SEBI registered Investment advisor (RIA) with Registration number – INA 000000342.
Be careful with Bank staff- they may make you bankrupt!

Last week, I was sitting with a bank staff for sorting out some issues in my account. Suddenly a ‘VIP’customer reached there and even without attending my issues, the bank staff started attending that person. Even though, I felt bad, I waited patiently to know, what is happening.

The customer is interested in putting 5 Lakhs as fixed deposit for 3 years. He told that he requires the money after 3 years for the marriage of his daughter. He is fine with the interest rate of 8% offered by the bank for a 3 year deposit.

The bank staff was trying to sell a ULIP policy to the customer. I was overhearing the sales pitch. It was like this:

Bank Staff: Sir, the deposit interest rate is only 8%, but now there are many investment options which are very attractive.

Customer: But are they safe? I am coming here because of the government backing of the bank and I am sure that my money is safe, even if the returns are bit low. This money is my sole source for my daughter’s marriage.

Bank Staff: But sir, this insurance is also from the subsidiary of our bank. There is a NAV guaranteed policy, where you will get a guarantee and the high returns of the equity market.

Customer: I am more bothered about safety and not on return. But if you are sure this policy is also from the bank promoted insurance company and is giving a guarantee, I will go for that, because I have belief in this bank, where I have an account for the last 30 years.

Bank Staff: Ok sir, please sign on this form and issue the cheque. I will fill up the proposal form for you because it is bit lengthy.

The deal is over and the bank staff collected the cheque for 5 Lakhs. The staff was all the more happy in attending my case now, because she has completed her target for that day with this single customer!

Let me explain what policy, she was selling. It is a NAV guaranteed Policy, which is very popular now a days. This particular policy is having a fixed term of 10 years. You can pay the premium either as a Single premium or in 5 annual premiums. In this policy he will get the guaranteed NAV only on maturity after 10 years. If the customer is surrendering the policy, the guarantee is not applicable and the earliest chance to get the money from the policy is after 5 years. The company will deduct 3% from this single premium as Premium allocation charges upfront and further there is a monthly recovery of Rs. 60/- towards administration charges in addition to the mortality and Fund management charges and an extra guarantee charge.

The customer is depositing this money to be used for his daughter’s marriage after 3 years and the bank staff is putting this money into this Single premium policy knowing well that the earliest chance to get the money from this policy is after 5 years and then the guarantee is not applicable! This is just an example of how the bank staff is misselling insurance policies.

Compulsory insurance for any loan!

Last month I got a call from my friend who is doing business in Bangalore saying that the bank, while sanctioning a business loan, made it a condition to pay 3 Lakhs as insurance premium in one of the costly ULIP. Knowing the high charges, he was forced to buy this policy, just to get the loan.

Be careful with the Bank staff – They are selling and Mis selling.  Earlier, this was happening mainly in private sector Banks. Now, after most of the banks started acting as agents for some insurance companies, this is spreading to nationalized banks and even big co operative banks. Most of the bank executives are having personal targets on insurance because, this is the highest revenue earning business for the banks now. Cross selling has emerged as cross killing! Policy holders are not getting after sales service from the banks.

Home Loan Insurance – Biggest Trap

My cousin, while availing a home loan from a big bank, requested for a pure term insurance of Rs.50 lakh to cover the housing loan. But the bank insisted that he should buy a mortgage redemption policy from their insurance subsidiary. I found out that this policy was offering around 40% commission to the bank in the first year and another 7.5% in the second year. There was another policy of the same company which charges just half of the premium with only 2% commission and the bank was selling only the former to get the 40% commission! The bank was advancing the huge premium and added to the loan and was recovering it along with EMIs. Recently, I heard that IRDA asked to discontinue this policy after lots of customer complaints. The ban has come after 4 years of selling this toxic policy to Lakhs of home loan customers!

Now after the reduction in commission on ULIP policies, most of the banks are selling Endowment and money back policies which is offering around 40% commission in the first year and 5% throughout the Term of the policy. The IRR on these policies will be around 5% for the customers on a 15-20 year policy.

The only way to save you from this mess is to understand the products better.

1. Understand the charges and commission in the policy?

Regulations allow you to ask the commission, that the bank is getting on a particular policy. Ask for it and cross check to confirm. If you study the product brochure, there will be a small portion mentioning as charges under various heads. These will give a rough idea on how much money is going out of your premium for various expenses of the company. If the charges are high, your returns are less.

2. Ask for more details than just the name of the policy?

Find out, the details of policy like whether it is a ULIP, Traditional policy etc. If it is a good ULIP, it will take atleast 15 years for it to offer a return comparable to a mutual fund. So the best option is to reject it. If it is traditional policies like endowment/money back policies, it will offer you around 5% return on a 15 year period. So the best option is to reject it. If it is NAV guarantee policy, it will offer you around 8-9% depending on many other factors but with very low flexibility. If it is a Term policy (which nobody will recommend normally), compare the premium with other companies and go for the better one. Online policies are now offering better rates. If you are aged 35, you can take a 20 year term policy for 1 Crore with a yearly premium of just Rs.10, 500/-!

Conclusion:

Before buying any financial product, analyse it carefully, because once you join, the escape routes are limited. Take professional help if you cannot decide. It will help you in saving your hard earned money. IRDA is planning to permit banks to sell policies of multiple companies. This can create lot of service issues in future.

Better use the bank only for banking, else, they will make you bankrupt!

19 Comments

  • Prasanna Posted September 16, 2011 10:59 am

    This is very common. Some of the Bank Tagged Insurance agents carry the pay-in chalan to the customers and collecting the premium and writing the chalan and THEY sign in the counterfoil and giving to the customer as the proof of collection.

    While one group are struggling even for 1% genuine margin, others freek with 7% commission just like that.. What a world?

  • Shyamsundar Posted October 10, 2011 3:25 pm

    Hello,

    I am contributing Rs.15000.00 annually to ING VYSYA LIFE PLUS POLICY and the term is 15 years. Now I want to withdraw from the above scheme/policy as I felt there is not much RETURNS are guaranteed on this policy, as it is like FMP Policy, where they invest in Units/investments in the commodity market. I have completed 7 years and there is no penalty for early surrendering of the policy.(min 3 years) Now What is your opinion on this Policy, whether it is good to continue for 15 years or not? please help, as one of my cousin who was earlier working with this ING Vysya had made me to invest/obtain this policy.

    • admin Posted October 11, 2011 10:50 am

      Dear Mr. Shyam sunder, In this policy you have already paid the higher charges in the first 5 years. The premium allocation charges were 44% in the first 5 years and there is no charges from 6th year. Surrender charges are only 2% of the premium, if you surrender now. The growth fund has performed reasonably well with a 10% return.But the insurance cover is very less in this policy.If you are not satisfied with the performance, you may exit the policy now and invest the proceeds in a good performing mutual fund. But, if you are withdrawing for spending, better wait for some time, because markets are in low levels now. Also go for a Term insurance policy to ensure a decent life cover.

  • K V N Kishore Posted November 6, 2011 11:07 pm

    there is a lot of mis selling happening with the banks probably under budegtary presuures for cross selling and possibly not aware of the results of their actions in eroding the trust of the customer. This should not be done at any cost.

  • Vivek Tyagi Posted November 9, 2011 10:53 am

    Very nicely written and explained.
    Thanks for this informative article.

  • Raju VN Posted November 17, 2011 1:52 pm

    For that matter not only Home Loans, but any loan e.g. Personal Loan provides also insist that it is mandatory to buy a policy from the same bank from where the loan is disbursed. If the borrower insists to buy a policy to meet with their insurance requirement from a company of the choice of the borrower, the bank refuses to consider extending the loan

  • prem Posted November 19, 2011 8:44 pm

    Hello,
    I have invested in( LIC Money Plus 1) – 50k per year for 3+ years now and the current NAV (growth) is only a little more than 13.
    I have covered myself with a 75lakh term plan so not bothered about the 5lakh cover this Moneyplus offers.However my exposure to equities or MF is nil except this and another one time 70k in Market plus which again has a NAV of 14
    Is it wise to continue investing in these or should I surrender.

    I have parked around 8lakhs as a FD for 10% interest since I have not being taking risk.This do not mean I dont want to.I also have additional 45k permonth to invest after my EMIs and expenses.
    I have a home loan of 30lakhs with a current interest of 8.25% which will increase to the floating rate by april 2012. I also have an agricultural loan for 2 lakhs at a rate of 6%. This is due for a renewal in april 2012.

    Could you please answer my queries below
    1)Should I continue Money Plus 1 and Market plus
    2)What would be better for my surplus 8 lakhs and my 45k permonth ….what would be a good investment option..
    3)Is it better to repay my homeloan partly….if so is it better to wait till april 2012 when my rates increases from 8.25%.same way is it better to continue the agricultural loan (gold pledged) and divert that too in to home loan repayment.

    Your reply would be helpful

    • admin Posted November 23, 2011 11:10 am

      Your portfolio requires a comprehensive financial planning to derive optimum results. Any advice in isolation will not be advisable. If you are interested in a comprehensive financial planning, please visit http://www.finvin.in and click on – contact us.

  • balaji bs Posted December 31, 2011 7:26 pm

    hello sir,

    i have invested in LIC jeevanbharathi for 2 lakh rupees sum assured with 23500 rupees annually since 2005. one of my friends cousin who is a common friend to me misselled this type of money back policy. i have already paid for 7 years. i want ur opinion whether i can surrender the policy or to stop making further annual payments. even i ad been enquiring about this in lic office and my common friend who sold this policy are giving vague answer not to stop it telling to me to continue. i want ur valuable opinion if i stop the policy will get my money back. plz let me know in tghis regard

    • admin Posted January 7, 2012 11:27 am

      You can get a surrender value quotation from LIC office and then decide. From investment angle, these policies are not good. Better to invest in good mutual funds. Insurance is for insurance cover and not for savings.

  • MaryAnn Posted January 22, 2012 11:09 am

    Hi, I am a novice in the field of SIP/ MF etc…However, I am interested in starting an SIP for about Rs.5000 p.m. in 2 or 3 SIP schemes…Please advise how to go about this…
    Had been to a nationalised bank recently for the same, and I was also informed of the same situation that is mentioned above…I now will not go for it…

    Await your revert at the earliest.

    • admin Posted January 25, 2012 12:14 pm

      You can approach brokers like Integrated Enterprises, Bluechip, Bajaj Capital etc for starting SIPs. You can select 2 funds from our recommended list. We have recommended 5 funds for long term wealth creation.
      If you are interested in a Financial Plan and investment as per the financial goals, please visit http://www.finvin.in
      We charge Rs.1499/- . This way of investment will help you in reaching your goals with minimum commitments.

  • PRAKASH DAS Posted January 29, 2012 10:28 am

    Dear Sir,

    I am interested to invest in mutual fund for 3 years.
    kindly advice me which plan is suitable for me

    • admin Posted February 2, 2012 10:38 am

      The selection of mutual funds should depend on many factors including your goals. time to each goals, your current investments etc. You can see the article on Best 5 mutual funds for wealth creation in http://www.finvin.in
      But better to invest as per the overall financial plan.

  • Hari Prakash Posted July 18, 2012 6:40 am

    This article written 10 months back and unfortunately the same situation is continuing even today. An executive from xxxx bank met me with lot of follow up and was trying to sell me an ULIP, Highest NAV Policy. The policy stated to invest 50K per annum for first 5 years and maturity at 10th year. The gauranteed returns is 1.5 times of the invested capital (i.e.Rs.2,50,000), which works out to Rs.3,75,000/-. Or the highest NAV on any day from 1st to 7th year. I worked out and showed him even if I invest Rs.50,000 for next five years in Bank FD @7% interest per annum (which is post tax) and take out money after 10 years, my returns will be 15% More. If I opt for 5 yr tax saving FD, then the returns will be 34% More. The executive stunned with my explanation and did not turn back.

  • Arun Dange Posted September 19, 2012 11:57 pm

    Dear Sir,
    I am planning to start in trading in derivative in future and option. pls sugest me the charge structure and what are the precaution one has to do before trading.

    Rgds,
    Arun Dange

    • admin Posted September 24, 2012 4:55 pm

      I will suggest you to keep away from futures and options. These are for experts and not for retail investors.

  • D J Posted November 30, 2012 5:30 pm

    Home Loan Trap section – “…the bank insisted that he should buy a mortgage redemption policy from their insurance subsidiary. I found out that this policy was offering around 40% commission to the bank in the first year and another 7.5% in the second year. ..”

    Whats the second policy called..the one with 2% commision?

    • Melvin Joseph Posted November 30, 2012 6:46 pm

      In this case, the bank was collecting the single premium from the customer and issuing a Regular premium policy technically to get the full commission of 40% in the first year and 7.5% in the second year. The company was utilising a technical explanation in doing so.If it is accounted under the single premium policy, the commission is 2% only.Anyway, after IRDA intervention, the first type policy was withdrawn by the insurance company.

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