Seek details from insurance agents

Ask for the risk-return matrix to make the right choice. Otherwise, exit in the free-look period

You walk into a bank to invest some surplus money in a fixed deposit. The relationship manager offers you another ‘fixed deposit’ linked to a security and gives tax-free interest. Should you go for it? No, because no bank deposit gives tax-free interest and you are being offered an investment-related insurance policy.

What you need to do is understand the product and use the free-look period to exit if you don’t like it. An important disclosure that you need to seek here is benefit illustration. This is a technical term in which the Insurance Regulatory and Development Authority (Irda) has mandated that sellers of unit-linked insurance plans should give.

The insurer is supposed to give you the options of four per cent or eight per cent returns. As the returns suggest, in the four per cent option, the product portfolio will be loaded heavily in debt’s favour and in case of eight per cent, in equity’s favour.

And if you are unhappy with the risk-returns matrix, which you should be because the returns are dismal (four per cent is what you earn in a savings bank account and some even offer six per cent), you should reject the product in the 15 days free-look period.

However, many policyholders are lured into these products by sales pitches of tax benefits and insurance-cum-investment options. Despite being expensive, policyholders buy these. They then file complaints against companies saying they have been mis-sold products.

According to Irda’s latest available annual report, as on March 31, 2013, the life insurance sector received 341,012 complaints. Based on the pattern of these complaints, those related to ‘unfair business practices’ accounted for 49.41 per cent in 2012-13, against 32.54 per cent in 2011-12. Out of a total of 168,482 complaints received in 2012-13, as many as 42,598 were related to Ulips. In 2011-12, some 36,702 complaints were related to Ulips.

In most complaints, Irda’s typical response tends to be that since the policyholder has signed the policy documents, he or she was aware of the product’s features. While this is technically this may be correct, the fact remains that investment-related insurance products continue to be mis-sold.

A resident from Lucknow who went to court against SBI Life Insurance is a case in point. Virendra Pal Kapoor, a retired scientist, had invested Rs 50,000 in a five-year Ulip from SBI Life. On maturity, this amount had declined to Rs 248.

In this particular case, it is possible that a multiple-premium product was sold as a single-premium product – a common problem in the earlier regime of Ulips where customers were told they had to invest in a ‘fixed deposit’ for three years, after which they would get returns.

Since the agent got the bulk of the commissions in the first year (often up to 60-70 per cent of the premium), he would not bother the customer after the first year. And the customer would be under the impression that the premium-paying term is complete. Fortunately, this is not possible under the revised Ulip guidelines, since there is a cap on agents’ commissions and other charges.

Gaurav Roy, chief operating officer, Bigdecisions.in, says that customers must always ask for the mandatory illustrations of returns. “It is obligatory for a product seller to provide these illustrations,” he says. According to Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services, customers must ask for a break-up of how much commission is paid to agents. If the insurance company is not forthcoming, then the regulator must do it on behalf of the customer.