Insurance ads are misleading. What's the regulator doing?
One has yet to see a smile on the face of anyone who has taken an insurance policy
The Securities and Exchange Board (Sebi) is cracking down on misleading mutual fund advertisements by stating that "Advertisements shall not carry any slogan that is exaggerated or unwarranted or slogan that is inconsistent with or unrelated to the nature and risk and return profile of the product".
It is high time insurance advertisements come under a strict code, much stricter than the mutual fund guidelines as insurance advertisements are the most misleading to the public.
Let's take a few examples. College plans show children graduating from college with a smile on their and their parents' faces. All this by taking a college plan insurance policy. Every parent who sends his child to school or college knows that education costs have shot up at least five times over the last many years. An insurance policy for college education would have at the most doubled (one is being extremely optimistic in this assumption of money doubling?). No insurance policy could ever have funded a college education given the rise in the costs of education.
Besides, one has yet to see a smile on the face of anyone who has taken an insurance policy. There are only cribs on the kind of returns that are seen and the fact that most insurance policy holders were sold policies by pushy agents and not bought for a specific need.
The same is true with retirement. Any retiree who retired and received a lumpsum amount from a retirement plan or is receiving pensions from a pension plan will tell you that inflation has far overtaken the returns from the plans. Retirees have paid exorbitant costs for the policies and have seen no benefits whatsoever given the inflation rates.
Insurance advertisements showing retirees smiling are completely misleading as there is no fact behind the advertisement.
Insurance advertisements have to be made more accountable. The Insurance Regulatory and Development Authority (Irda) has to wake up and make insurance companies more transparent, especially when they solicit policies through advertisements.
The following should appear on every communication sent out to potential investors in insurance policies: the costs payable every year and the agents fees; the investment pattern; and assumptions on inflation and how the policy will secure the insurer for retirement, college education or other such end objectives.
Returns do not come out of thin air. If an insurance policy is to secure a person for paying college education ten years down the line, the returns should beat inflation. Investments in government bonds will not beat inflation, while investments in equities are risky. Management expenses for insurers are much higher than mutual fund expenses as life cover and other covers are bundled into the plans.
The best of fund managers would baulk at promising returns that cover the cost of education or retirement given the volatile nature of markets. The losses suffered by 401K (pension schemes in the US) investors are testimony to the fact that even-long term investments can completely fail.
Lets hope Irda follows Sebi.
Arjun Parthasarathy is the editor of www.investorsareidiots.com a web site for investors.
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