Low-Cost Deals in Insurance and Investment – Is it Worth It?

Low prices are undeniably attractive, but it’s crucial to examine what lies behind them. This article explores how investment companies leverage the appeal of “Low Cost” to entice investors. But are these offers truly reliable, or are you falling prey to hidden business tricks?

Table Of Contents

1.)Tricks of Insurance Companies

• Premium Holiday
• Charge Return
• Premium Return

2.)Free Investment Apps: Investors Beware!
3.)No – Cost EMI – Think Twice!
4.)Income Without Tax – ULIP vs Mutual Funds
5.)Direct vs regular Mutual Fund
6.)Conclusion

What is a “Dark Pattern”?

A Dark Pattern is a design element in a user interface (UI) that is intentionally created to trick or manipulate users into doing something they might not otherwise do. These patterns often exploit human psychology and cognitive biases to achieve their goals, which can range from making users spend more money to signing up for unwanted services.

One common trick of this “Dark Pattern” strategy is when a website or app advertises one thing but then delivers something else. For example, a website might advertise a free trial of a product, but then require users to enter their credit card information to sign up.

We mostly associate this to just online platforms. Let’s look at how this strategy is carried out in insurance and investments in general.

1.) Tricks of Insurance Companies

• Premium Holiday

Some insurance policies present “premium holidays” as a perk. In a 10-year policy, they claim to collect premiums only for 5 years and offer a “holiday” for the remaining 5 years. What they don’t disclose is that you only receive the returns generated from the first 5 years’ premiums at the end of the 10th year. No additional gains accrued. This exemplifies how companies can repackage ordinary features as extraordinary benefits.

• Return of Charges

Certain insurance policies entice with a “charge return” feature, promising to refund charges collected initially at maturity. This creates an illusion of paying “No Charges”. But how accurate is this?

Imagine a regular policy charging an allocation fee of ₹10,000. Investors might hesitate due to the seemingly high charge. To counter this, the company introduces a similar policy with a ₹20,000 allocation fee but with a promise to return the entire amount after 10 years. This “charge return” is presented as a major advantage.

What’s happening behind the scenes? They essentially take their required ₹10,000 from the ₹20,000 charge. The remaining ₹10,000, if invested in a Mutual Fund-like scheme, can indeed double to ₹20,000 in 10 years. This is what they return to you after 10 years under the guise of a “charge Return”.

While you celebrate this “Return”, you forget that it comes after 10 years with no interest earned and with inflation significantly eroding its real value.

You were initially wary of paying ₹10,000 in the first plan, but now you are prepared to not only pay the same amount indirectly in the second plan but also celebrate it as a benefit!

• Return of Premium

Below is a table comparing the benefits of Return of Premium and Term Plans without Return of Premium.

	Age (Yrs)	Term (Yrs)	Sum assured (₹)	Premium (₹)	Maturity value (₹)
Maturity value (Rs)	30	25	10,00,000	9000	226,000
Pure Term Plan	30	25	10,00,000	2800	Nil
Premium difference				6200

In the above table, receiving ₹226,000 may seem lucrative.

Let’s invest the ₹6200 spent for the Return of Premium plans in other plans and see how much Maturity Amount is gained!

Amount invested per annum (₹)	Tenure (Yrs)	Assumed rate of return (%) (Yrs)	Maturity value (₹) (Yrs)
6,200	25	7	422,000
6,200	25	8	492,000
6,200	25	10	612,000

Without adopting the Return of Premium policy, if you choose to invest in an individual Term Insurance Policy and invest the remaining amount separately, additional profit can be gained. Now what do you think? Return of Charges and Return of Premium is an offer or a business strategy of the company?

2.) Free Investment Apps: Investors Beware!

Many companies offer various investment services, such as Mutual Fund platforms, stock trading through online platforms, or providing highly lucrative products. They are identified as ‘Discount Brokers’.

Have you wondered how a company that gives us more offers like ‘free’ and ‘discount’ makes a profit?

When you invest through a free app, all your investment data is provided to the company. This data becomes an essential asset for their business. They utilize your data to sell other products through cross-selling techniques and somehow you trust and start investing in those products.

Major free investment apps create a vast pool of investors and establish alternative investment funds (AIFs), utilizing data to make profits easily. Small investors are easily sold credit-based schemes with high-risk profiles. Even investors who wouldn’t normally want to invest in such high-risk, high-fee plans, are easily caught in the net spread by Free App companies.

When you invest through free apps, all your information regarding your initial investments goes to the company. This becomes a crucial asset for their business. There is a risk of your data being sold in the market. In a situation where data privacy Is not assured in even well-established companies, what level of data privacy and confidentiality can be expected from a Free App company?

Computer scientist Tristan Harris mentions in his statement,

‘If you’re not paying for the service, you are the product being sold’.

3.) No Cost EMI – Think Twice!

Companies often promote the ‘No Cost EMI’ scheme as a means of purchasing goods with the assistance of banks that they have a tie-up with. When viewed superficially, this scheme may seem like a great advantage, as it allows individuals to make payments without incurring additional costs or interest. However, the reality may differ when it comes to making purchases through this scheme.

When buying products through a ‘No Cost EMI’ plan, the items are sold to us at the Maximum Retail Price (MRP). Contrary to what is expected, we do not get a reduction from the MRP. When the Maximum Retail Price (MRP) of a product is ₹50,000, typically you can get a discount of 5,000 or even more. If you are buying the same product through No Cost EMI, you are giving ₹50,000 and there is no scope for bargaining or discount. You are paying ₹5,000 extra and this is how the company compensates for the interest.

Companies often charge a processing fee of about 2% for certain ‘No Cost EMI’ plans. This fee is deducted in such a way that it appears as if it is part of the scheme. The ‘No Cost EMI’ plan, in essence, is a clever marketing strategy that might not provide the cost-saving benefit it claims to offer.

4.) Income Without Tax – ULIP vs Mutual Funds

Income Tax for the money earned from investments is seen as a significant burden by investors. So people are attracted to investments that have no Income Tax.

Many investors consider it a significant advantage in unit-linked policies as it is generally believed that in ULIPs, there is no need to pay tax for the Maturity Amount. Even though it is true in reality, does that make ULIPs great?

The charges are high in ULIPs and there is no standardization, unlike Mutual Funds. Choosing the best-performing ULIP is difficult as it is not easy to compare one fund option with the other due to the absence of this standardization.

You should consider all these parameters and compare how much Maturity Amount can be gained from ULIP and Mutual Funds. Most importantly the Maturity Amount gained after deducting Income Tax. It is true that in many cases, the balance Maturity Amount in Mutual Funds, after paying Income Tax, can be higher than the Tax-Free Maturity Amount of a ULIP.

Therefore, it is important to avoid blindly investing in Tax-Free investment schemes.

5.) Direct vs Regular Mutual Fund

The returns are a little higher in Direct Mutual Fund schemes because they have a lower expense ratio when compared to Regular Mutual Fund schemes. Attracted by the low expense ratio, many Investors opt for direct Mutual Fund schemes instead of Regular Mutual Fund schemes.

Guidance of AMFI-approved Mutual Fund distributors is available to the investor while investing in a Regular Mutual Fund Scheme. This helps the investors in choosing the right schemes and Rebalancing the Asset Allocation at the right time. Such guidance is not available to investors in Direct Schemes with a cheap expense ratio.

A worst-performing fund in the Flexicap fund category has given returns of 13.89% in the last year. Another good-performing fund has given 33.37% returns. There is about a 20% difference between the two. Don’t get stuck with low returns without guidance in a poorly performing bundle that claims to save a 1% expense ratio. Instead, opt for regular schemes through a good Mutual Fund distributor even if they have a higher expense ratio and you can earn higher returns.

For this, you must choose a Mutual Fund distributor who has good experience and cares about the customer’s welfare. ‘Free’, ‘affordable’, ‘discounted’ etc are not helpful to the investor. There is no doubt that what looks like an offer can get us into great trouble later.

6.) Conclusion

“Low Cost” is tempting bait, but you must remain vigilant against what lurks beneath. Be cautious before choosing any investment plan, especially those labeled as “cheap”. Thoroughly understand the underlying financial details. Don’t let yourself be deceived by alluring words and hidden tricks.

Companies tend to bet on the mindset of the people. Unless the collective mindset of investors changes, huge insurance and investment enterprises will keep exploiting people using these tricks. It is high time that investors demand quality products in return for what they spend instead of settling for cheap products for low cost!