Wednesday, February 6, 2008

Mobile as calculator?

Mobile phone as a calculator? Insurance as an investment vehicle?

How many of you would use a mobile phone predominantly as a calculator? I guess, not many. In fact, you would look at me curiously as to why I am asking such a silly question, and whether there would be anyone in this world who would answer in the affirmative. If I were to offer a phone that had no SMS or address book facility, but a scientific calculator functionality attached, how many would buy it? Surprisingly, in the world of financial products and services, this is exactly what many unwary customers end up doing.

Here is how it happens. Assume the margin for the distributor in selling calculators were ten times that of selling mobiles phones. What would he do in such a case? Most likely, he would only sell phones that had a calculator feature attached – whether or not the customer wanted it. He would wax eloquent about the advanced nature of the calculation facility, glossing over the lack of basic mobile phone related features, or the fact that a ‘simple’ mobile phone costs only a fifth of this ‘special’ phone. Only if a knowledgeable customer insists, would he even show her the ‘simple’ and effective, fairly priced phone. Such a customer would know that there are several good standalone calculator brands for her to choose from, should she need one.

Transfer to the world of financial services. We all know we need life insurance, much as we have now come to need mobile phones. Now, life insurance in itself is a complete product, where the company takes a premium from the customer, and pays a lump sum to the family in the unfortunate event of the customer’s demise. Almost every single life insurance company has this insurance scheme – which is called a ‘term plan’. But for the distributor or insurance agent, this is not where the juice is!

The high margin business for an agent is what is called ULIP, or unit linked insurance plan. Here, investment is the ‘calculator’ of our analogy, the red herring thrown in to confuse the customer. The agent would sell ULIP as a great investment plan, which also provides insurance. Never mind, that it only provides lip service to insurance, just as a phone without SMS or address book would be useless as a mobile phone! Also, never mind that there are several much better investment plans available in the market (like good scientific calculators) at a much lower price than the ULIP.

An unwary customer would be subjected to a barrage of ‘features’ and ‘benefits’, without educating her on the real costs extracted by the company and distributor in providing these features. She would be shown unrealistic projections and growth rates of her corpus. The blatant falsehoods in many of these claims would come forth only years later, by which time the agent would have long gone. The main objective of insurance, which is what the plan is meant for, would typically be given a go-by. Worse, customers are often given insurance covers that are ridiculously low; after which she comes to live in the false security that her family is provided for.

Life cover Costs of investment management
ULIP vs. term insurance ULIP provides very low life cover (for a given premium).
Choose term cover of 10-12 times income using a term policy
ULIP vs. mutual fund --- 15% - 30% initially in case of ULIPs.
2% - 2.25% in case of mutual funds

There is no breach of the law here. It is the customer who has the responsibility of reading the fine print and being knowledgeable about various products and associated costs. The distributor would only work to maximize his income; the customer should try and protect her interests. Thus, if she goes to a mobile store (insurance), then might as well buy a simple and effective mobile phone (term insurance policy at competitive rates). It is worth going to the adjacent shop (electronics) to buy the calculator with desired features (the investment plan). An agent who claims to fill both spaces through his product, only ends up filling his own coffers instead, at the cost of the customer.

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