Are you buying insurance blindly?

How would you feel if you invested in a scheme and, after eight years, got back less than your principal? Ask Mahesh Patwal. When he started his career in 2007, the Mumbai-based accounting professional's first investment was in a pension plan that deducted almost 30% of the premium in the first three years. He also bought a 10-year endowment policy that offered barely 5% returns. Last year, frustrated by the low returns generated by his policies, Patwal (see picture) surrendered both policies and got back Rs 1.02 lakh for the Rs 1.29 lakh he had invested 

There are thousands like Patwal who blindly buy insurance policies every year only to terminate them prematurely. India has one of the worst persistency figures when it comes to insurance. Persistency is a measure of the percentage of policies still in force. For some insurance companies in India, the 61st month persistency was as low as 5% in 2014-15. This means, 95% of the policies sold by the company had been terminated by the fifth year. A McKinsey report says that the average one-year persistency in India is 60% compared to 94% in the US (see graphic). 

Terminating a policy prematurely can lead to huge losses. Patwal lost Rs 27,000 but ET Wealth estimates his loss at over Rs 1 lakh. This is because if the same money had been put in the PPF to earn 8.5%, it would have grown to Rs 2.04 lakh by now. 

Though surrender charges on new purchases have been capped by the regulator, terminating an insurance policy still leads to losses for the buyer. "Surrendering the policy leads to losses, especially in cases of endowment plans which levy heavy upfront charges. This is why it is critical that buyers understand the features, terms and conditions of the policy before taking the plunge. Understanding the features of the plan are a must while buying the policy. "Only after understanding the product features, policyholders are able to ascertain its relevance to their needs,

They should also know that other instruments can offer the same benefits they seek in an insurance plan. For instance, PPF and taxsaving bank deposits can help save tax without charging a rupee. Similarly, ELSS funds can save tax and help build wealth at much lower costs. Take the short test on Page 4 to ascertain whether you should invest in an insurance plan. 

Insurance is not investment 

Financial planners never tire of telling their clients not to mix insurance with investment. "If a policy generates investment returns for you, it stops being an insurance policy. It will neither give you good protection nor good returns," says Sanjeev Govila, a Sebi-registered investment adviser and CEO of Hum Fauji Initiatives. 

Yet, almost everybody has an insurance plan in his portfolio. Many buyers like 

Babbu Khanka (see picture) fall into the trap because a close relative or family friend makes them buy an insurance plan from them. Khanka plans to surrender the costly but low-yield money-back plan his father's friend had sold him in 2007. He will get barely Rs 31,000 even though he put Rs 39,000 in the policy. Had he just put the money in the PPF, it would have grown to Rs 66,921 by now. 

To be fair, many insurance buyers are misled by agents and financial advisers. Banks are at the forefront of mis-selling. If you go to a branch, relationship managers pounce on you with unsolicited investment advice. This used to be a problem only in foreign establishments and private banks but now even PSU banks are indulging in these unethical practices. The hefty sales targets and lucrative earnings from commissions (sometime more than the salary) have turned relationship managers into mis-sellers of insurance

However, more needs to be done. One critical step is to ban the sharing of bank account details with the sales team. Most of the mis-selling happens because the sales team knows who has how much in his bank account. The RBI also needs to strengthen the ombudsman system and make the complaint procedure more customer friendly. 

Are buyers also guilty? 

While it is easy to point fingers at distributors, buyers can't escape blame for not doing enough research. Most are happy to let the broker take care of the paperwork. Sure, they don't have to do the tedious task of filling up the insurance form but at least check if the broker has filled it up correctly. He might have opted for plans and add-ons you don't need or given incorrect information about you. 

The next check is the welcome call from the company where the telecaller explains all the terms and conditions of the policy in detail. "These calls ensure that the buyer doesn't feel he has been missold an insurance policy," says Govila. Some companies even try to assess the needs of the customers before selling him a policy. "We have a system wherein the policyholder undergoes a detailed financial need and risk analysis, thereby identifying the best suited policy for him 

Buying a wrong insurance plan can have grave financial implications. If you are paying a huge premium for the insurance policy, you will not be able to save for other critical goals. Worse, the policy will give you a false sense of protection. If you are the sole breadwinner of the family, the cover offered by an endowment policy will not be adequate to support your family.