Monday, October 5, 2015

Traditional Life Insurance Plans


In recent past I read many blogs coming from of new age financial planners suggesting opting of a combination of term plan and mutual fund in place of a traditional life insurance plans of whole life or endowment kind . I do not disagree with such suggestions and I fully appreciate it but what do not go down well the way they criticize the agents selling such plan. The tone suggests as if those selling such plans are unprofessional and those who buy are victims of such agents who are mainly driven by their commission structure / income. 

Let us put the matter straight that such plans which are available in market are duly approved by the regulator i.e. IRDAI and there should not be any apprehension of any hidden agenda or element of wrong doing in it. These plans are time tested and have survived many economic cycles over a century now . Even in developed countries , such plans are available and are patronized by a bigger section of the customer base.

Those who discard these simple plans, do it on the basis of its non-transparency and poor investment record, the second being the more prominent reason. Let us not forget that the very purpose of talking life insurance policy is not to get higher return but to ensure a risk cover and the safety of the invested sum. On both these counts , the traditional policies are simply unmatched. Mutual Funds and for that matter even a life insurance plan of ULIP structure are good and attractive only to the time scale when financial / stock markets are in upward movement. They do not ensure the safety of the money invested in it as they are linked with the market movements. It would be a good exercise , if these financial planners meet the clients who had invested big sum in the year 2007-08 and suggest them again to invest in MF/ULIP.

Since the bulk of the investible fund under these plans are in debt instruments one can not expect it to give a return even at par with the bank fixed deposit or post office saving schemes. The element of regular compulsion of saving and the security cover coupled with the expectation of a lump-sum amount at a predetermined date for a particular occasion make these plan click with the masses. For bulk of our customer base in non-metro market , high return has never been a deciding factor. It is the trust with the company and the friendly agent which matters more. 

A customer feels cheated only when he is subjected to a situation of mis-selling which happened blatantly in 2005-08 on similar logic of giving high returns. The down turn of market in subsequent years led to the loss of the confidence in our customer base and the life insurance industry is yet to get it back. Promise of less return with guaranteed delivery is far superior proposition than promising high return with questionable delivery possibilities. This is much more relevant to life insurance sector having long term service commitment.

The real need is to understand the risk profile of the prospect and suggest him/her the plan which suites the requirement. Simply promoting term plus mutual fund would not be a right thing to do.

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