is noting wrong in the above pitch. However, there is many a slip between the cup and the lip that goes un-communicated. There are certain Ulips that not just provide the sum assured to the nominees on death but also waive off the premiums. By waiving off the premiums it means, the insurer now starts putting in the same amount of premium into the fund as was being done by the policyholder when he was alive. But you pay a higher price for such a plan. What to do: Know that there is nothing free and look for the price tag everywhere.

The pitch: “ You don’t have to pay premiums in later years. The policy takes care of that.” The reality: This sales pitch has already been banned in many countries. Mostly used in an endowment policy wherein the premiums need to be paid for the entire duration of the plan. Such policies rely on the bonuses declared by the insurance companies based on their profitability. If the company does have a good year, the percentage of bonus could be high. If you leave this bonus amount in your policy to build up with your cash value after a few years, you could have enough cash value in the policy to pay the premiums. This scenario is possible, but not guaranteed, and perhaps not even probable. The "vanishing premiums" scenario depends on three big "IFs:" Only if the insurer has consistent good years; Only if the company pays high bonuses; Only if you do not withdraw cash value. What to do: No free lunches. Check for costs.