Monday, April 27, 2009


I meet lot of people who have bought insurance plans but have no clue if that plan is best suited for them.Most of them tell me that they bought it because the insurance agent recommended them this product as the best one for them.Well insurance agents are trained people on the subject matter of insurance and are supposed to sell you insurance based on your need analysis.Need analysis entails analysing the financial needs and goals of the client and based on that the agent should recommend a product. While there are few good agents out there who do that, the truth is there are plenty more who are out there to sell a product based on their OWN need analysis.and their need is to maximise the commission that they get out of the sale. The result is that lot of unsuspecting and naive clients end up with products/policies which may not be right for them.They keep on paying premiums year after year hoping that they are putting money in the right place and will help them reach the ultimate goal of financial independence. The truth is seldom will you come across situation where ill suited product will get you the desired financial independence.
So whats the solution? All of us cant be experts at insurance. Yes , we cant be experts at insurance but we can be little smart at dealing with our agents. Here I am listing down 10 questions that you must ask your advisor/agent before handing him the premium cheque.
1. I don't have insurance cover. What should I buy, a term plan or an endowment? This is the first question that you must ask your agent even if you have an insurance cover. The reason is that this is sort of a litmus test for all the insurance agent/advisers. A good and professional advisor will tell you that first thing that you must buy, if you don't have any insurance , is a term plan and then he might suggest endowment. The reason for that is that term plans are the cheapest form of insurance. Any agent who tells you otherwise is out to make a killing at your expense. You must not deal with him. You don't have to go further and ask him any more questions. This question is like a qualifier.
2.Who are your clients? Ask him to tell you the names of few of his clients. Ask him especially about his clients in your neighbourhood. This will ensure that he can't give dummy names and also you can check with them about his service delivery levels , if you want. A good advisor will be more than willing to tell you the names of his clients because they do depend a lot on positive references for a bulk of their business. While the cheats will always try and avoid this.
3.What will be the internal rate of return (IRR) on my investment under this plan? I know this is a bit technical for everyone to understand, but ask your agent this nonetheless. IRR is nothing but the effective rate of return that one gets on his investment. Besides, insurance agent is supposed to be a well trained financial adviser and he is expected to know this. A good one will tell you in detail about this. And if he is struggling to tell you this then , you better dump him because it means either he does not consider you intelligent enough to explain you this simple concept or he does not know this himself ,when he is supposed to tell you where to put your hard earned money for next 10-15 years. Either way ,he is not good for you.
4.What has been the performance of this fund/plan/policy since inception? You must ask this question if you are buying a ULIP from him. Since ULIPs are market linked insurance policies, their performance, is not guaranteed and depends on the market. Generally agents try and tell the clients the performance of the fund when the markets were doing well and will conveniently ignore the performance of the plan when the markets were not doing well. To get a better and correct picture about the policy/fund's performance , you must ask him about the performance history since inception. Then you must match the details provided by him to the ones mentioned on the insurance company's website. If there is any disconnect in the data provided, its a signal that you are not dealing with a good advisor/agent.
5.What is the claim settlement ratio of the company? Ask your agent to give you an idea of the claim settlement ratio of the company he belongs to . Also ask him how does that compare with other insurance companies. For example, in India, Life Insurance Corporation (LIC) has the highest claim ratio among all the life insurance companies in India.From a customers point of view, the company with best claim ratio is supposed to be a better choice.
6. What are the exclusions of this policy? Most of the insurance policies have well defined exclusions. These exclusions are supposed to be explained by every agent to his clients , in detail before completing the sale. But normally, none of the agents do this. They don't do it because they believe it reduces their chances of making a sale. While declaration of policy exclusion is vital element of the insurance contract , the agents never tell it. So you must ask your agent about the exclusions of the policy. If he is less than forthcoming on that , then you should know that he is not the guy you should be dealing with.
7. Is the returns in ULIP guaranteed? Its a common practise to sell ULIPS on the premise of a product delivering very high guaranteed returns. Truth is that ULIPS are market linked products and the returns are not fixed or guaranteed ever. They may deliver higher returns but that's not guaranteed and depends totally on the way market behaves. If your agents tells you anything other than this, you are stuck with a bad lemon.
8.What are the charges deductible from my premium under this plan? Insurance plans are known to have very high upfront charges which are deducted from the premium paid by the customers. These charges can be upto 30-40% in case of ULIPs and can upto 60-70% of the first year premium in case of endowment plans. You must ask your agent about this. A good agent will come clean on this while a bad one will try and give you a vague answer.
9.What is your commission in this? Well this might seem little impolite to you , but, trust me there is nothing wrong in asking your agent this question because its common knowledge that they work on commission basis. Agents make about 30% of the first year premium paid by you as commission on sale of endowment plans while for ULIPs and term plan its lesser. They get lowest for term plans .
10. Why should I buy from you? Last but not the least, ask him to list down reasons why you should buy it from him. A good agent might try and differentiate himself on the basis of his impeccable service delivery record etc. Also it will allow him to tell things which he might not have been able to tell you which could be beneficial for you.
So if you ask these 10 questions to your insurance agent, I am sure that chances of him selling you a ill suited product will be very slim. These are simple questions which all us can use easily to avoid being duped by the insurance cheats out there whose only aim is to make big commissions at clients expense.

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