Understand your life insurance policy's caption before making a purchase.
Two years ago, when Paromita Sinha (name changed), then 63, entered her bank branch to open a fixed deposit of Rs 1 lakh, her relationship manager was more than happy to assist her. He helped her with the complex documentation and other formalities.
To her shock, the next year, she received a renewal notice from a private sector life insurer pertaining to a life insurance policy she had never purchased.
It is only then she realised that the bank official had sold her a traditional endowment policy instead of opening a simple fixed deposit.
“She had no idea that the product involved recurring annual payments. The bank official never explained the terms and conditions to her and presented the endowment policy as a regular fixed deposit with a one-time investment,” says financial planner Preeti Zende, Founder of ApnaDhan Financial Services.
By that time, the bank official no longer worked at the branch.
Over the years, insurance policies have been mis-sold to countless of individuals for a variety of reasons. Now, mis-selling complaints have seen a dip according to Insurance Regulatory and Development Authority of India (IRDAI) annual report 2021-22.
From 35,189 in 2019-20, the number of mis-selling complaints dropped to 25,482 in 2020-21 and further to 23,110 in 2021-22. Yet, many fall prey to certain dubious pitches, especially during the tax-saving season.
Moneycontrol takes you through some of the most commonly-used sales pitches that you should steer clear of.
‘A traditional policy is like an FD’
The promise of a guaranteed income is a spectacular trap that ensnares many an unsuspecting buyer. Insurance is no different.
Th returns under guaranteed traditional policies range between 4-6 percent, and you have a better chance of earning higher returns if you were to invest in other debt instruments. In fact, insurance is not at all about income or return, but protection.
“Instead, what they should look to buy is a simple term insurance policy. Anything apart from term is a combination of investment and insurance. A regular term policy is a great instrument to protect your family financially. You can buy a large cover at low premiums,” says Zende.
Insurance Samadhan Chief Operating Officer Shilpa Arora has handled similar cases of mis-selling.
“They are sold typically to unsuspecting senior citizens as bank fixed deposits. Also some agents and banks present unit-linked insurance policies (Ulips) as mutual funds. Those who are less financially savvy end up investing in Ulips without realising that these are not one-time investments. Most realise it only when they receive premium renewal reminders in the following year,” she adds.
‘Purchase a life insurance policy for triple benefit of life cover, tax benefits and investments’
The oldest and most common sales pitch, particularly during the tax-saving months of January, February and March, this continues to appeal to a large section of Indians.
In a hurry to save on taxes under section 80C, which offers tax deductions of up to Rs 1.5 lakh on certain instruments, including life insurance premiums, many end up buying policies they do not necessarily need.
“They do not even ascertain whether they really need to invest to save on taxes. For many, the Employees’ Provident Fund contribution, which is mandatory, largely takes care of the 80C limit. They make these mistakes as they wait until the last minute and invest in a hurry to meet their HR’s (Human Resource Department’s) investment declaration deadlines,” says financial planner Melvin Joseph, Founder, Finvin Financial Planners.
The solution? Do not treat tax planning as a separate exercise. Evaluate your existing investments and expenses in April – chances are that your EPF contribution and children’s tuition fees, both eligible for deduction under section 80C, will consume a large chunk or can even exhaust the entire Rs 1.5 lakh limit.
“Tax planning should be embedded into your overall financial planning. If your EPF contribution cannot help you maximise the tax benefits, consider Voluntary Provident Fund (VPF), which is an extension of EPF, and Public Provident Fund (PPF). Start in April, so that you can invest monthly instead of looking to gather Rs 1.5 lakh at one go in January or March,” adds Joseph.
‘Buy a guaranteed policy to create a long-term corpus sans volatility stress’
Perhaps the most favoured traditional life insurance products through the last one year, many individuals find non-linked, non-participating, guaranteed endowment policies attractive due to the assured maturity proceeds they are promised.
This is in contrast with Ulips where returns are market-linked as also participating policies. Although the latter, too, offer secure returns, they do not offer a fixed maturity amount as the final corpus depends on annual and terminal bonuses declared during the tenure.
However, guaranteed policies offer lower returns of around 5 percent.
“Neither do such policyholders get adequate insurance nor does this qualify as a proper investment. Most traditional policies invest in debt instruments. The returns never exceed 4-6 percent,” says Zende.
High networth individuals (HNI) who are looking for assured-return instruments that offer tax benefits, though, could find value in these products. Maturity proceeds under life insurance policies are tax-free.
'Revive your lapsed policies'
According to Insurance Samadhan, a firm engaged in helping policyholders resolve grievances against insurance companies, nearly 40 percent of complaints it receives are related to lapsed policies.
Put simply, these are the policies that have turned dormant as policyholders had stopped paying premiums. Typically, tele-callers 'inform' policyholders that their lapsed policy has accumulated bonuses but needs to be revived to be able to claim the bonus. They could be asked to pay a fee and also buy a fresh policy.
“These primarily unlicenced tele-callers who have gained access to lapsed policy data and are able to build trust by introducing themselves as company representatives or even trusted government bodies like the Insurance Regulatory and Development Authority of India (IRDAI) or ombudsman officials,” says Arora.
While mis-selling victims have a window of 15-30 days to return and cancel the policy, the callers often tutor them on responding to calls from insurers.
“Insurance brokers are required to maintain call recordings for three years as per the distance marketing guidelines. The client can ask for this at the time of dispute. If mis-selling is proven, then they have to refund the money. However, policyholders who revive their policies are trapped as they are told that the bonus would be processed only 60 days post-policy activation,” says Arora.
As an individual, you can avoid falling into these traps by reading the documents you are signing carefully. This will help you ascertain whether you are indeed investing in a fixed deposit, mutual fund or are being surreptitiously sold a life insurance policy with a multi-year premium payment commitment instead. More importantly, never ignore verification calls from insurance companies post policy issuance.
Irrespective of what your bank official or agent might have told you, answer the questions to the best of your knowledge to nip the mis-selling nuisance in the bud.
