If you are not fully covered, a policy offers little insurance

And you thought insurance is all about security! It hasn't been that way since the not-so-good old days when insurance was the monopoly of state-controlled behemoths. At some point during that period the noble objective of protection got relegated to the backburner, with savings becoming the hard-sold mantra. Customers got taken in, agents became rich, and LIC and the other chosen few lived happily ever after. If you expected the scenario to change post-deregulation, well it hasn't and the private players too are only too happy seducing life insurers with six-figure bonus figures and the much yearned-for tax breaks.

So much so it's pretty tough these days-despite the proliferation of private insurers and their merry band of agents-to find a soul willing to peddle a pure life insurance policy without the frills of savings and bonuses. The agent you happen to stumble upon won't be interested in information that one would presume vital when signing up for a loan: your age, your loan exposure (house, car etc), and the size of your family. ''What's your budget,'' is the first question thrown at you, which will then decide how much premium you can afford to pay, which in turn will determine the policy and cover you get.

Don't believe us? Well, this experience in bagging a pure life insurance policy (without the frills of savings and bonuses) will help convince you. A 30-year-old with wife, child and a housing loan of Rs 7 lakh was looking for cover. He estimated Rs 15 lakh to be a fair cover, taking into account the loan as well as any other unforeseen circumstances. For Rs 15 lakh, an endowment assurance policy would entail a premium of Rs 65,430 per annum. A little too steep don't you think? The agent's advice? Scale down the policy to Rs 5 lakh, as that will reduce the outgo to ''only'' (the agent's words, not ours) Rs 21,810. That the purpose of our dear friend was risk cover and not savings was lost on the agent, who also threw in the carrots of tax breaks and an assured sum at the end of the policy's term (another agent seemed almost sure that the Section 88 benefits that were scaled down or eliminated in the budget would be rolled back sooner than later).

Our friend finally threw up his hands and eventually decided to consider the savings option. So what would be the yield on this instrument, he asked. And asked again. All he got was a blank stare. In fact five agents that BT spoke to were unable to tell us what the effective return on the savings part of the policy would work out to, preferring instead to focus on the ''liberal'' bonuses that were in store. So we had little choice but to go back to our excel sheets. What we found out isn't exactly encouraging.

For a ''with-profit'' endowment assurance policy, the premium is higher by over 50 per cent. And the effective yield for a 15-year policy works out to roughly 5.14 per cent. Yes, you read that right. The yield is even lower for 20-year and 25-year policies. And it falls further if you factor in the recent reduction in section 88 benefits for the Rs 1.5-5 lakh income bracket.

Now look at the premiums which, for a pure life policy (as per current rates), work out to around Rs 370 per lakh. Compare this with the average of Rs 4,000-odd collected against the savings-linked policies-an increase of over 10 times. The consumer loses in two ways: one, he has been sold a savings-linked insurance policy with the attendant high premia, and two, he has a substantially higher outgo for every lakh. ''Go for the product that gives you maximum returns on the lowest cost. Term products are the cheapest, where money accrues only on death. Savings can be parked in other investment avenues available and not insurance products,'' points out Sandeep Shanbhag, a Mumbai-based financial planner.

If the yields are so low and the premiums so high, you must be wondering why your friendly-neighbourhood agent is marketing savings-linked policies with such vigour. The answer is simple: his commissions are more attractive on these expensive policies, and are lowest, at just five per cent, on pure life policies. Here's an example: If you go in for a Rs 2 lakh endowment policy, on an annual premium of Rs 8,724 the agent will take home a commission of Rs 3,053. But on a Rs 20 lakh pure life policy with an annual premia of Rs 7,400, the agent is richer by only Rs 370. Now you know why agents are ignorant about pure life insurance and why many insurance companies don't even offer such policies (they have policies that return only the premiums you paid, but the premiums are more than double the pure life premiums). ''Most of the time people buy insurance as a hobby which they should stop doing. Insurance is to be bought by people who need it. There are many very high net worth individuals who don't need insurance and buy it just for the sake of it,'' adds Shanbhag.

The disadvantages of falling into that trap are apparent: one, you pay high premiums but you're still not fully covered, and your savings are still lower than other avenues like PPF, NSC et al. What's more, the returns on your investment are unclear as neither are you aware of the cost of the insurance cover nor the return on your investment. So the next time an agent accosts you with savings-linked policy, just throw that five-letter word-a four-letter word for the agent perhaps-at the agent: yield.