Don't let bank compel you to buy insurance policy with home loan

Instead of taking an agent's word, do your own research on policy benefits and obligations

The Finance Ministry recently pulled up public sector banks (PSBs) for mis-selling insurance products. The Central Vigilance Commission has cautioned against the forced selling of insurance, saying the lure of commissions from their sale could affect the quality of loans.

While the government and its arms take steps to prevent mis-selling, buyers must practise caution.

Avoid package deals

Bankers may make purchasing an insurance policy a condition for sanctioning a home loan. Sometimes, they even add the premium amount to the loan. The borrower then not only pays interest on the home loan but also on the funds borrowed to buy the insurance policy.

“Neither the banking nor the insurance regulator mandates the customer to buy insurance from the bank for the purpose of availing a loan,” says M Barve, founder, MB Wealth Financial Solutions.

It is okay if a bank insists that the loan is hedged by an insurance policy so that in case the borrower dies or the house gets damaged, it doesn’t suffer a loss.

Get home insurance when you purchase a house. If the house is damaged in a fire or a natural disaster, the insurance will compensate you.

In addition, buy a term plan to offset the liability of the home loan. If something happens to you, the payout from the policy can be used to repay the loan.  

“Instead of buying the policy from a bank, compare term insurance options from various insurers and then make a suitable choice,” says Barve.

False promises

Sometimes, sellers mislead buyers regarding a policy’s features and benefits.

“Mis-selling can take the form of exaggerating the policy features, promising incorrect returns, or providing misleading information on the premium payment term,” says Harshit Gangwar, business head-life insurance, PolicyBazaar.com.

Insurance-cum-investment products are often mis-sold because sellers receive higher commissions on them. “All kinds of false commitments are made at the time of selling. Customers could be told that unit linked insurance plans (Ulips) offer guaranteed returns in the short-term. They could be told that premiums need to be paid only for the first three years, after which the policy sustains on the basis of the profits or interest accumulated in the initial period. Returns could be exaggerated. Some sellers entice customers by offering cashback on the premium paid,” says Dinesh Bhoi, assistant vice president, life insurance, Anand Rathi Insurance Brokers.

What should you do

Follow ground rules to avoid the trap of mis-selling. “If a policy’s return appears too good to be true, or the agent seems too pushy, do your own research before buying,” says Naval Goel, founder and chief executive officer (CEO), PolicyX.com.

Go online to do the due diligence. Gangwar says: “Policy buyers can now easily compare plans from various insurers on their benefits and premiums instead of relying on an unverified source of information.”

At the time of purchase, go through the sales illustration before you agree to the purchase. “This illustration clearly specifies the payment schedule and the benefits—both guaranteed and non-guaranteed,” says Kapil Mehta, co-founder and CEO, SecureNow.

Later, when you get the policy copy, check the personal details, sales illustration (if you did not do so before), and the copy of your proposal form. “Checking the proposal form is important because buyers often sign an empty form and leave it to the agent to complete it. It is important to ensure that the information filled on your behalf is accurate,” says Mehta.

Customers are provided with a free-look period of 15-30 days. During this period, they can go through the policy document. If they don’t like something, they are free to cancel the policy. To avoid this, agents pick up policies from insurers but deliver it to the customer after the free-look period has ended.

At the time of receiving the policy, take the agent’s signature along with the date of delivery.

Checks to run before you buy insurance

• Understand your needs and then identify a suitable product category
• Look at a policy’s key features document (KFD) to find the essential information on product features
• Comparing the benefits illustration of a few policies will give you a sense of which product is more cost-effective
• Product features and premiums can also be compared on online portals of aggregators
• Make sure you are comfortable with the tenure for which premium has to be paid and the lock-in