While those of you who are wondering what does F.D have to do with life insurance…Beware…you could be a victim of it.

As it happened with Mr. Mangesh Pai who went to the largest private sector bank to rollover his F.D maturity into another F.D; he landed up rolling over his maturity amount into a life insurance policy instead. He was told by a bank officer that this would be like a F.D with life insurance cover and 10% interest minimum. Mr. Mangesh found it attractive and signed the papers.

Being a busy heart surgeon, he didn’t get time to go through the papers he got after few days until to his surprise he got notice from insurance company intimating payment for renewal premium after a year. He started wondering “when did he buy this company’s insurance policy, that too with such a huge premium?” (his F.D maturity was huge). While digging through all his financial papers in his file, he found that he was cheated and been sold a life insurance policy instead of F.D which he wanted. Moreover the policy has annual premium paying term of 20 years. He further found out that it was a ULIP with 35% charges and very low life cover. He has filed complaint with RBI and is fighting against the bank.

With thirst of earning huge commissions, bank hire people mostly young who have inadequate knowledge and experience on insurance. These people with tag of “Financial Advisor” or “Relationship Officer” are given targets and incentives. On the verge of achieving those targets and earning incentives, they tend to mis-sell in a big way. Same is the case with “Relationship Managers” of most broking firms. They are trained for aggressive sales and thus have only one thing in mind…sell insurance to anyone anyhow and achieve targets. The ultimate losers? Consumers. Beware…

In another case, Mrs. Priya Arora got call from a MNC bank where she holds a credit card. Despite showing no interest in an insurance product being pitched to her, she found insurance premium being debited in her credit card bill. Mr. Ahmed who went to a public sector bank for opening a savings a/c was asked to take an insurance policy. “You need to take this product along with a/c opening,” said an officer at the bank.

While the advent of private life insurance companies have definitely increased insurance penetration in India which is still very low, it has also definitely increased mis-selling of insurance products. With increasing number of insurance companies so are increasing number is insurance agents. Companies are hiring agents very aggressively to boost sales as a result of which you will find many college students, housewives, doctors, teachers, and people with part time jobs as insurance agents who sells insurance part time merely to earn some extra buck. These people lack knowledge, skills and experience; result of which – wrong product being sold or mis-selling. Insurance agents merely push the product which is earning them higher commission irrespective of weather such product meets your needs and requirements or not. As is happened with Mr. Kamlesh the only earning member in the family who ended up paying 70000 p.a merely for 5 lakh of insurance cover, most of them are ULIPs with high charges. Being bread earner of the family he should have been given much higher life insurance coverage at a lower premium.

Most of the agents typically are trained on only two or three ULIP products and they sell only those products. If you ask such agents about an endowment or term plans most of them don’t know much about it and they will try to convince you that this or that ULIP product is better, that it has given 30% returns in last 5 years.

It is recommendable to avoid buying insurance from part time agents primarily because you may be victim of the wrong product which may not meet your needs, you would suffer from bad service from the agent and secondarily this is their part time work, they would be out of it anytime and then you would be all lost.

So shouldn’t we buy insurance at all? If we have to, where do we get it from?

While life insurance cover is one of the most important things to have for an earning member of the family, we need to determine goals, requirements and how much insurance do we need. Typically, when we think of buying insurance we ourselves don’t know how much cover we should take. Most of us decide it on the premium. We opt of whatever Insurance cover we get on lower premium. Some of us just opt for whatever cover the agent says. Most of us land up being underinsured. You need to look upon various aspects such as cost of living, expected cost of living, your income and increase in your earnings, your dependents etc. before taking a cover.

“It’s a complex process, I don’t have time, skills, and expertise to access all these factors and determine my insurance need!”

You need not - hire a Certified Financial Planner (CFP). The role of a qualified Financial Planner is to look at all aspects of your lifestyle, goals, and requirements and develop a financial strategy suitable for you. The recommended strategy should help you reach your goals effectively and efficiently. Insurance Planning is a part of it in which they would recommend you how much insurance you should have and what mix of products you should opt for viz. term plans, ULIPs etc which would make you financially secure and help you meet your requirements and goals. Once you have a plan designed by a CFP, you can buy various kind of insurance products as recommended by him/her. This will help you getting what you actually need and not what actually an insurance agent needs.

Do not fall in pit of aggressive insurance agents or bank officers who may sell you a ULIP with high charges and low cover. It would be very difficult for you to get out of it!!

Get a strategy and plan developed by a CFP and be financially secure.

Happy Financial Freedom!

Agent: Sir this is the best plan for you - it will give you good returns as well as proper risk cover. The premium is also cheap, just Rs. 35000/- p.a. The insurance cover is Rs.5 lakhs. After every five years, you will get 20% of this insurance cover back. At the end of the 20th year you get the remaining 40% of insurance cover with all accumulated bonus. As you are just 28 years old, this plan is well suited for you.

Client: OK. I know this plan very well. Another agent had explained this plan to me. When I asked him how much premium he was willing to pay on my behalf, he said he could pay 2 months’ premium. If you can pay more than that, I will purchase this plan from you.

Agent: No problem, sir! I want to complete my sales target for this year; I can pay 3 months’ premium for you. You should know that I am paying more than the commission I am receiving.

The sale is made.

…This is the Indian financial market…

Nobody is bothered about:

• Financial needs analysis
• Risk measurement and management
• Rate of return from investment
• Capital appreciation

The effect:

• Mismatched asset allocation
• Huge uncovered risk
• Poor rate of return
• Capital eradication due to inflation
• Non-achievement of financial goals

Who is responsible for this? The part-time agent, who sells the products without any financial knowledge and just wants to complete his/her sale target? Or the buyer who is just concerned about the illegal premium rebate?

The agent paying the premium amount on the buyer’s behalf is very much like a bribe received for purchasing a product. For small gains in the short term, the buyer is actually opting for huge losses in the long term - losses that are not quantifiable at the time of sale.

Why does this happen? Here are some reasons that might give you a clue:

• Competition among agents and financial organizations
• Lack of a professional approach to financial planning
• Perception of financial consultancies as a part-time profession
• Lack of innovative financial products from financial organizations
• Lack of selling and communication skills
• Lack of trust and confidence in the customer’s mind about their financial planner
• Lack of back-up for the so-called financial planners – no proper knowledge, proper office with staff, no technological assistance
• Low standard of entry into financial consultancy – HSC pass plus a few elementary examinations is all that is required to start off as a financial consultancy
• Huge market requiring huge number of financial planners, resulting in financial organizations recruiting any half-decent Johnny as a financial planner

Rebates in the Times of Nationalization
Before 2000, financial sectors like insurance and banking were nationalized. Public sector organizations never bothered about their agents’ knowledge and skills or how they were procuring the business. They didn’t need to as there was no competition. The only competition was among the agents to grab maximum business. This would result in them offering part of their own commission to the buyer as rebates. They were also known to offer some extra incentives in cash or kind to complete a sale. These practices continue to this day.

Although these offers are unethical and illegal, they nevertheless took deep roots in the insurance fraternity. As a result, the customer began to consider a premium rebate in the light of his/her right. He/she did not have any qualms in accepting a rebate or a gift.

Rebates in the Open Market
As the market was thrown open after 2000, various private companies entered the fray increasing customer awareness about maintaining their financial health.

They offered various new products and public sector players were forced to increases their product portfolio as well as services.

With this influx of new companies and products, insurers needed staff to sell them to the public. Enter fresh graduates, call centre executives and banking employees, who started selling financial products with the same elementary knowledge and wrong information as their predecessors in the public sector entities. Result? The rebating habit caught hold here too.

Rebates vs. Discounts
For selling any tangible product, sellers offer discounts. Discounting is used as marketing tool to attract the consumer. Consumers are offered some schemes or free gifts for buying particular products during particular time-periods. Sellers use stock clearance sales as a tool for moving dated products from their stores.
But, in no case do they ever sell a product below its cost. They always try to manage the pre-decided profit margin while selling such products - i.e., they reduce their profit margin to the bare minimum by reducing the sale price.

Generally, prices are first increased and then reduced by giving discounts, giving the customer the feeling that he/she is winning the bargain battle. And this feeling urges the customer to buy more, thus increasing sales.

Discounts are ultimately healthy for the customer because even with the discount, he/she receives the benefit of the product without losing the quality of the product as a result of the discount.

But the same strategy cannot applicable to intangible financial products or services.

Benefits in the case of financial products come in the future and they depends on external factors such as the world economy and market conditions. Regular reviews and proper follow-ups are necessary for a financial product to achieve the desired benefits or goals. The impact of wrong financial decisions can be verified only in the future, by which time they are irreversible.

Purchasing financial products is like cultivating a farm. Timely water, fertilizers, pesticides, and insecticides are necessary for the farm to thrive. It requires years of such care to bear fruit, literally.

Ditto with financial products. They are not one-time affairs. It requires nurturing and caring for decades, regular review of your financial position, changing plans according to changing needs, and regular follow-up to ensure the product’s success.

When a customer demands a rebate he/she is risking not getting future follow-ups, regular reviews, and proper attention to maintaining his/her financial health. In other words, discounted service always leads to discounted quality. If any financial consultant agrees to provide service on rebate, the customers must think twice before taking the consultant’s advice and doing business with him/her. Why is the consultant doing this? Is he/she a proper knowledgeable person in the finance field? What is his/her experience? Will he/she be available for providing follow-ups and after-sales service? Does he/she just want to complete his/her sales target? Ultimately, is this sale transaction going to be a one-time affair or an instance of life-time parenting?

Demand for Rebates – Call for Losses
Customers demand for rebates due to two reasons:

• They are totally ignorant about their financial requirements and do not know about the financial consultant’s ability to change their financial health by proper service and advice. Customers then buy into the regular short-sighted practice of demanding rebates.
• Customers might think that they are fully knowledgeable in the field of the finance and thus do not require any advice or service any time in future. Their main concern at the moment might be that they do not have the right channel to buy financial products without interference from intermediaries such as brokers. Buying financial products from financial consultants is an easy way out, especially with the promise of rebates.

I would like to ask just one question to both of the above-mentioned types of customers: Would you dare to ask a rebate from your doctor for his services? How reassured would you then be that he/she is giving you the absolutely best quality attention to your medical problems?

To maintain good financial health, take the best of the best services from professional financial planners and avoid all agents or so-called financial planners whose interest in this profession is at best half-hearted.

Quality always comes with a price, even if the quality is not visible to the naked eye. Remember, brass and gold don’t have same price.

Key Qualities of a Financial Planner - Knowledge and Integrity
A financial planner needs to assess customers’ present positions, prioritize their needs and goals as per their risk appetites, and then suggest the proper financial product (s) that will fulfill those goals.

This requires proper knowledge of various faculties of finance like insurance planning, risk management, retirement planning, investment planning, portfolio management, estate planning, plus various laws such as the Income Tax Act, Gratuity Act, Companies Act etc., and so on. Armed with this knowledge, the planner now needs to compare the various products on the market, weigh the pros and cons of each, and then suggest the suitable product to the customers.

Another quality is integrity. Integrity to the customer as well as to the organization that he/she represents. This quality is the basic need to develop the finance industry in India today.

When financial planners are ready to offer rebates, it means that they are ready to adjust their integrity. It also means that they have no qualms in suppressing or misrepresenting valuable information to earn extra commission. You have the right to always expect the highest level of integrity from your financial planner - he or she is, after all, the trustee and caretaker of your finances and your guru in all matters financial.