Ever wondered why insurance agents are so persistent? Because they get a fat wedge of your first-year premium.Legally, they are paid up to Rs 40 for every Rs 100 you give as premium in the first year. Of course, other incentives like foreign trips, microwave ovens and white goods make up the non-cash ‘incentives’ that come from your premium. You can end up paying as high as 70 per cent of your first year premium as cost in a unit linked insurance plan (ULIP).That is, Rs 70,000 from a Rs 1 lakh premium does not go to work for you.The regulator C. S. Rao, Chairman of the Insurance Regulatory and Development Authority sees no problem with this. ‘‘Initial expenses can go as high as 100 per cent. But charges come down drastically and subsequently they are minimal. Insurance is a long-term product and if you invest over long tenures you would definitely gain out of it.’’But agents like to sell insurance as a five-year product instead of a long-term one. ‘‘Who has seen a 20-year investment,’’ was what this correspondent was told by many different agents. Agents typically sell ULIPs to save taxes and for investment, the main purpose of insurance—a life cover—is thrown is as an additional extra.While the insurance industry has upgraded itself after the private sector companies came in and launched more transparent ULIP products, where costs are disclosed, traditional products like Money Back, Endowment and Whole Life still hide behind opaque and undisclosed costs. Try asking your agent to spell out costs and see him vanish through the door.So, what can you do? Buy a cheap term cover and invest the rest in a pure investment product—PPF is a great long-term savings vehicle for the zero-risk investor, mutual funds work well for higher risk appetite—that has transparent cost structures.In an exercise by Express Money (see Safety First in today’s edition of Express Money), it was found that after taking into account all costs, it makes imminent sense to buy a cheap term plan to insure the life of the bread winner and then invest the rest of the savings in a pure investment product, instead of buying a hybrid product in the form of a ULIP.The Indian Express will bring you periodic updates on the issue of the insurance industry keeping costs and benefits opaque and agents mis-selling life cover to you.-WITH DEEPTI BHASKARAN
