By Sangeeta Verma

Laal FD – was a slang for ULIP policy internally in a very prominent Bank for many years. It was because the document of the insurance policy they sold as a corporate agent came in a prominent red cover-page booklet and also because it was SOLD TO UNSUSPECTING CUSTOMERS as a FIXED DEPOSIT.

Bankers were selling it like crazy – after all who wouldn’t want a lap dance in a night club in Sydney having experienced one already in Thailand. I have heard Bankers boasting about visiting 12-15 countries under Reward and Recognition program in just 6-8 years due to insurance selling.

Now we know why wouldn’t they!

A bit of History always helps

It all had started from late 2002 onwards, when 7 new private Life Insurance companies came into existence from the then existing 4. To immediately set the distribution channel running they focused on the existing agent network of LIC (Life Insurance Corporation of India) and Corporate Agents like Banks. The new age private sector Banks that time were really hot and revered by the customer. They provided status to him, call centres to him and most important, they provide ATM to him – Any Time Money. What – it is called Automated Teller Machines? I am sorry I had no idea.

If the oldies would remember, it was that time only when the stock markets had started picking up from their crash in 2001. Term Insurance would make profits in decades, endowment policies were boring and LIC was already selling – in such a scenario Unit Linked Insurance Plans – or ULIPs became instant hit with product managers. They were linked to the performance of the market. The product could be customized to any level. The creative juices started flowing. They take a product, twist it, launch it, re-twist something else, launch in a different category under some other name and keep on doing it.

Life of a Product Manager of an Insurance Company

The product manager would have to work on 2 things primarily – matching the cash flows of the customer with the premium payments they have to receive from him and when the customers likely requires the funds at his disposal (I doubt if the customer actually ever understood his requirement) and MOST IMPORTANT the target of achieving faster profitability along with ensuring higher payouts for agents to sell their product.

The Cash Flows conundrum

I remember the classic flight training scene of the movie Armageddon where the NASA’s Air Force chief tells Bruce Willis’ men – “We have got the finest pilots at NASA…we are going to twist you, we are going to flip you and when you scream we are going to go harder & faster”

Now replace pilots with product manager, NASA with Insurance Company and of course ‘you’ here is YOU – the customer! LOL!

Imagine a scene of review meeting of an insurance product managers with their business seniors way back in 2002-2003. They would be comforting their management that they would make the product so complex & launch so many different products and variants that once sitting next to an insurance agent, the customer would not be able to make any excuse of NOT taking the policy. Be it one time payment (for the big shots who have bulk money with them), be it annual payment for the middle class one, be it six-monthly or quarterly for lesser mortals OR even monthly for the bottom of the pyramid. They would leave none.

They would also be able to give back in a way customer wanted – for kid’s education when he turns 18, 21 etc., for the customer’s early retirement guised in form of Pension Plan, for his wealth building, for his tax savings and so many other options. They named the products so emotionally that only a fool would not buy as the product had “smart” in it, only a beggar would not buy as the product had “elite” in it, only a good-for-nothing won’t buy as the product had “star” in it, only a moron won’t buy as the product had “easy” in it and so many such emotional tags attached to the products they launched.

Show me the Money!

So the Unit Linked Insurance Plans (ULIPs) had such flexibility. As Uncle Ben of Spiderman once said – With great Power comes great Responsibility, similarly, With great Flexibility comes great Costs.

Customer Costs = Company’s Profits, and that too after paying huge

So now let us see, what a customer pays in a ULIP.

Premium Allocation Charge

A charge which has now come down to single digit now. It was in it’s golden days as high 100% of the premium collected in the 1^st year from the customer. 100%!! Yes, believe it. No wonder they could take them to Australia.

Policy Administration Charge

It was kind of a file charge. A fixed amount from that would get deducted every month till the policy is running or atleast till major part of the tenure of the policy.

Fund Management Charge

Now because they were given you such good product and good service, their fund managers who invest the money you give them, would have to work much harder so they would charge anything between 1.25% to 2.5% or higher percentage. Initially this figure was much higher than what Mutual Fund AMC’s fund managers used to charge, though I believe their work was easier as Life Insurance premium money was expected to stay much longer.

Discontinuance Charge

How dare you not like their scheme and take money out – you have to pay some charge for getting out prematurely from the plan. Just joking, there was some compliance angle to it as well to dissuade you from withdrawing too early.

Mortality Charge

This was the money that would go to protect your life. That’s it. This is the game. Don’t you understand it – this is just what you have to pay when you go for Term Insurance. Whatever other costs you have to pay are the costs of giving you the flexibility. When you invest through Mutual Funds – you have to pay Fund Management Charges only. You take Term Insurance – you have to pay mortality charges only.

Game Over friend! You get Investments and Insurance by going for Mutual Funds (paying Fund Management Charges) and Term Insurance Plan (paying Mortality Charges).

Premium Allocation Charge and Policy Administration Charge is a LOOT. This is how they pay their agents, make a fool out of you & make profits.

This is the TAMASHA being played on your money. Over a 30 year period, on Rs.1 lac, with a difference of 2% points for the first 10 years that the insurance companies take out from you extra, you lose Rs.5 lacs – yes Rs.5 lacs.

Do you know that a very prominent Bank does roughly Rs.3000 crore worth of premium collection every year as a corporate agent. They get about 12-15% as commission from the Insurance company. This makes it whopping Rs. 350 cr of payouts as commission every year.

Now you know why your Bankers hard sell insurance to you so much. That’s why!!

Long back, I used to wonder why the regulator or the Government would let this fleecing continue. Then I got my answer – the insurance lobby is very strong. LIC is very strong. They have a way with the Government. It bails out Government every single time they are in a problem. Whenever Government needs to sell some stake in a PSU, LIC is there to buy it, whenever the Government is in need of money, LIC will declare dividend to benefit Government as they the largest shareholder of LIC. Now the question arises, how come LIC does all this. Simple.

They have been selling endowment policies for long, they have a huge corpus and to add to that kitty there are so many unclaimed amounts lying with them. The premiums that the policy holders have paid and forgotten with them. This amount is nearly Rs.1700-1800 crores out of total of around Rs.6000 crore lying as unclaimed money with Life Insurance Companies put together.

One thing is for sure, you like it or not, be it ULIP or endowment, this TAMASHA this circus is going to last as only 2.5-2.7% of Indian population has a Life Insurance Policy.

QUESTION IS: Whether you are going to watch it from the audience or are you going to be one of the Joker performers. Choice is yours and so is the money!!