The Little-known Secret of How Metros buy Insurance

Insurance sales start surging in January of every year and peaks in March. So, are more accidents happening during this period? More people getting hospitalized? Or, a sudden realization in the new year that one needs life cover?

It’s Option D – none of the above. The reason is painfully simple – tax saving! So, what’s driving this sudden rush to buy insurance – is there an inherent need or is it just the gift of gab of that persistent insurance agent whom you met the other day?

Insurance-policy

We have taken four case studies from the four Metros of India to understand what kind of insurance are people from these metros opting for and what’s their motive to go for a particular insurance product.

New Delhi: Last minute scramble

Mr. Abhishek Khurana, 34, is a Mechanical Engineer working with an automobile company. His family consists of his wife Ranjita, 32, homemaker, and a 3-year-old son.

When we spoke to him, Khurana had no idea about the exact life risk cover he had. A few airy calculations later, he revealed that he had some 21 traditional policies and he was paying around Rs. 50,000 premium p.a. towards them.

Most of his policies had been purchased during the December-to-March period every year, initially when his “family agent” would drop in to coax a policy or two out of him and later when he started receiving HR mails at work to submit tax-saving proof.

The above example shows that the motivation to buy life insurance was solely for tax saving. Lack of awareness and an attitude of postponing things until the last minute rendered him an under-insured person. According to his income, he should have had a life risk cover of at least Rs. 1 Crore, whereas his cover barely crossed Rs. 10 Lakhs.

Kolkata: Keep your enemies closer

Mr. Bimal Gupta, 36, is a Commerce graduate having his own garments business in Kolkata. His family consists of his wife, Ragini, 33 a homemaker and a 5 year old daughter.

His father Mr. Deenbandhu Gupta, has always invested in insurance policies. The same has been largely followed by all his elder brothers.

However, Gupta realised that insurance policies were a very low-yield investment and was not very keen on “investing” in insurance. He has taken a term cover for himself and one child plan for his daughter, investing his remaining money in PPF.

“Here in Kolkata, after the Saradha scam and few more similar stories, we have lost faith in private players,” says Gupta. He trusts only Government companies. His term plan and child plan are also from LIC. “I am aware that cheaper term plans are available, but I don’t trust private insurance companies. Thus, I have taken a lower cover so that I can afford the premium.”

Here, insurance was purchased for the right motive, but due to prevalent business climate, apprehensions and affordability issues, Gupta is under-insured.

Chennai: Love thy neighbor

Mr. Venugopal Iyer, 44, runs a small restaurant in Chennai. His wife, Saraswati, 41, is a part-time school teacher. They have a 13-year-old daughter and a 10-year-old son.

Mr. Iyer is extremely busy in his business and has no time to look at his books of accounts. His only motive to buy insurance was to oblige Saraswati’s friend, Anuradha, who had started an insurance agency as a “pass-time” activity. Today, Iyer is sitting on around 12 policies in his name, 10 policies in wife’s name, 2 policies each in his daughter’s and son’s names. He has no clue what policies he has bought. Nor does he expect any of these policies to secure his future or cover his life risk. Whenever Anuradha is not able to meet her targets, she drops into Iyer’s place and wangles a couple of policies from him.

Another quirk about Iyer is that he is mighty apprehensive about paying taxes and thus files ITR only to the extent of having nil tax liability.

This has also prevented him from availing a sufficient life risk cover for himself. He earns around Rs. 10-15 Lakhs a year, but due to under-reporting of income, he is not eligible to buy a life risk cover of Rs. 1 Crore. Although he knows what a term plan is, he is yet to agree that the trade-off is worth it.

So, here, the motive to buy insurance is to oblige or to “maintain relations”. He doesn’t have enough life risk cover, defeating the basic purpose of life insurance.

Mumbai: Bank on the banker

Last, but not the least, lets see what typically happens in Mumbai, the financial capital of the country. Mr. Yogesh Deshpande, 47, is a highly accomplished professor serving in a leading engineering college in Mumbai. His wife, Sulochana, 42, is a homemaker and occasionally takes hobby classes. They have two sons – elder son Namit who is 21 years old and younger son Rajat who is 18 years old.

Deshpande only believes in investing in bank FDs and places complete faith in his banker.

On more instances than one, he visited his bank to open an FD only to have his banker successfully sell him a ULIP. The banker’s pitch was simple: “this (ULIP) is ‘almost’ like an FD but with higher returns, plus insurance, plus tax saving.” Only after receiving his policy document did Deshpande realize to his horror that almost 30-40% of his investment had been wiped off under various heads of “charges”.

After realising his mistake, he decided not to buy any more policies from his banker. But when his wife wanted to avail locker facility, the banker said that only “limited” lockers were available, and that he would give the lockers only to those who bought an endowment plan from him. The Deshpande couple knew that they were being given a raw deal, yet went ahead so that they could get a locker.

In this case, the purpose of buying insurance was an unwillingness to resist selling pressure from a service provider.

In the above examples, what’s intriguing is, insurance was neither pitched nor perceived as a product to cover risk. It was either to save tax or to maintain relations or to make an “investment”. Even in cases where the investor was willing to buy insurance for all the right reasons, monetary constraints sometimes reined him in.

Key takeaways from these case studies:

  1. Life insurance is to cover your life risk. Thus, ideally it should be 10-12 times your annual income at a minimum.
  2. Term plan is the best cover you should buy for life risk. This way you get sufficient cover at a low premium.
  3. Tax saving is an additional incentive provided to encourage you to cover your life risk and to secure your dependents. Even if your tax saving is done, do not skip term plan.
  4. Private insurers are also well regulated by IRDAI. Thus, you need not restrict your term plan choices just to PSU insurers. Private insurers with good claim settlement ratio could be a good choice.
  5. Insurance agents’ “targets” are their headache and not yours. Do not stake your future (and your dependents’) just to oblige your agent. Buy it from him only when you genuinely need it.
  6. Similarly, your banker cannot “force” you to buy a policy to give you a locker or a loan. Although this practice is prevalent, please be informed that this is illegal and unethical. You have every right to lodge a complaint against this behaviour.

Know your rights. And know your responsibilities. Above all, know that you need life insurance to provide life cover, not to save taxes or oblige someone.

P.S : The above article is written by Prof. Saurabh Bajaj and was first published on http://blog.bankbazaar.com/the-little-known-secret-of-how-metros-buy-insurance/

Author: Prof. Saurabh Bajaj is CEO with Nidhi Investments, Mumbai. He has been actively involved in writing for investor awareness since last 5 years. His articles have a readership from 64 countries across the globe.

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Published by professorbajaj

Prof. Saurabh Bajaj is an Author, Mentor, Motivational Speaker and Wealth Planner. He has done his MBA from Narsee Monjee Institute of Management Studies (NMIMS) Mumbai, one of the top 10 management institutes in India. He holds the prestigious FRM (Financial Risk Manager) degree awarded by Global Association of Risk Professionals (GARP), USA. Till date, there are less than 15,000 professionals in the world, who have been honored with this degree. He has also been awarded CFGP (Chartered Financial Goal Planner) Certification by AAFM (American Academy of Financial Management). After his MBA, he joined J P Morgan, the second largest Investment Bank in the world. He has worked with J P Morgan as Risk Analyst for more than two years. Prof. Bajaj also holds an Advisory certification awarded by AMFI (Association of Mutual Funds of India). During his stint at Bombay Stock Exchange, he has handled Investment Management and Treasury operations of the BSE Corpus. He has set up an entrepreneurship venture in the field of Wealth Planning and Investment Consulting under the name “Nidhi Investments” and holds the profile of CEO. Prof. Bajaj sits on the Expert Panel of CAClubindia.com and MBAClubindia.com as Investment Expert. He is actively involved in investor education through his blog www.professorbajaj.com which has a readership from 78 Countries all over the world. His articles are also regularly published in caclubindia.com , mbaclubindia.com , totalca.com , charteredclub.com, bankbazaar.com and lawyersclubindia.com . He has been awarded the title of “Best Article Writer” from caclubIndia.com in Jan 2012 and has been selected amongst “Top 5 Technical Writers” from all over India in Feb 2013. He has been invited by various TV Channels like SPIN TV, CNBC TV18, UTV Bloomberg Etc for programs like "Expert Advice" , "What Markets Want ", "Budget Analysis" etc. He has been invited by Several organisations like Lions Club, Rotary Club, Agrawal Welfare Foundation, Rajasthan Mandal, Agroha Vikas Trust, Union MF, UTI MF, Arthamitra Gurukulam, Vidyalankar Institute of Technology etc for expert lecture on "Smart Investing", "Life is A Celebration", "Financial Freedom", "The Digital IFA" etc. He was ranked 8th Merit at All India level NMAT which got him selected for MBA programme at NMIMS, Mumbai. He did his MBA with Capital Markets as his specialisation. Soft Skills has become an inevitable part of every selection process and teaching learning process these days. The students from small towns and tier II cities, in spite of being talented and well equipped with technical skills, are seen struggling in the selection process. This is because of their lack of exposure to these soft skills. Mr. Bajaj has a zeal for training candidates to develop these skills and has been imparting the same on since last two years. This zeal and passion inspired him to set up his own firm called “Knowledge Circle” which aims to train candidates for soft skills. Till date, he has trained more than 5000 participants from over 220 organizations across various fields of soft skills. He has been associated with MSBTE (Maharashtra State Board of Technical Education) to conduct Soft skills training workshop for the faculties of Polytechnic Colleges in Entire Maharashtra (Mumbai Region, Pune Region, Aurangabad Region and Nagpur Region) since last 8 years. He has also been associated with ICAI (Institute of Chartered Accountants of India) for training CA Students on various topics related to Communications skills, Group Discussions etc. He was invited by Fr. Agnel Polytechnic College, Vashi for a motivational workshop for faculties. He was also invited by Vivekanad Polytechnic College for "Communication Skills and Email Etiquette" training for non-teaching staff. Apart from these, he has conducted “Capacity Building Soft Skills workshop for Faculties” at ITI Gunj, ITI Pusad, ITI Digras and ITI Umarkhed. This was the first ever soft skills workshop for faculties in the history of ITI’s in Vidarbha. He was also invited by Shivaji Education Society to conduct similar Soft skills workshops for the faculties and office staff of Shivaji Junior College Pusad, Shivaji High School Pusad, Shivaji Vidyalaya Belora and Shivaji Vidyalaya Bhojla. He has conducted training workshop on “Effective Presentation Skills” for the relationship managers of HDFC Mutual Fund, Andheri Branch, Mumbai. He has also been invited at College of Management and Computer Science, Yavatmal, College of Dairy Technology, Warud, B N College of Engineering, Pusad, B D College of Engineering, Wardha, College of Engineering and Technology, Akola, Dr.N.P.Hirani Institute of Polytechnic, Pusad etc. for the Guest lecture on “Developing Interview Skills”.

2 thoughts on “The Little-known Secret of How Metros buy Insurance

  1. The third story is mine. Although I am not from Mumbai.

    My Banker forcefully sold me a guaranteed NAV plan because I was looking for a locker.

    I only realised it late and lost lot of money in a product that I thought was “Guaranteed”.

    Thanks to your article I will be more careful now.

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