Insurance Agents, insurance Policies and Commisions

Here is some more good news for people seeking insurance. IRDA is having plans to make insurance agents more accountable for the insurance policies and other investment products they are going to sell to the customers. However, it’s just a news item, and I wish that it should not remain just a news item citing a proposal. Something concrete should be expected and implemented. In the recent past, there have been many proposals, like waiving off the entry load for mutual funds, taking off insurance policies with complex commission structures, and so on. However, nothing concrete has been done till now. One can only wish things are implemented.

However, the following news item reveals some of the bare truths of the world of insurance agents and their commissions.

As per the news items:

Commission structure for insurance agents is set for a major overhaul. In a move that is likely to have far reaching consequences, Insurance and Regulatory Development Authority, IRDA wants to make agents more accountable by linking their commissions to the services offered by them reports CNBC-TV18’s Priyal Guliani.

An insurance advisor earns (on an average) as much as 30% commission in the very first year of selling an insurance policy and subsequent drop in the commission structure to about 7.5% in second and third year, does not attract him enough to continue offering correct services. As a result, more often than not, services of an advisor fail to meet investor’s expectations after the first year. Now the insurance regulator plans to phase out payment of commissions over a longer time frame. It intends to remove the yearly cap set up under the insurance act 1938 and keep the structure flexible based on the service provided by the agent.

This is also to ensure that the discontinuation of insurance policies, which is as high as 60% in the first year and 15% on an average, comes down.

Insurance industry growth rate is riding high on the sale of unit linked insurance products, which attracts as much as 30% commission in the first year itself. Most often, this product rather than being sold as an insurance policy is shown as an investment tool and compared to mutual funds, resulting in its mis-selling and that is the biggest concern of the insurance regulator.

A 10 member committee set up by IRDA in September 2007 to study commission structures is expected to present its report on the last day of this year.

News item Ends:

Now look at that mess – Commission as 60% is offered to Insurance agents in the very first year.

There has to be a reason and some justification for such stupid offers. The reason is that such huge amount of commission is offered to insurance agents to get the investor into buying an insurance policy which locks him for a long term commitment as long as 25-30 years. Moreover, such policies also have hidden clauses and conditions that if the investor discontinues the policy, he will have to suffer a major loss. The end result is that the insurance agents sell to the ignorant customers such policies that do not fit into the customers requirements at all. The only thing that the agents are concerned is to earn the high level of commissions – as high as 60%. The investor is then left with “Hidden conditions” and “his investments are subject to Market Risks”.

Read through the comments left by so many readers about the big amount of premium they are paying towards their insurance policies. So many questions have been posted asking me when is the right time to exit this policy, what is the loss that I will have to bear if I exit this insurance policy now and so on. Even after buying such policies, the investor is no longer aware of the policy details. Yet, we are all there to jump in, on the advice of the “highly educated” and trustworthy agents or in the name of tax-savings. All we end up doing is making a mess of our money in the commissions and end up getting into long term commitment of paying of insurance premiums.

Let me repeat once again - Buy insurance products for Insurance purpose, buy investment products for investments purpose, buy tax-saving products for tax-saving purpose. Do not mix them all.!

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