Insurance v/s Investment v/s Tax savings – agent based business

Let me continue further with Part II of my previous article. In case you’ve not read my previous article, please read it before continuing with this one.

Let’s begin with a question: Who is the biggest investor in the Indian Stock Market? Your options are:

1. Foreign Institutional Investors
2. High Net worth Individual
3. Life Insurance Corporation of India (LIC)
4. Banks (Foreign or Indian)

The answer is option 3 – LIC. The amount of money LIC collects as insurance premium is huge, so huge that it makes it the biggest investor in the Indian market, beating all big foreign fund houses. Depending upon the policy you take, you may/may not be guaranteed a return. For them to generate a return and pay for their employees and agents, they need to invest the money and make profits. If they promise some specific amount at the maturity, the policy makes sure that the admin charges are big enough to compensate for the returns. Individual Investors end up receiving a slightly better return than what the banks FD offers. That’s a fact. The problem is that individuals don’t know how to calculate the profits on their investments. That’s why the very first article that I’d written, was aimed at giving a brief idea about calculating the profits.

The biggest problem is with the ignorant investors and these agents – neither the investor knows what he wants to achieve (tax benefit, insurance or investment) nor is the agent interested in customer’s benefit. All he needs is a SALE of one such policy, which earns him a commission. Visit the career section of website of LIC India, the eligibility criteria for becoming an agent is as follows:

• 12th standard pass
• Age 18 and above

That’s all it takes to become an agent. Same may be true for other insurance companies. It’s true that agents may even have Bachelor’s or Master’s degrees, but the minimum required qualification indicates what kinds of people are suitable for an agent’s work. They don’t even need a basic commerce or economics background – anyone with 12^th standard (Maths, Biology, Arts) will do fine. Most of the readers of this blog atleast have a bachelor’s qualification, yet we end up believing these agents, thinking that they know better than us and they can suggest us better solutions.

Last year, a relative of mine celebrated the 3^rd birthday of his kid. He wanted his kid to become a doctor like him. After the lunch party, he told me that an agent is visiting him in the afternoon, as he wants to buy some education shield policy, so as to secure the medical college fee. Around 4 pm, an agent walks in with a briefcase which carries a calculator and some pamphlets of investment plans.

Very nicely, the agent explained the benefits of the education shield policy and was continuously attempting to tell my relative how important it is to secure the education money for the kid. He was repeatedly using the sentences like “How will you feel when your meritorious child will secure a seat at the Medical Entrance exam, and then you’ll discover that you are short of money” and “Suppose your kid cannot secure a free seat, and he needs money to take a payment seat or donation seat, that is the time this policy will help”. The investment horizon was 15 long years. During the half an hour of his explanation, I kept quiet, while my relative was getting puzzled with the 3 policies that he had short listed. He finally asked the agent to tell him which one to choose. Nowhere during the conversation did the agent mentioned how much will be the admin charges and what actual profit will my relative make by investing in this policy – probably he doesn’t know how to make the calculations. He finally suggested one policy, claiming it to be the best. My relative finally nodded and said, “OK, on your words, I’m taking this policy”.

Till that time, I was sitting quite. I could not understand why did my relative asked me to wait when he had to take the decision on his agent’s will. However, the deal was finalized. My relative committed a certain amount of money each month, for the next 15 years, to get an assured return at the end of the 15 year horizon.

This situation is quiet commonly observed in our daily lives – at home, shop, office, sometimes even at coffee shops. We see/hear about such policies, call/meet the agents and end up purchasing something that we don’t really understand or better to say we may not even need it. Agents will be after you for everything, for tax planning, for insurance, for policies giving death benefits for your loved ones, for hospitalization, for education for your cute little ones. People call it investments and savings, I call it PSYCHOLOGICAL BLACKMAILING.

I’m NOT against these policies or these agents – It’s a business, someone has to do it. But I’m against the ignorance and faulty decision we take based upon the agent’s advices. Some policies are really good, but our decisions are influenced by what the agents want to sell, and obviously they want us to buy somethings that earn them more commission, not the ones that are right for us.

One of the professors during my lectures at Rotterdam School of Management described the working principle of these agents in the following way:

If I am not gonna sell my crap policy to this customer, some other agent will sell other crap policy to this customer. So let me sell my crap policy to him and earn my living (commission)

My Professor later continued with the following - “The same can be carried on for the following phrase on similar lines”:

If I am not gonna rob this person off his money with my gun, someone else will rob this person off his money with his gun. So let me rob this person with my gun, and earn my living

In essence, the person will be robbed, either by this agent (robber) or the other.

I know, and I agree, that this was something really at an extreme end :- ). However, this shows the truth about the world of brokers and agents. In all my articles, I’ve always talked about the HUGE size of the market. It’s equally true in the world of agents. People are just waiting for profit making opportunities, and the same goes for the agents and brokers as well.

Once the agent left, the reaction of my relative was as follows: “Bahut dino se kuch to lena tha, so le liya (I was waiting to take some policy since a long time, now I’ve taken one)”. Even after paying, he didn’t know what he had bought.

I picked up the visiting card of the agent that he had left. It had 4 logos - LIC, ICICI Insurance, Sundaram Finance & Bajaj Alliance. He was in the business of selling anything and everything – same is true for other agents as well. The next day, I called up on his cell phone. I asked him for a similar education policy that my relative had bought. He insisted on meeting me personally, but I continued the discussion on the phone. I asked him how much will be the cost of medical education 15 years down the line. He had no answer. I asked him what is the cost of medical seat (free, payment, donation) as of today, he gave me a vague range (“Sir, I don’t know but it can be anything from 1 lakh to 8 lakhs). Continuing further, I asked him, “If it’s such a wide range, which policy should I buy and for how much?” His answer was, “Depending upon your budget, you should invest. I’ll help you once we meet”.

The conversation stopped there. The agent had no idea of medical education fee even as of today, yet he’s willing to sell the products for 15 long years. Now let’s look at this real life case in detail:

Purpose: What does my doctor relative want: Security for his kid’s education fee.

How much will be the education Fee 15 years down the line: UNCERTAIN

How sure is the choice of career path for the kid: UNCERTAIN

Returns of the selected policy: CERTAIN sum of money depending upon how much you CONTRIBUTE. YOU have to decide HOW MUCH to contribute. Does this serve the purpose of education shield policy & will that be sufficient at that time?

Right from the purpose & investment of this policy to the career path that his kid will finally choose, nothing is certain. Even after buying the policy, a doctor himself does not know whether he did right or wrong, though he is from medical stream and wants to serve a purpose for a similar stream. What he gets is a RUPEE VALUE of money, which may or may not be sufficient to fulfill the purpose. Depending upon the budget, he has to decide how much he should invest and for how long. He has to make the prediction about the cost of medical fee. And he is the one who is most ignorant about the risks, uncertainties and the products. I made the time value calculations for his investments. After investing so much and for so long, he got nothing better than the return offered by Bank FD.

My readers have been complaining that I’m too pessimistic with investments. So let’s also have a positive outlook now. Suppose that my relative made investments predicting the cost of medical education to be 1 million (10 Lakh Rs) at the time when his kid is eligible for college admission. So he invests x amount of money each month, to get 10 lakhs at the end of 15 years. However, the meritorious kid manages a scholarship and he can complete the MBBS course with just a living cost of 1 lakh. My relative will definitely feel happy as his investment saved him enough money (9 lakhs). But even though he saved money for the future, it comes at a cost. To invest in such a policy, he may have to cut onto certain other expenses for today. May be buying a better car is foregone today, may be moving to a bigger apartment is foregone today, may be a world tour is postponed today, so that his investment for his kids future is secure. Everything comes at a cost. At the time when his kid will be eligible for admission, my relative would cross 45. At that time, despite saving money on his investment, he may repent foregoing a luxury car, a better apartment, a world tour – for which he may not be excited after the age of 45. Be it investments or anything, everything comes at a cost in the present.

If something is not understandable by me, and I’m not able to identify whether my long term investment will suffice my purpose, should I invest in such a policy? Well, atleast I will not do it. I’ll prefer continuously investing in ETF’s or IF’s, as monthly systematic investment plans. If my investments with such policies are “Subject to Market Risks”, I’ll better take market risk on my own by investing in low cost ETF and IF. The fact is that everything is uncertain. If you like to take risks, take it in a systematic way, which does not attract any commissions or high brokerage. Don’t get trapped with the jazzy titles of policies – they are not designed to serve your purpose. If you are risk averse investor, go for bonds, Bank FD’s or PPF account. The choice is left to you, depending upon your risk appetite.

If you fear that your death will cause a calamity for your family and want to buy insurance, buy a death benefit policy. Don’t club it with returns – better take a policy with benefit/returns only in case of death/accident. It’s like throwing your money in the sea and not expecting anything. What we end up doing is taking a mix of policies – clubbing death/accident benefits with returns or tax savings. That is what takes us to the wrong path. Tax-saving buzz word adds to it. It is important to know that insurance should be taken as insurance, not as investment. If you want to invest, invest in investment products (Stocks, Bonds, ETF, IF, PPF, etc). Avoid clubbing the two. Once you start looking at a combined mixed policy, you end up focusing on returns. What you forget is the admin charges and commissions.

After reading my articles on ETFs and IF’s, some readers have asked me to recommend which ETF or IF is better. Well, I am criticizing agents, brokers and their recommendations, and I don’t wanna be categorized as one of them :- )

I am writing with an aim to tell you what’s good and what’s bad in a particular product or strategy. Which brand do you want to buy is left to you.

Keep watching for further content.