To sell life insurance we need to conduct financial planning

We sell life insurance. Our natural desire is to continue to do so. Our natural desire is to not advise the customer on the totality of his financial investment needs. We are also not qualified to advice a customer on whether to buy risky investments or not. We should not do that. But in order to explain the position of life insurance endowment products it is essential to know which needs are satisfied by long term investments and which needs are satisfied by short term investments. Life insurance is one of the many financial products a customer buys. To understand the place of life insurance amongst all his other investments, the customer has to understand his entire investment needs.

It is also essential to explain to the customer, the risks of investing in shares and mutual funds in a comprehensive manner. We should start selling on the basis of investment risks, not on the basis of investments returns.

For as I have kept saying consistently in this blog: Investment returns are uncertain, investment risks are certain.

Why the Customer is Confused

Now picture the situation the customer finds himself in when it comes to investment decisions. For a moment forget that you are an insurance sales person. Think you are the customer. Imagine that as a customer the inputs you normally receive from various sources on where you should invest your money.

Some examples of such advice are:

• Your friend says that you should invest in a particular share because he got a tip that the share price is most definitely going to rise.
• Within a few days, you read a newspaper article that says if you want to make money in the shortest possible time, you should invest in mutual funds.
• Another article you read advises you to not invest in an endowment insurance policy, citing the very high agency commission as the reason.
• You switch on the television and the panel discussion advises you to take a term insurance policy if at all you want insurance.
• Your father tells you to not take risks in savings.
• And in another TV talk show you are told that the modern avenues for investing are shares, company debenture, mutual funds, etc.

At the end a few weeks or months of bombardment from all sides any lay person will be thoroughly confused. He only knows that it is now a fashion to invest in mutual funds. He does not know why he should invest in mutual funds.

Some Examples of what the lay person does not know in investments (You may also ask if the so-called mutual fund expert knows the following)

• The customer does not know his long term needs require a different investment strategy as opposed to his short term needs
• He does not know that investment in mutual funds is a function of the degree of risk appetite that he has
• On the one side, he probably does even know of the concept of risk appetite
• On the other side he does not know of the exact risks of investing in shares or mutual fund
• He does not know that all mutual funds do not earn a high return
• He does not know that a mutual fund which makes a lot of money in a particular year in all probabilities will not fetch high return year after year, because that fund manager’s investment strategy does not work in all financial market situations
• He does not know how to predict the future earning on a share or mutual fund investment
• He does not know the changes taking place at every day, every week, every month and every year in the financial markets
• He has not applied his mind to decide which investment avenue is best suited for which future need in terms of the risk and in terms of the duration of holding
• He may at best know that a friend of his has made good profits on a particular mutual fund. But he does not know that those who lose money in the financial markets do not publicize their loss and hence he will rarely get to know that
• He does not know that a financial adviser, who knows the subject of financial management, will never recommend mutual funds for long term financial goals

But exposed to constant media mis-information, the customer has no choice but to believe the mutual fund agent’s word. And the word of the mutual fund agent, the financial advisers, the print media and the visual media is: Investing in mutual funds gives you very high return in the shortest possible time.

Mis-selling the Mutual Funds

Nothing can be more blatantly wrong than this. The fact is that between 35 % to 60 % of all mutual funds give a risk adjusted return of less than 8 % depending on whether the equity market is going up or down (Read: A Customer Wants MFs, how should we respond?). In other words there is only a 65 % chance (during the time the share market is booming) or a 40 % chance (when the share market is going down), that the mutual fund investor will earn more than 8 %. But the customer does not have this data and no one in the media or other public platforms talks about this. For the first time an authority like SEBI has cautioned the mutual fund industry to be more conservative when advertising and to not promise unrealistic gains to prospective buyers of mutual funds. (Read: There is Good News from SEBI). This warning is however being ignored by the mutual fund association (AMFI) and they continue to put up fraudulent advertisements as before. They continue to make more and more noise that indicates that mutual funds give high returns.

In investments wisdom is more important than qualifications

So hiding this knowledge and scientific data, the innocent lay person is made to believe that he will earn a lot of profits by investing in mutual funds. The lay person may not be financially literate or qualified; he nevertheless is wise about his money. The fact is that even today more than 90 % of the financial savings of individuals is in low risk investments such as banks and life insurance. (Read: Where do Indians Invest their Money?). He does so because for the customer safety is more important than returns. It is, after all, hard earned money.

At the same time he is confused. On the one hand there is an aggressive media campaign that says invest in mutual funds. On the other hand his wisdom tells him not to take risks. The customer is confused on where he should invest. He actually seeks guidance on how investment decisions are to be taken. The mutual fund industry is only confusing him.

Keep your market space

This is where the life insurance agent should step in. If the life insurance agent does not step in, this market space will be taken by the mutual fund industry. They already have to some extent. Calling themselves financial advisers, they are offering financial advice on life insurance also by telling the customers that they should not buy endowment policies.

The life insurance agent should step in and offer whole some advice on all financial needs – both short term and long term. When the customer is confused (as he currently is), it is essential to position life insurance correctly and to educate the customer on

• Asset Liability Matching (showing the customer how duration of investment holding is related to the time when the financial need is likely to arise, such as retirement needs likely to arise after 20 years)
• The meaning of risk in investment. This should be done in a detailed manner – not merely telling the customer that certain investments are subject to market risks, which is like hiding information, rather than educating the customer on risks
• How to match needs and investment options to suit the customer’s investment risk appetite and investment duration needs

Don’t Sell Mutual Funds; Explain the place of Mutual Funds in Investment Portfolios

This is what the customer wants. As life insurance sales persons we have to educate and equip ourselves to do so. We do not have to sell the customer other financial products; as a matter of principle we should not sell other financial products, but we should place all financial products in the correct perspective and show the customer where life insurance fits in.

Life Insurance Endowment is the only Financial Product that meets low risk, long duration and low liquidity needs of a customer

Life insurance endowment is for long term, low risk and low liquidity needs. Examples of these needs are children’s education and marriage, and retirement planning. This is the strength of life insurance endowment products. We should sell in this market space. Keep reading this Blog Help India Insure for updates and a detailed analysis of the market space for life insurance endowment products, Life insurance endowment has no competition from other financial products. Let us together play our part to Help India Insure. Soon you will get in Help India Insure why life insurance is the best product for long term investments. Keep reading.