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/-!
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!