Protect yourself from these common mis-selling ploys insurance agents use

An IRDAI report shows that banks and broker channels received more mis-selling complaints than other channels

Mis-selling is a sales practice where the insurance policy is deliberately misrepresented for the sole purpose of sales. According to the Insurance Regulatory and Development Authority of India’s (IRDAI's) annual report for 2020-21, "Analysis of channel wise mis-selling complaints shows that banks and broker channels received more mis-selling complaints than other channels." Most sellers are well-intentioned and try to help customers choose policies suitable for their needs. But, there are always some--and they aren't just banks and brokers, but also individual agents, direct selling agents, and corporate agents--who indulge in this practice. Here are some ways, according to the report, that mis-selling happens and what you can do about it.

Bundling: Here the banker will bundle the policy by making it conditional for availing bank services. One may try to force-sell you a policy bundled as part of a banking product. A very common one is, when an investor takes a home loan from the bank, the bank very often bundles an insurance policy premium to cover the home loan taken. Dilshad Billimoria, board member, Association of Registered Investment Advisors (ARIA), says, "What’s worse is that sometimes, the bank even adds the premium amount as part of the loan disbursed. This means you are paying interest on the premium for the home loan mortgage and buying insurance on borrowed funds. This is definitely not a pre-requisite, and the borrower must get the note removed from the policy conditions of a loan agreement from the bank."

While it is good to have a cover on the home loan taken, the borrower is under no obligation to take a mortgage policy at all, let alone one from the bank disbursing the loan. There are no mandatory guidelines on this. Billimoria says, "A pure term insurance plan is a better option. Always compare the best options from various providers. One may even consider a single premium option."  

Splitting: This mis-selling practice involves splitting of policies wherein multiple policies are issued to the same proposer at the same time. Pankaj Mathpal, managing director and chief executive officer (CEO), Optima Money Managers, says, "Suppose you are to buy a single policy for premium of Rs 50,000. The agent persuades you instead to buy 5 policies with a premium of Rs 10,000 each. He convinces you that you will be able to afford the premium of at least few policies in the future especially in case of a cash crunch."  If you feel you’d be able to reduce future policy lapse risk due to a possible un-affordability of premium using this method, be aware that this isn’t actually in your best interest. Mathpal says, "This becomes very expensive, because first you miss out on a discount offered on a larger sum assured. Besides, the total premium paid on multiple policies will be higher than that of a single plan. Put simply, the agent suggests splitting to meet his target."

Misrepresentation and miscalculating benefits: Here, false or mis-leading information about policy features is shown. For instance, an incorrect explanation of product features and benefits by the salesperson sourcing the business. Sometimes a high-premium policy is sold in such a way that you don't realise the future money commitment. Incorrect premium-paying term and policy term is explained to policyholder, especially in cases where a regular premium paying product is sold as single premium product. Melvyn Joseph, a Sebi-registered investment adviser and founder of Finvin Financial Planners, says, "The layman doesn't understand the jargons or calculations of insurance, especially when the savings element is part of the plan. Distributors and agents get huge commissions to sell such savings products. If the buyer really goes through the terms and conditions and understands them, he will immediately cancel the policy in the free look up period itself. Always go for simple products which are easy to understand, like a term plan." In short, experts are simply suggesting you select term plans and ignore all other types of life insurance, such as whole life, endowment policies, money-back policies and savings and investment plans. You get peanut returns of 3-4 per cent on such savings plans. Note that term insurance, like endowment and money-back plans, is not an investment product, but an income replacement product. Hence a term plan works better.

Free look: Here the free look cancellation requests are rejected by sales personnel not authorised to take such decisions. The law allows policy holders 15 days as a free-look period from the date of receipt of policy document. It's 30 days in case of electronic policies and policies sourced through distance mode.  The policy holder is allowed to cancel the policy during this period and get a refund.

Joseph says, "If you get the policy via courier, you have a way to prove the date you received the policy. When it comes to individual agents, they pick the policy from the insurer to hand-deliver it to you, but purposely delay the delivery and give it to you after the free-look period." In such a case, you are not able to cancel the policy. In fact, experts said that most people are not even aware of free-look period. Mathpal says, "If your agent hand-delivers the policy ensure you take the agent's signature and mention the date of policy receipt.' It is the responsibility of the policyholder to prove the date of receipt of policy document.

See Box for more types of mis-selling.

Dealing with mis-sold policies: The investor must understand the best way to limit the loss. Mukul Chopra, senior partner, Victoriam Legals-Advocates and Solicitors says,  says, "If the free-look period of the policy is not over then the buyer can immediately return the policy and ask for a refund." Usually, insurance companies provide a 15- or 30-day free-look period, and it would be a safe escape to have the policy cancelled in such time. One can even lapse or surrender the policy, but it's best to consult a financial advisor, not the insurance agent, before making this choice. Surrendering the policy means stopping payment of premium and cancelling the policy contract before the stipulated maturity date. Chopra says, "For a policy to be eligible for surrender i.e. to have acquired a surrender value, premiums should have been paid for at least three years in case of traditional policies excluding ULIPs, or as specified in case of other policies." As surrender of a policy, even if mis-sold, would lead to a heavy loss, one can meet one’s funding needs by taking a loan from the insurance company against the cash value accumulated in a policy. Chopra adds, "As long as the interest cost of the loan is less than the yield from the policy you can use the loan to fund the future premium payments and finally encash the policy on maturity, thereby avoiding a loss."

Nikhil Varma, managing partner, Miglani Varma & Co-Advocates, Solicitors and Consultants says, "However, if you come to learn or understand that you were mis-sold the policy only later, it is advisable to wait for the expiry of the lock-in period and exit thereafter. One may, otherwise, approach the insurer or the regulator to have their grievances redressed." 

Causes of Mis-selling

• Life insurance policies are sold only as Tax saving/ Investment plans
• Churning of policies to get higher commissions
• Insurance is sold to clients who were not present in India at the time of sourcing. Buyer has to be present India as per rules
• Tampering, forgery of proposal/ other related documents
• Sales personnel lack proper knowledge /are inadequately trained, thereby recommending unsuitable products to prospects
• Charges under the policy and lock-in period are not properly explained while sale of Unit Linked Insurance Policies

Source: IRDAI Annual Report, 2020-21