A challenge for insurance salespersons

Over the last few days, I've read more than one article on how ULIPs are actually good products, if only for knowledgeable investors who can understand the ins and outs of the charges and the structure. The take off point is the same, which is that with the upfront commissions on ULIPs reduced, the insurance industry and its distributors have focussed on selling endowment plans (the so-called traditional plans) with great gusto. This is natural, given that endowment plans have higher commissions than ULIPs now.

If anything, endowment plans are even worse for investors, with far less flexibility, no transparency and an even poorer outcome in terms of both life cover and growth of capital for investors. Even so, insurance salesmen will try and push nothing but endowment plans now that they are the most lucrative.

The basic problem is that all such discussions start off from the characteristics of the product, rather than the need of the saver. If you start from the need of the saver, then the answer will always be that term insurance is only kind of insurance product to buy. Other products can never provide the amount of protection that people actually need.

If that sounds like a strong statement, here's a challenge to any insurance salesperson. Start with the basic requirement of insurance--if someone dies suddenly, then how much of an insurance payout does his or her family need? The thumb rule is five to ten years of current income. Within that range, it depends on whether the spouse is earning well, whether the family has a own, paid for house and similar factors. So someone with a ₹10 lakh annual income needs ₹50 lakh to ₹1 crore for the family in case of sudden death.

Can any insurance salesperson come up with endowment or ULIP plans that can do this? They can't. Under these plans, the cover is so low that a huge proportion (even all) of the salary paid as premium will not do the job. And that's the real reason that these products are useless.

I await responses from those who would like to prove otherwise.