How does a Insurance company fool you

In continuation to my blog regarding the myths busted in the shares, I am today writing about the myths of Insurance and why to avoid it

A Insurance as per dictionary mean : Coverage by a contract binding a party to indemnify another against specified loss in return for premiums paid.  Which in simple English means that if you pay me some month amount known as premium, I would pay the full amount due of something happening to you/your goods or something valuable to you.  

This concept originated in England in early 17th century.  One Mr.Robert Hayman took a insurance of 100 pounds sterling with Mr.Arther Duck.  Mr.Duck was to pay Mr.Hayman 100 pounds in case Mr.Hayman's did not arrive safely from Guyana.

My object of stating the above is not telling you a fable or quoting history but to make you understand that Mr.Duck took nothing but a bet with Mr.Hayman.  Mr.Duck may have presumed Mr.Hayman's ships will arrive safely and agreed to pay 100 pounds if they did not arrive.  Indeed if they arrived safely than Mr.Duck would have collected the premium or the bet amount.  This is called speculation in economic terms.

This is the way an insurance company works.  It bets against your life.  If you are 40 years old and want to take a Insurance for 20 years, the company will agree to pay you certain amount in case you died before you completed 60 years.  In case you complete 60 years the company pays you the amount deposited by you + bonus if any.  In many ways you are hedging your life for a few bucks.  This doesn't sound good.

Anyways lets move on.  When a Insurance agent come to sell you a policy, he will show you loads of data often giving a picture of growth in percent terms.  It will usually be upwards of 25 to 30 %.  If you tell this same agent to give you in writing that his companies returns will be given at assured rate, lets say 25 % over 10 years, he will bluntly refuse.  Because even the Chairman of the company can't predict what will happen in immediate future, let alone in a couple of years.

Even Muslim scholars have a very negative view of Insurance.  They call interest bearing policies Riba and non interest policies as Gharar.  Jewish orthodoxy considers Insurance is against God's divine will while the Christians consider insurance as a lack of faith in the divine.

Now let us come to India.  Indian Insurance scene is lead by the Insurance behemoth LIC.  People often tell me that LIC being Government owned, is safest and trust it implicitly.  But remember UTI which also owned by Government but went bust making many people poorer by thousands of bucks.

The most interesting part is the mis-selling undertaken by Insurance cos through their agents to sell policies.  People of purchase their insurance policies through friendly neighbourhood agent or a far off relative.  This agent is ready to pay at least two of your premiums.  You often don't read the clauses and readily sign the policy documents.  Most of these neighbourhood/relative agent are carrying out their agent/advisor job as a part time work and they don't have the necessary education to tell you about a policy.  They use your attachment (relation/neighbourly) to sell you a policy.  And within 3 years, when you ask them about the details of returns, they often have left the part time job.  Thus you are left in hole.  In most of above cases your claim may be rejected for not filling the necessary disclosures at the time of signing the policy.

Some banks like the SBI use the Home Loan and Car Loan as instruments to blackmail you into buying a policy with their sister concerns.  I don't know why IRDA hasn't looked into this yet.  A friend of mine went to SBI for a home loan, the bank made him take a 10 lac insurance, which he had to take for the fear of loss of time in taking his home loan proposal to another bank.

I hope this makes you understand that Insurance is no way to invest money.  FD by banks are your best bet.  I will write a separate article on Mediclaim/Mutual fund and other asset classes at a later date.

If you find this article interesting kindly share it with your friend.  Please post your comments to keep me going.

Vijay Prabhu