New insurance mis-selling trick is ingenious

Ob-la-di, ob-la-da, life goes on, brah!...
La la how the life goes on…
—The Beatles

Chirag and Naina Joshi, who live in the Mumbai suburb of Malad, were recently visited by the neighbourhood insurance agent.

The gent had brought along with him newspaper cuttings of the current fracas between the Securities and Exchange Board of India and the Insurance Regulatory Development Authority (Irda).

The Joshis had been vaguely aware of the ongoing battle, but had not bothered to go into the details.

The agent convinced them that their investments in unit linked insurance plans (Ulips) might get into trouble in the days to come. And so it was best to redeem that investment and put that money into endowment insurance plans.

Worried at all the negative coverage against Ulips in the media, the couple decided to get out of their Ulip investment and put the Rs 5 lakh that they get into an endowment policy.

“There are insurance agents who are approaching clients and showing all the campaign against Ulips and getting them to buy endowment policies,” says Uday Kulkarni, an author, who brought this trend to the attention of DNA.

“These agents are getting policyholders out of Ulips sold to them by other agents and getting them to invest in endowment policies,” he adds.

Malini Gupta, south Delhi-based branch manager of a new generation private sector bank, concurs. “This sudden fracas between Irda and Sebi has put fear in the minds of people. Clients have come to us asking what to do. And we have been advising them to get into endowment plans.”

Four out of five life insurance agents that DNA contacted tried to sell endowment products  when the reporters told them they already had Ulip policies.

Hyderabad-based Suri Seetha Ram, who has been selling life insurance policies for 25 years now, says, “People are confused, but the matter has not spread too much to them. They are asking us what the matter is all about. But now or even 10 years down the line, people will believe what the advisor tell them.”

In an endowment policy the policy holder is insured for a certain amount. This amount is referred to as the sum assured. Over and above this, the insurance company announces a bonus, which is a certain percentage of the sum assured, from time to time.

At the maturity of the policy the policy holder gets the sum assured as well as the accumulated bonuses. The returns on this product are not guaranteed (even though most investors think they are).

“Typically endowment plans do not invest in equity and hence post expenses an investor can realistically expect a return of around 3- 5% per annum,” says Sandeep Shanbhag, director Wonderland Consultants, a tax and financial planning firm.

The basic question of course is why agents are doing this.
“Endowment policies enjoy some of the highest commissions. The commissions (including bonuses on the commissions earned) can vary from 20- 40% of the premium in the first year depending upon the term,” says Suresh Sadagopan, a certified financial planner who runs Ladder 7 Financial Advisories.

Adds Shanbhag: “The commissions on such plans are typically around 35% of the premium paid in the first year, 7.5% in the second and third year and 5% for the rest of the period of the policy. The commissions on Ulips vary. However, more often than not, the ticket size of a typical Ulip investment is higher than the average endowment policy.”

Over and above this, endowment policies are not transparent at all.

“Traditionally,” says Shanbhag, “these policies have been quite opaque. Neither has the insurance company been declaring where and how the premium collected has been invested; nor has the investor been asking for any transparency in the matter.”

Agrees Sadagopan “Nothing is disclosed — not the charges, nor where they are going to deploy the funds. Ulips are far better in this regard.” 

Since these charges are hidden, people think there are no charges at all in such policies, something the insurance agents make use of.

“Agents say don’t take Ulip policies because they are lots of charges but in case of endowment policies there are no charges,” says Kulkarni, explaining this new mis-selling trick.

“Like the charges of Ulips are fully transparent, charges under endowment policies should also be fully transparent,” he adds.
The higher commission on these policies also leads to a situation where a knowledgeable policyholder asks for a kickback out of the commission earned.

Shashank Marathe, who works as a part-time an insurance agent admits: “People ask for a rebate when they know that we get commission. So, we show them the commission money and tell them, fine, we will give a part of this. But many customers don’t know that the real earning that we make out of insurance selling comes from the bonus. This bonus is given every year, over and above the commission that we get. In endowment policies, it is 40% of the commission money earned.”

Over the last few years, agents have found it difficult to sell these policies. “Agents find it difficult to sell endowment usually because there is a long tenure involved… People don’t want to invest and keep their money locked for 15-20 years. In Ulips, they know that after three years, they can withdraw money,” says Marathe.  But the recent fracas between the regulators has given endowment plans a new lease of life.

A financial planner not willing to be named best explains this new trick in insurance town: “An insurance agent is an insurance agent is an insurance agent.”
(Certain names have been changed on request)