Common Sales Pitch Unit-linked Insurance Policy

The most common life insurance sales pitches that you should be wary of:

This product is like a mutual fund
In the last one-and-a-half years, several life insurance companies have launched ‘new fund offers (NFO)’ for small-cap and mid-cap fund options attached to their unit-linked insurance policies (Ulip), However, the term ‘insurance’ was conspicuous by its absence in several advertisements, leaving scope for lay individuals to misinterpret these products as mutual funds. Regulators started barring insurers from issuing advertisements without references to the embedded life cover element. 

An endowment policy offers FD-like secure returns, plus tax benefits
For risk-averse investors, they are lured to guaranteed returns with the prospect of such returns as being tax-free. Often, it’s senior citizens who fall prey to such sales pitches by bank officials, only to realize at the time of renewal that the product involves recurring premium payment commitment over 5-10 years or more. Also, elderly individuals end up paying for the life cover' mortality charges when it is unnecessary as they do not have dependents.

The returns under guaranteed traditional policies range between 4 percent and 7 percent over the long term. Exiting early if you find the policy to be unsuitable later comes at a cost - loss of part of your premiums.

In fact, insurance is not at all about income or return but protection. And the protection element in such policies is much lower. Instead, look at buying adequate term insurance covers, which are available at affordable premiums.

Life insurance policy offers triple benefit of life cover, tax savings and investments
The oldest and most common sales pitch, particularly deployed during the tax planning months appeals to salaried employees who are in a hurry to make tax-saver investments during this period. It is best to not treat tax planning as an isolated exercise. It should be part of your overall financial plan that is drawn up at the beginning of the year. Invest every month and through the year, instead of completing the task closer to the deadline.

Buy a guaranteed policy to avoid the market volatility risks
With life insurance companies increasing their focus on non-linked, non-participating, guaranteed endowment policies, such products are being promoted heavily due to the assured maturity proceeds they are promised.

This is in contrast with Ulips where returns are market-linked. Moreover, while participating endowment policies, too, yield secure returns, they do not offer a fixed maturity amount as the final corpus depends on annual and terminal bonuses declared during the tenure.

While policyholders with lower risk appetite might find guaranteed payouts to be a source of comfort, the fact remains that they stand to earn only 4-7 percent annualized returns despite staying invested over the long term.