Mis-selling Life Insurance

A television commercial by a leading insurance company shows a financial adviser being hounded by a devil-like creature who disappears when the adviser continues to give the right advice to the prospective client and not cut corners. A couple of years back, another leading insurer had launched a campaign explaining the importance of paying attention to the basics before buying a life insurance product.

 

There is enough anecdotal evidence to suggest life insurance is often mis-sold. In fact, the industry now accepts this and the sector regulator has instituted reforms to control the menace. The efforts have certainly improved sales practices but not completely plugged the hole.

 

What can you as an individual do to protect yourself? How do you spot the devil in the detail? Here are a few simple ways to spot mis-selling.

 

Hear the opening pitch

Life insurance is a long-term product because you need insurance for the most part of your working life. Even as an investment product, it works only if held for a long term because of the embedded costs. However, it’s more difficult to sell a long-term product, so, to make their jobs easy, agents often approach you with a short-term insurance plan. If the words ‘short-term’ and ‘insurance’ come in the first few sentences that an over-eager insurance agent mutters, run. The main purpose of life insurance is to protect your family and assets financially in case of unforeseen events.

Another example is when insurance is bundled with other financial products or passed off as a freebie. For instance, you take a home loan and instead of buying a pure term insurance, which you must buy to protect your dependants from having to repay the loan amount should you die, you are sold an insurance plan with returns. Or, say, you are visiting your bank to open a Public Provident Fund account or a recurring deposit account and the bank employee directs you to an individual who offers a product that gives similar or better returns and insurance as bonus. This, again, is a red flag, as insurance is not a by-product of investing.

See standard illustration

When you sit down to understand the calculation for a traditional plan or a unit-linked insurance plan, if the agent gives you a handwritten calculation instead of the insurance company’s standard illustration of the calculation for the life insurance product, alarm bells should ring.

 

An agent or distributor who wants to sell the product for her own benefit will show her own calculations where the predicted returns will generally be in double digits. This is definitely not the right way to portray the benefits. Ask for the company illustration of the calculation. The agent should have this information readily available. Or, you could check it on the insurance company’s website.
 

Fill the form yourself

When you get a job offer, do you sign the contract without reading all the details? Of course not. So why would you sign insurance documents without reading them first? “Most insurance agents who want to push an insurance product will offer to fill the form for you. You will only be asked to sign at the relevant places. This is not the right practice.
 

By reading all the details and filling the form yourself, you will be able to understand all the details of the policy—what’s included, what’s not, surrender value, grace period, and much else. You can also get any doubts clarified. Even if the exercise is difficult, it helps you fully understand the product and minimize chances of error such as in name, age, address, nominees and more.

Check the product name

Every insurance company sells multiple policies—term plans, unit-linked insurance plans or traditional plan. Under each category there will be products with slight variations. It can happen that the agent contacts you for a particular product but ends up selling another. For instance, you get a call for an insurance policy while you are taking a home loan, but instead of selling you a policy customized for loan products, the agent sells you a traditional policy. Hence, ensure you check the product name while filling the documents.
 

Also, beware of agents who ask you to not bother about the medical details required in the form. They do this because if there is a medical issue, the company will have follow-up questions. The agent wants to avoid this as she is not bothered about the claim part. What matters to her is sales.
 

Wait for insurer to call

As a part of best practices adopted, most life insurance companies will make a call after the agent has explained the product and you have paid the first cheque. The insurers make this call to ensure that you have understood the terms and benefits of the policy correctly. If you realise at this point that you didn’t buy what your were explained, you can return the policy.

There have also been cases of imposters calling up on behalf of the LIAM and offering to help policyholders exit a life insurance policy and invest the money in better investment products. LIAM does not call individual customers offering to help them exit plans.

A lot of the hard sales push in insurance draws upon the basic human emotions of fear and greed. The minute you feel that the agent or distributor—who may well be a friend, a family friend or a neighbour—is talking of very high returns with very little risk, stay away.

Avoid too-good-to-be-true products. If you still want to buy it, don’t sign on the documents right away. Instead, ask for the policy brochure and go through it carefully.