Wednesday, January 23, 2013

The Art of Closing Insurance Policies

Why do so many people purchase Maruti cars? Because they produce quality cars? Or maintenance is cheap? Or availability of service stations? In my opinion none of these is true reason. The actual reason is people trust that brand name. When a few of my friends purchased cars, they first checked how much money they can afford. Then they checked which Maruti car is available for that money. Is it Alto, Rits, Swift, Ertiga or SX4. Then they purchased those cars. Easy. Maruti, Life Insurance Corporation (LIC), SBI - all these companies enjoy the benefits of a trusted brand name.

I do not say people are missing any thing by purchasing Maruti cars, because Maruti produce quality cars. However, this is not the case with LIC and SBI. SBI as a bank is very competent. However, when it comes to mutual funds or Insurance - it is a different story. However, people blindly buy SBI mutual funds, just because those are from SBI.

The things are worse with LIC. Nowadays I am mastering the art of closing LIC policies. Not mine, but my friends. If one of my friends talks to me for half an hour about his insurance, he is convinced to close his policy. Why? I will teach you how to do it.

During any conversation when your friends mention about their LIC policies, jump on. But do not show the excitement. Casually ask them how much they pay as premium and what is the insurance coverage and maturity benefit. And then, ask them why they joined this scheme. The three possible answers to this question are 1) I want to save/invest some money. 2) I want my dependents to live a comfortable life even without me. 3) both 1 and 2.

No matter what they say, you can prove that they are losing money. Let's check one by one.

1) I want to save/invest some money
Don't be surprised by this answer. Many educated people buy insurance policies just for investment purpose. Don't tell them that it is not a good idea to mix insurance and investments. That will not sell. But you can tell them that how much money they are losing because of this policy.

For example, if a person pays Rs 5,000 as monthly premium, the insurance coverage will be Rs 12 L, for a 20 year term for most of the policies. On maturity, the insurer will get this amount as maturity benefit.  Usually this will be the guaranteed maturity benefit. Then they will pay bonus, which was declared every year. The LIC gives no guarantee at all for this bonus. However, many insurance agents convince the policy holders otherwise. This is the hardest part. Your friend will not believe you when you say the agent lied to him, because the insurance agent was his uncle, father's best friend, or his best friend's spouse. To convince this, go to LIC home page, and show him the details of his policy. 90% people do not read this information before they buy LIC policy. Usually, it will be difficult for them to digest the truth the agent cheated them, so I will tell them it may not be intentional. While the agent was talking about the policy, he may be confused with some other policy, because they talk about all the policies. This will relieve my friend, but I know the truth. Big commissions are paid to LIC agents for each policy, so they use one or two white lies to sell policies.

Now tell your friend that from LIC we can expect 5-6% compounded growth for your premiums from the past data. Next is the most tricky part. Go to any website which helps you calculate returns for recurring deposit. For example InvestmentYogi Calculators. Show him that what will be the return if he invests Rs. 5,000 per month for 20 years in PPF. PPF pays 8.6% returns compounded annually. In any case, the difference will be above Rs. 10L. Just convince your friend that he is losing more than 10L because of this LIC policy.

We are the people who bargain with autoriksha drivers to just save Rs 10. We drive through entire city to check price of mobile phone before purchasing one, just to save Rs 100. Then what if some one losing Rs 10 L? No need to tell any thing, watch your friend dialing his insurance agent to know how to close his policy.

I said PPF deliberately. Do not mention bank recurring deposits, because they don't have tax benefits. (80C benefits). Don't say mutual fund, because the returns are not guaranteed. If your friend learns from this mistake, and spend some time on his investments, he will soon realize the benefits of mutual funds. Leave it until then.

2) I want my dependents to live a comfortable life even without me
Well, this is the purpose of insurance. Unfortunately, LIC gives negligible insurance coverage. For Rs 5,000 premium, usually it is Rs 12L. Seldom sufficient for today's IT generation, whose annual salary runs above it. Just show your friends that for Rs 1000 a month, he can get nearly Rs 50L coverage, if he goes for an on line term insurance. (of course, conditions apply)

Now it is your job to explain your friend what a term insurance is. Most people have not heard of it, no insurance agents will explain this, because these are online policies and agents will not get any commission. go to wikipedia page on Term Insurance. and show him what a term insurance is. In a nutshell, the term insurance is a type of insurance in which you pay premiums to get insurance coverage for a certain term. In a term insurance there is no maturity benefits.

3) both 1 and 2
People, who buy insurance policies both for investment and insurance, were the easy preys to the insurance agents.  Because, when they ask about PPF to their insurance agent, the agent will say it has no insurance benefit. When he asks about term insurance, the agent will say there is no return. So, these people go for LIC endowment policies.

But it is equally easy to convince them that they made a mistake. If they are paying Rs. 5,000 as premium, ask them to split this to PPF and term insurance. If they invest Rs 4000 to PPF for 20 years, they can get Rs 24L+. Then if they spend Rs. 12,000 yearly (Rs. 1,000 per month) on a term insurance, they can get near to Rs 50L insurance coverage. This is far better than any endowment policy.

What will I get by making these people to close their LIC policies and switching to other investment tools? Nothing. On the other hand, I want people to manage their money well. I want people to get more returns on their investments, and more insured. And I want to stop these insurers and agents cheating their clients.

That's all the purpose of writing this blog.