Wednesday, June 2, 2010

Part 15: The Minefield called Insurance

Why do we pay more for fruit salad when we can get each of the individual fruits cheaper?  It’s because of the perceived value-add that the vendor offers of cutting it up and mixing it together. Would we still pay more if we knew that mixing different fruits may actually be harmful to the health?

Why do we pay more for “combination” drugs when the same medicines bought individually would be cheaper?  Take the simple example of Combiflam.  It’s nothing but Ibuprofen (an anti-inflammatory) and Paracetamol (analgesic, antipyretic) – so why not buy Crocin which is Paracetamol, and Brufen which is a brand of Ibuprofen? The market is flooded with various combination drugs, some of which have superfluous dosages; some combinations actually counteract the effects of each other; and in some cases, the combinations are plain dangerous. Why do we still buy them? Why do we ignore any article we come across which tries to explain this?  Is that because somewhere in our mind we want to believe in the efficacy of a wonder drug which will be a miraculous panacea for all ills? We do not really want to know what it consists of – deconstruction and demystification puts on us an additional responsibility of understanding what we are consuming, and by extension, taking responsibility for our own health.  We would rather pay someone for a magic pill and believe in it with a fond ignorance. 

And who is that someone who prescribes it to us?  The Doctor who is supposed to be the expert in whom we repose blind faith.  We go to a big hospital even for a small illness, and are very happy undergoing a round of mostly needless tests to reassure ourselves that we have not ignored anything potentially life-threatening. We take whatever medicine is prescribed without checking on what each of them is for, and what the side effects are likely to be. We ignore what we know to be a fact – that in a lot of cases, the doctors too have targets – they need to keep the rest of the hospital running with their cross-referrals. We do not want to know about the kickbacks they get from each of their prescriptions. We over-test, over-medicate, and over-pay without checking the facts - in fact we consciously ignore the facts. Why would we do that?

When we buy financial products it is no different. In actual fact there are only a few categories of financial products – what is relevant to us is Stocks or Equity, Fixed Income or Debt, Real Estate, and Gold or Silver.  Assuming you don’t want to invest directly in Equity, what you need to do is invest in Equity Funds, Debt Funds, Real Estate, and Gold or Silver.  Each of these Asset classes has its own characteristics and has different risk and return profiles. The problem starts when the marketers start combining these together in magic pill products that will solve all your life’s problems – like take care of your retirement, get your daughter married, make sure your son becomes a doctor.. for each dream there is a product. In most cases these products are bundled with Insurance. Not only will your son become a doctor but he will do that even in the “unfortunate event” something happens to you!  Have you ever stopped to consider that the guys who sell you these dreams have no choice but to take your money and do the following (1) Deduct a mortality charge from it for the insurance part in case it’s an insurance product (2) Deduct a commission for the agent who sold you the product (3) Invest the balance in Equity, Debt, Gold ETF’s or a mix of the above.

So what’s the harm?  They are doing what you would have done yourself, aren’t they? Do you know how much they deduct for the mortality charge? Do you have any idea of how fat their commissions are? Do you know that the commissions are calculated as a percentage of the total premium, the major portion of which is actually meant for you to save? Do you know they have several more charges hidden inside like (in case of insurance products) Premium Allocation Charge, Policy Administration Charge, Fund Management Charge,  Administration Charge, and We-will-not-tell-you-what-it-is Charge?

Do you even know what the charges are? Do you know that some charges are so hidden from you that they get deducted from the NAV of your fund without your knowledge? Have you ever seen a single statement from an Insurance Company describing to you what the exact charges were and how your investments have fared month-on-month, like any Mutual Fund does?

Did you know that in the year 2009 the entire premium collected by the Life Insurance Industry in India was about Rs.200,000 crores out of which Rs.14,000 crores was paid as commission?  That is seven percent. The same as what a bank deposit yields you. And you would still trust your savings to an insurance company?

There is more.  Did you know your friendly banker who claims to be your “financial doctor” is working for a bank which has given him targets to sell those products which yield the maximum commissions?  Why do you think he never advises Term Insurance? Why do you think he mixes up insurance and savings in the first place? He is an MBA from a premier institute and he obviously knows his stuff.  His knowledge may be excellent but what are his motives?

Do you know major insurance companies have tie-ups with the banks to push their savings-cum-insurance products?  Do you think it is in their interest to educate you about your finances?  Then why do you listen to them when they peddle ULIPs or Pension Plans and all other kinds of bundled financial products?  Because you don’t want to take the trouble of being better informed?  Or because you don’t want to confront them because you don’t have adequate knowledge to counter what they say? Or you are looking for that one magic pill which promises to end your life’s problems – as your friendly banker is talking to you, you see visions of spending your retired life ensconced in luxury, enjoying sybaritic indulgences – all you have to do is hand over your money to him and he will take care of the rest?

Your friendly insurance agent is no different of course.  Except that several times she is the wolf who comes in the garb of a well-meaning aunt.

And you are Little Red Riding Hood.  How quaint.  Bye till the next issue

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