Do your homework before approaching an insurance agent

A recent Harvard Business School study, Understanding the advice of commissions-motivated agents: Evidence from the Indian life insurance market, shows misleading statements by life insurance agents keep consumers away from the right insurance products (term plans).

For the study, the researchers sent trained auditors to pose as customers and seek insurance advice.

The auditors’ meetings with agents centred on life insurance, specifically term and whole-life.

The study said, “Life insurance companies may not have an incentive to educate consumers about how term life-plus savings are better than whole-life insurance, as it may cause consumers to save with banks, not with life insurance firms.”

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A whole-life insurance plan is a plan with unlimited term.

A whole-life plan pays the nominee in case of death till the age of 99 years, while a term plan pays the nominee only if the insured dies within the policy term. Whole-life policies might or might not pay a bonus.

The study, authored by Santosh Anagol, Shawn Cole and Shayak Sarkar, says, “In another experiment, we found requiring disclosure of commissions on a particular product led to that product being less recommended.

“This is interesting in that it suggests hiding information may be an important part of life insurance agents’ sales strategy and that disclosure requirements could change the optimal strategy of agents.

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“In this case, it appears the disclosure requirement on one product simply had the effect of pushing agents to recommend more opaque products.

“These results suggest the disclosure requirements for financial products need to be consistent across the menu of substitutable products.”

The study found before pitching a product, insurance agents estimated how much one could put into life insurance every month.

That most insurance agents consider only their remuneration and overlook the advisory side of their profession is an established fact.

Approaching an agent lessens your burden, but increases your cost quite a bit. Therefore, it is imperative someone considering buying life insurance should first do his/her homework.

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Here’s what you need to know before sealing a deal with a life insurance agent:

Do you need life insurance?

Owning life insurance is not mandatory for everyone.

For those who are the only breadwinners in their families, life insurance is a must.

It can be bought once responsibilities or liabilities increase.

Those who are single and living on their own might need a health insurance or personal accident cover more than a life cover.

Which life insurance cover do you need?

Certified financial planner Anil Rego says, “Determine which type of policy you need — term, unit-linked or traditional.

“Or, are you looking at investment plans or pure life cover?”

Even if you are convinced about investing in a unit-linked or traditional (endowment/money-back), experts advise keeping insurance and investment needs separate.

Therefore, for life insurance needs, stick to a term plan that gives pure risk cover at a very low cost -- annual premium of Rs 3,000 for a cover of Rs 15 lakh (Rs 1.5 million).

For investment needs, consider pure investment products such as equities, mutual funds and fixed deposits.

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How much cover do you need?

Typically, your life insurance cover should be eight-10 times your annual income.

Simply put, life insurance is to protect your family from any kind of financial burden and, therefore, it should cover all possible expenses of your family.

“This can also be determined if you know the exact purpose you need life insurance for,” says certified financial planner Pankaj Mathpal.

For instance, to cover business or personal liabilities, loans/debts, your child’s higher education, retirement needs or your family expenses.

Experts say on many occasions, individuals buy more than one term plan and link it to different goals.

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How much can you afford to pay?

Knowing the cover you need partly solves the problem.

One also needs to know how much one can pay by way of premiums.

So, even if you want to opt for the highest sum assured, you need to consider whether you would be able to pay for it through the policy period.

Experts advise increasing life coverage periodically, as responsibilities/liabilities and incomes increase.

Or, you could get a cheap plan on buying online.

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Which company to buy from?

Check on companies and their products; these might or might not vary much in the case of term plans. Check on the claim settlement process, time taken for this and the service. To know more about firms, visit their websites.

Shop for the best premium

Life insurance companies’ premium for policies could vary, even for the same type of policy.

So, look for the best quote, though this shouldn’t be the only determining factor for buying a plan, as opting for a very small premium could also mean a small cover.

Understand the policy

Once you have zeroed on a policy, ensure you have been sold the policy you had chosen. Read the documents and understand these completely.

Discuss with agents aspects such as when you or the company could cancel the policy and whether there is a penalty for it. Also, check how to change the name of the beneficiary, etc.