What to look out for when you buy insurance or investment products

The year was 2003. A crime was committed. There was no violence or bloodshed. Yet it was vile enough to leave us feeling plundered and gasping for air.

We were the victims. We had just returned to India after several years abroad. We settled down in the salubrious city of now Bengaluru (this was a decade ago, when the city was still verdant). We made new friends, enjoyed the restaurants around town, and drove out to Mysore and Coorg on long weekends.

And then it happened.

One morning in December 2003, we called our bank manager. We had brought back to India a significant portion of our assets and wanted help with investing this money. We did what most people would in our circumstance—approach our bank. The bank manager sent a young rookie to meet us. The rookie spent not more than 15 minutes discussing our investments and came up with his recommendation: invest in a unit-linked insurance plan (Ulip). Not being familiar with Indian investments, we hoped he had our best interests in mind when we signed the cheque.

A month later we checked the status of our investment. We were stunned to see its value drop sharply. We pored through the policy bond and realized that nearly 60% of the premium was not invested at all. It had been used to pay insurance charges and commissions to the bank.

The bank manager refused to redress our grievances. He impassively stated that our signature on the forms meant we had read and understood the terms of the investment. We left the bank that day, feeling gutted, victimized and with no recourse. Clearly, part of the fault lay with us for not studying the products carefully before investing. However, peddling inappropriate products to vulnerable investors without disclosing its risks, is a crime. The only difference between such crimes and those committed in broad daylight is that financial crimes are white collared and go largely unreported.

Having personally experienced the helplessness and anguish of losing money over toxic products, we set up an organization to alleviate the hardships of investors who had been victims of such financial crimes. Here are some common investment or risk management products and here’s what you should look out for when you buy them.

Health insurance

No matter now urgent the need to reshape your nose, it will not be covered by your medical insurance policy. Neither will most mental or dental expenses. Pretty brutal, you may say. Check the waiting periods for pre-existing conditions, maternity care, day care and ongoing procedures that don’t involve hospitalization, such as dialysis or chemotherapy.

Look out for co-payments, deductibles and sub-limits. Co-payments mean that insurance companies pay only a part of your bill. You pay the rest. Deductible is the limit after which your insurance policy will kick in. Sub-limits are caps by the insurance companies on room rent, surgery costs, or specific ailments.

Life insurance

Always get the medicals done through the life insurance company, so they have a record of your health status. Do not get swayed by policies sold to you without the need for medicals. Your nominees may suffer during the claims process if a material health fact was not disclosed. I reiterate this in the light of the large number of policies sold online, without the need for medicals.

Look through the exclusions (deaths due to suicide, dangerous activities, lifestyle or smoking-related diseases), and charges in your policy. Check for mortality costs, surrender, policy administration, fund management, fund switching, withdrawal, and revival charges. Watch out for lock-ins, and the implications of discontinuing premiums midway through your policy.

Credit card

This is one of the easiest traps to fall into. Credit card companies allow you to pay a minimum balance, and carry forward the rest. But you get charged nearly 3% interest each month, or about 36% annually on the unpaid amount.

Besides, you will pay extra if you use your credit card to withdraw money, unlike when you do it from your debit card. If you have used your credit card abroad, you would also have noticed the overseas transaction fees in your statements.

This could also be true if you are buying through online e-portals and paying in foreign exchange. Financial instruments have made a science of wording products in a way that makes it impossible to fully understand the implications. However, the devil is in the detail. He is lying in wait, hoping his horns are not too visible. All the product’s charges, risks, exemptions and conditions are hidden in the obscure small print. When you read them, your mind shuts down because it reminds you of an abstruse engineering text book. With your guard down, the devil is now ready to ensnare. The only way to avoid these pitfalls is to keep asking the questions till you are sure. Ask the seller to put the disclaimers and explanations in writing. Tell him to write down what you stand to gain and lose by investing in the product.

Disclaimers are meant to protect both the buyer and the seller. Don’t make it a one-way deal. Trust me, I learnt the hard way. I asked my son why his maths marks were lower compared to last semester’s. Like mutual funds would state in their fine print, he declared that past performance was not an indicator of future results.

I rest my case.

Priya Sunder is director and co-founder of PeakAlpha Investments.