Beating insurance mis-selling by banks: Use e-banking, reduce branch visits

At the recently held State Bank of India Economist Conclave, finance minister Nirmala Sitharaman highlighted that while bancassurance has improved insurance penetration, it has also led to mis-selling. She added that such practices contribute to higher borrowing costs for customers. 

Echoing her views, Debasish Panda, chairman of the Insurance Regulatory and Development Authority of India (IRDAI), also underscored growing concerns regarding banks mis-selling insurance products.

 

Common types of mis-selling

 

Misrepresenting insurance as fixed deposits: Bank relationship managers often market insurance products as high-return fixed deposits (FDs). “Sometimes they also misrepresent them as short-term investments, having a tenure of barely three–five years,” says Shilpa Arora, co-founder and chief operating officer, Insurance Samadhan.

 

 

Bundling insurance with loans: Purchasing of term, property, and other insurance is presented as a precondition for sanctioning of the loan. “Borrowers feel they have no choice but to buy,” says S. K. Raghav, managing director, Lords Mark Insurance Broking Services. 

Worse, borrowers are sometimes sold irrelevant policies. “Customers are sold a personal accident cover instead of a term life policy, which fails to fully protect the family from loan liability,” says Deepesh Raghaw, Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA).

 

Inappropriate products for senior citizens: Unit-linked insurance plans (Ulips), deferred annuities, and guaranteed income plans are most often mis-sold to seniors. “Sometimes these are sold as alternatives to FDs,” says M. Pattabiraman, associate professor, IIT Madras, and founder, Freefincal. The terms and conditions and risks of these products are not properly explained to seniors. 

Ulips, which include a mortality charge, can severely impact returns for senior citizens. “The mortality charge goes up as age increases,” says Raghaw. The nuance that higher mortality charge will eat into returns from Ulips is not explained.

 

Another common tactic is building unrealistic expectations of returns from products like participating plans. “What is not made explicit is that returns and bonuses depend on various factors and are not guaranteed,” he adds.

 

Group health policies: Banks often push policies under group schemes. “These products often come with limited coverage. The insured also cannot port the policy to another insurer for better coverage,” says Raghav.

 

Mode of premium payment: Regular premium plans are sometimes falsely sold as single-premium policies. When customers realise they need to pay high premiums yearly, many default.

 

How to protect yourself?

 

Borrowers should know that buying insurance is not mandatory for availing loans. “Never feel compelled to purchase insurance as a prerequisite for loans or other products,” says Raghav. Instead of buying a new plan, consider assigning an existing life insurance policy as loan cover.

 

If offered high and guaranteed returns, steer clear. “Be cautious of offers that sound too good to be true. Verify their authenticity by calling the insurer,” says Arora.

 

Always participate in pre- and post-issuance verification calls. “Verify that the policy meets your requirements. If it does not, cancel it,” says Arora.

 

Before purchasing health insurance, Raghav suggests reviewing the coverage, sub-limits, exclusions, portability and other terms and conditions.

 

Stick to essential policies only. “Choose pure term insurance if you earn and have dependants, and immediate annuity plans for income needs,” says Pattabiraman.

 

All customers, but especially senior citizens, must embrace online banking. “This eliminates the need to visit branches and reduces the risk of becoming a victim,” says Pattabiraman.

 

Key mistakes to avoid

 

· Do not treat a member of the bank’s staff as a financial advisor (they do not have fiduciary responsibilities; instead, they are under high pressure to fulfil targets)

 

· Never sign on the dotted line of a policy without fully understanding its terms and conditions

 

· Do not purchase an insurance product without first evaluating your financial needs and goals  

 

· Do not get pushed into making a quick decision; take the brochure home, read product details and understand them, or consult a trusted advisor before committing