5 things your insurance agent won't tell you

Here we tell you how not to get tricked by an insurance agent.

Below are five things your insurance agent may not tell you.

Don't blindly buy what your agent is selling. Ask questions.

When a friend of mine took a policy, she was told she would have to pay premiums over a period of 25 years but could expect a lumpsum of around Rs 22 lakh (Rs 2.2 million) on maturity.

She thought 'could expect' meant guaranteed. Not at all!

What the policy stated was that she would get a sum assured of Rs 10 lakh (Rs 1 million) after 25 years.

And the rest? Well, that is what is referred to as a with-profit bonus. This means that, depending on the profits of the firm, a bonus would be declared every year.

So, the agent 'assumed' a bonus of around Rs 50 per Rs 1,000 of sum assured and came up with that amount. In reality, the bonus could be much less. And, if the firm does not make substantial profits, it could decide not to declare a bonus that year.

Always ask your agent what the sum assured is -- this is the amount you are guaranteed and you are sure to get. And, if there are bonuses, ask if they are guaranteed bonuses.

• How much must you get insured for?

There is no free lunch. If your agent is offering to help you, remember, there is an underlying motive behind it.

Your agent will be keen on selling you a policy on which he/ she is getting the best commission.

That is why, it is often recommended that you visit an independent financial planner who is not making profits based on what he sells you. His advice will be objective.

Generally, the commissions start from around 10% to 15% of your premium. This is for the first premium. So if you are paying a premium of Rs 40,000, your agent will pocket Rs 16,000. A neat sum indeed.

That is only for the first year. The next three years, the agent will get around 7% as commission and the rest of the term, 5%.

So the higher the premium you pay, the more the agent benefits.

These premiums are just an industry average and will vary between insurance companies and the type of scheme. In some cases, the commissions could even touch 50% of your premium. But, in such cases, where the commission in the first year is this high, the agent will not get an ongoing annual commission since it is all paid upfront. 

• Home loan insurance

Also, for a normal life insurance scheme, the equity exposure (amount permitted to be invested in shares) may just be around 8% to 10% of your total investment. The returns you expect on the scheme cannot be high. In fact, it may just hover in the 5% per annum category.

You may actually benefit my taking a term insurance policy which is the cheapest form of life insurance available.Term insurance is the most basic life insurance policy. If you take it for a fixed time period and you die during this time, your nominee gets the money. If you live, you get nothing.

• PF & PPF: Whats the difference?

'You actually don't need a cover'

Do you have dependents? If yes, then you should take a term insurance cover to provide for them should something happen to you.

But if you do not have any dependents, do you really need to be insured? Not really.

My cousin is a housewife who was convinced by a very persuasive agent to take an insurance policy. But her husband dissuaded her from doing so. She was not working; he was the bread earner. Neither were her parents, her spouse or her children financially dependent on her. Her husband, on the other hand, was very well insured since he was the sole earner.

You may think of opting for an endowment scheme where (unlike term insurance) you get money returned to you at the end of the policy or just before retirement. It sounds fine but do take a crack at the numbers and ask some relevant questions.

1. Are you getting a decent return?

2. What is assured and what is not?

3. Would you be better off investing by yourself?

• The best way to save? Have a goal

Like I mentioned earlier, the agent might hard sell the policy where he gets the best commission. Don't expect him to be objective.

An agent was once selling me a policy from the Life Insurance Corporation of India. I asked her to suggest some comparable policies from other insurance companies. She told me they were not as good and LIC offered the best deal in the market.

When I probed, I realised she had not done a comparative case study of all the policies in the market to be in a position to pass that comment.

Later, she told me that if you are an agent for one particular life insurance company, you are not allowed to sell polices or be an agent for any other life insurance company.

Lesson: don't ever expect your agent to give you an objective stance. If you want one, go to a financial advisor who does not get commissions based on where you invest and from whom you buy insurance. You will have to pay but, in the long run, it will cost you less.