Buying insurance? Beware

I have learnt one lesson. Never trust an insurance agent.

Their job is to sell you an insurance policy whether you need one or not.

Firstly, they have to meet their annual targets. To do that, they will go out of their way to convince you that you need a policy. The more they sell, over and above their targets, the more benefits they get in the form of paid holidays and other such incentives.

They will always sell you a policy that benefits them. A percentage of the premium you pay goes to them directly. Every year, they get a smaller percentage of it. So, if they get 15% of the premium in the first year, in the following years, they may get around 2%. However, till you keep paying your premiums, they benefit.

So, the higher the premium you pay, the more lucrative it is for them.

I bought a moneyback LIC policy with a life cover of Rs 2,00,000 for 20 years. This means, if I die during this time, my nominee would get this amount.

I have to pay an annual premium of approximately Rs 15,000 for 20 years.

Every five years, I would get a survival benefit of Rs 50,000. So, over 20 years, I will get back Rs 2,00,000 in the form of periodic five-year payments.

Out of the Rs 3,00,000 that I pay in premiums (Rs 15,000 x 20 years), Rs 2,00,000 is returned to me. This effectively means I have paid Rs 1,00,000 only.

Sounds great? That is what I thought till I did some more homework.

Later, I realised if I had bought a 20-year term life insurance cover, I would have spent only Rs 2,000 as my annual premium. That would be Rs 40,000 over 20 years.

In the moneyback option, I pay Rs 3 lakh with Rs 2 lakh returned to me, making my effective payment Rs 1 lakh. I would have saved much more had I take a term cover and still got the life cover of Rs 2,00,000.

The balance Rs 13,000 amount every year (Rs 15,000 - Rs 2,000 = Rs 13,000) could have been smartly invested in any other investment.

Me. Not the agent.

I should never have depended so heavily on him. Neither should you depend on your agent.

We labour under the misconception that they are the best placed sources of knowledge and tend to forget that selling policies is their bread and butter. So you can never expect objectivity.

Here are a few tips to keep in mind:

1. Don't get emotionally swayed. The agent paints a pathetic picture of the future and then banks on the customer's insecurity to sell him a policy.

2. Ask your agent for a comparable cover. For instance, if I had asked him for a comparable life cover of Rs 2,00,000, I might have not taken the moneyback policy.

3. Ask your agent to describe in detail at least two to three policies and grill him when comparing them.

Ever been conned by an insurance agent? Or has your insurance agent been most helpful and honest? Why don't you tell us about it?

Get Ahead reader Vijay Chachra is a 28-year old Senior Electronics Design engineer at a start-up company in Pune.