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Come into my parlour...

...says the insurance agent as he traps uninformed investors into buying unsuitable policies. Here are the lures you should avoid.

Suresh Sadagopan | Print Edition: August 2010

RETURNS CAN BE AS HIGH AS 30%. According to insurance regulator, Irda, the benefit of investing in Ulips should be illustrated through returns of 6% and 10%. However, agents usually show fancy illustrations, depicting 16%, 24%, even 30%, returns. If confronted, they explain that it is to give the customer a 'realistic picture' of what they can earn if the returns are high. It's not just agents who indulge in this practice. Many banks also project impossibly high returns to lure customers. Lesson: If returns seem too good to be true, they probably are.

SURRENDER OLD ULIPS, BUY NEW ONES. Agents get higher commissions when investors buy new Ulips. So they urge customers to surrender an existing Ulip and invest in another one. Insurance products have a front-loaded charge structure. Customers pay the charges all over again and agents get their commissions. Lesson: Check if you really need to cancel the policy.

RETURNS ARE FANTASTIC; INSURANCE IS A BONUS. Ulips have given good returns over longer tenures, but so have equity mutual fund schemes. Insurance agents hype the product and position insurance as a freebie. The fact is that you will have to pay for insurance and the agents don't include these charges in the returns from a Ulip. If the charges are factored in, the returns will be far less alluring, especially in the initial years. Lesson: Don't get carried away by returns alone. Factor in the charges before investing in a Ulip.

THE FIRST TWO (MONTHLY) PREMIUMS ARE PAID. These are the magical words agents use to soften clients. The lure of a free option is hard to resist and people sign up after a token resistance. The tax-saving bait is also used to pull in clients. Lesson: Look the gift horse in the mouth; examine the product thoroughly. After all, you will have to pay the remaining premiums.

THIS PRODUCT IS BEING DISCONTINUED. Agents feed this farce to customers at regular intervals. In June, they were urging people to invest in pension plans before insurance became mandatory. Now, they are insisting that the clients buy a policy before 1 September as a five-year lock-in period will come into force after this date. What they fail to tell investors is that the charges will be much lower for the new products and surrendering a policy will be possible even after a year at 12.5-15% (these charges will go down subsequently). Lesson: Find out the details before putting in your money.

To boost sales, agents often fill up forms for customers and mention that the client is in perfect health-even he is not. In case of medical problem that does not find mention in the form, claiming reimbursement can prove to be a nightmare. Lesson: Fill in the form yourself. YOU JUST SIGN, WE'LL DO THE REST.

TAKE THIS FOR YOUR CHILD/SPOUSE. If agents find that the earning member cannot be insured, they suggest that a policy be taken for the spouse /child. They justify this by dangling the lower premium bait. Insurance is essential only for the breadwinner as it is the loss of his/her income that will affect the family's financial condition. Insuring a non-working spouse or child serves no useful purpose because they do not have an income to replace. Lesson: If you want to protect your family, don't succumb to this sales pitch.

THE SCHEME IS BACKED BY GOVERNMENT. LIC agents tend to pitch their products by brandishing the company's lineage and the government's support. However, the fact that it has survived 50 years does not imply that it will do so for the next 50. Also, being a government-owned company may not be an advantage; customers of the erstwhile UTI lost a lot of money when the company unravelled. Besides, insurance companies come up with fancy names for their schemes, which are often old wine in a new bottle. Lesson: Don't be dazzled by big or exotic names. It's the substance that matters.

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