Since 2004, with the advent of private insurance companies, there has been a distinctive shift from traditional plans to unit-linked insurance plans (Ulips) in the life insurance business. But, aggressive selling of policies by insurance agents also has led to an increase in complaints. To guard yourself against any misrepresentation of products, here are five questions you should always ask your agent before buying a policy.
Why should I buy a new plan?
Insurance agents, just like mutual fund representatives, often use a sales pitch saying new Ulips are less expensive than the existing plans because of low net asset value (NAV)—which represents a market value of per unit—of Rs10. NAV is calculated by dividing total net assets by the number of units outstanding. But the fact is, irrespective of whether a plan is new or old, shares must be bought at the same price from the stock market. You might get more units by buying a new policy, because NAV is low, but the percentage change in return of the two plans that have the same portfolio remains the same.
What are the other ways to save tax?
In a rush to file income tax returns and meet the deadline, a lot of us rarely ask our financial advisers about other tax-saving options available, and go for Ulips. If you already are insured adequately, there are other good tools such as equity-linked saving schemes (ELSS), which could help you save on tax.
How has your fund manager’s performance been in the past?
Not all life insurance companies have dedicated in-house research teams. Always ask about the experience of fund managers and how the fund performed last year.
What if I stop paying premium after three years?
Insurance policies are a long-term investment tool. Agents, however, sometimes sell the policy with the wrong pitch that you can stop paying premiums anytime after three years of taking out a policy. The actual amount you get back after three years can be very low from the initial amount you invested because Ulips have high allocation charges for the initial years. Even if you don’t withdraw the amount, but stop payment after three years, mortality rates keep getting deducted from the plan.
Should I ask for signed illustrations?
Always ask your agent to give signed illustrations of the return promised. Under the Insurance Regulatory and Development Authority rules, an agent cannot show you illustrations with more than an optimistic estimate of 10% and a conservative estimate of 6%.