Why many bankers hard-sell guaranteed insurance plans

livemint.com:

insurance plans, according to industry executives. And that is because of the huge commissions dangled by the insurance sector. Industry executives aver that guaranteed insurance plans make up for a bigger chunk of the financial instruments marketed by relationship managers.

To be sure, the insurance sector does not segregate data on different types of policies in public domain. The head of a leading bank’s private wealth division told Mint, on condition of anonymity, that about half of the firm’s total assets under management (AUM) are deployed in guaranteed insurance plans. The commissions vary depending on the type of plan and the insurer but are typically around 40-55% of the first year premium and subsequently lowered from the second year onwards.

In March, the insurance regulator removed a cap on product-specific commissions. It said the commissions will now be covered under an insurer’s expense of management. “Insurance is a high commission product and they (the insurers) are incentivizing the bankers to sell it.

We don’t subscribe to half the AUM going into a product like this. This can just form a part of one’s fixed income portfolio but if the horizon is 10 to 15 years, they can have more allocation to equity products," said Himanshu Kohli, co-founder of Client Associates, a private wealth management firm. Equity products also offer better returns but with higher risk.

For instance, the rolling returns from Nippon Bees (Nifty ETF) was 11.74% during a 10-year period. Note that in the case of mutual funds, the investment can be redeemed at any time by paying the applicable capital gains tax and exit load. For guaranteed insurance products, this money gets locked in until maturity.