Ask for a benefit illustration of the 'tax-saving' plan you're being sold

If you realise you have been mis-sold an insurance policy, cancel it within the 15-30 days free-look period

With the March 31 deadline for making tax-saving investments approaching, there is typically a surge in the purchase of insurance. This period is also characterised by rampant mis-selling. It occurs in both traditional plans and unit-linked insurance plans (ULIPs) and even in health insurance.

Traditional plans

Traditional life insurance plans are of several types: wholelife, moneyback, and endowment. Since the non-participating version of these plans offer guaranteed returns, customers believe that all traditional plans are risk-free.

This is not true. Sonam Srivastava, founder and chief executive officer (CEO), Wright Research says, “Agents selling traditional plans could make exaggerated promises of returns. They could also conceal charges and expenses, recommend superfluous insurance, or push unsuitable products.”

Misleading customers regarding surrender norms is a common tactic. Saurabh Jhunjhunwala, assistant vicepresident, insurance products & sales, Prabhudas Lilladher Wealth, says, “Although traditional insurance policies prohibit clients from making partial withdrawals, some agents may deceive clients by claiming they can do so after three years. This alternative is called surrendering the policy. If a client chooses to do so after three years, he will receive only 40 per cent of the premiums paid.”

Customers are frequently misled into believing they need to pay premiums for only one or three years. In reality, the premium payment term could be 10-15 years or more.

ULIPs

ULIPs invest in market-linked instruments. They don’t offer assured returns. Clients receive units and the maturity benefit depends on the net asset value of these units.

Srivastava says, “While selling Ulips, agents may misrepresent risks, omit to disclose the lock-in period, or over-emphasise short-term returns.”

ULIPs have a minimum policy duration of 10 years, but are at times marketed as single-premium or five-year policies. The reality is that they come with a lock-in of five years. Even if a customer surrenders the policy before the completion of five years, he will receive money from it only after five years, after deduction of surrender charges.

Expenses are at times downplayed. Jhunjhunwala says, “ULIPs have four types of charges which are frequently not disclosed. They include premium allocation charges, administration charges, fund management charges, and mortality charges.”

Health insurance

Agents at times encourage customers to provide incorrect information about their health status. Kapil Mehta, co-founder & CEO, SecureNow, says, “Advisors often persuade buyers not to reveal their pre-existing diseases so that policies can be issued without any complications.” Doing so, however, can result in the claim being denied in the future. Rakesh Jain, CEO, Reliance General Insurance, says, “Mis-selling by declaring that no medical tests are required, or that there will be no loading for pre-existing diseases is common.”

Other policies owned

When applying for a new policy, it is vital to furnish information regarding the policies already owned by the customer. The insurer evaluates the applicant’s present health and financial status, as well as the total sum assured chosen (aggregated across all firms) before issuing the insurance. Jhunjhunwala says, “Suppose that a person is eligible for a relatively lower sum insured and at the time of purchasing the new policy he avoids disclosing the other policies already owned by him. In that case, his nominees may encounter difficulties when they file a death claim.”

Churning of policies

Sometimes, when an agent switches to a new firm, he advises his clients to terminate or surrender the policies purchased previously from him and instead buy new policies from his new firm. Falling prey to such tactics could result in unnecessary charges for customers.

When a customer approaches a lender for a loan, he is sometimes coerced into buying insurance. Says Mehta: “Lenders sometimes make the sanction of a loan contingent on the purchase of insurance.” Customers could also be forced to buy life insurance to get access to products like lockers (which are often in short supply). Such practices are against regulations.

Customers are sometimes led to believe that they can only avail of the tax benefit of Rs 1.5 lakh by purchasing a new insurance policy every year. The reality is they can obtain the same benefit by paying the annual premium on an existing policy. “This results in customers buying more insurance than they need to,” says Mehta.

Exercise these precautions

Customers must perform a few checks before buying an insurance product so that they are protected from mis-selling and also get a better understanding of what they are buying. 

“Before concluding the purchase, customers should carefully read the brochure, prospectus, customer information sheet, and policy wordings,” says Jain.

If a customer has any doubts, he should contact the insurance company’s customer care number and seek clarification. Policy details, features, coverage, etc. can be verified on the company’s website.

Customers must also go through the benefits illustration. Vivek Jain, head of investments, PolicyBazaar, says, “It outlines both the guaranteed and the non-guaranteed returns without any manipulation.” It also provides precise information about the surrender value at different points.

Jain of Reliance General recommends that customers should read the policy schedule after concluding the purchase, and they should contact customer care for any modifications within the prescribed time limit. All policies come with a free look period of 15 or 30 days. 

Customers who believe they have been mis-sold a policy may cancel it within this period.

Steps to take before knocking on ombudsman’s door

First file your complaint with the insurer or broker

Complain to the ombudsman if the insurer or broker fails to reply within a month of complaining, or you are dissatisfied with the response

Complain to the ombudsman within one year of rejection of the complaint by the insurer or broker, or if one month has passed without receiving a reply

The compensation sought through the insurance ombudsman should not exceed Rs 30 lakh

Source: Council for Insurance Ombudsmen (www.cioins.co.in)