Finance Minister Nirmala Sitharaman and Insurance Regulatory and Development Authority of India (IRDAI) Chairman Debasish Panda recently expressed concerns about the mis-selling of insurance products by banks, bringing such widespread malpractices into focus once again.
In July, the Economic Survey 2024, too, had flagged the mis-selling menace. “Product mis-selling is too rampant to be dismissed as an aberration of a few overenthusiastic sales personnel,” the report, authored by Chief Economic Advisor V Anantha Nageswaran, had said.
Top echelons of the government and IRDAI voicing their concerns around mis-selling has raised hopes of a concrete push against the practice. However, only time will tell whether an effective and durable solution will emerge. On their part, individual investors can remain vigilant while acting on the advice of bank officials and other intermediaries.
Here are the most common insurance sales pitches that you should be wary of:
‘This product is like a mutual fund’
In the last one-and-a-half years, several life insurance companies have launched ‘new fund offers (NFO)’ for small-cap and mid-cap fund options attached to their unit-linked insurance policies (Ulip), However, the term ‘insurance’ was conspicuous by its absence in several advertisements, leaving scope for lay individuals to misinterpret these products as mutual funds.
If you do not do your homework and go by their claims, it is easy to fall prey to such sales pitches from your bank relationship managers or your neighbourhood agents. IRDAI issued a diktat in June barring insurers from issuing advertisements without references to the embedded life cover element. Despite this, on your part, it is best to be cautious while evaluating any investment option recommended by intermediaries.
It is not difficult to ascertain whether the product is a mutual fund or a Ulip. At the time of investing, you need to check the name of the entity in whose favour you are writing the cheque or authorising the auto-debit. If you are keen on investing in mutual funds, ensure that the name of the entity is not suffixed with 'life insurance company' but is a 'mutual fund' or 'asset management company'.
This apart, Ulips come with a lock-in period of five years, while this is not the case with mutual funds. Equity-linked saving schemes (ELSS mutual funds) carry a lock-in period of three years.
Also read: Ulips can't be promoted as pure investment tool without mention of life cover element: IRDAI
‘An endowment policy offers FD-like secure returns, plus tax benefits’
For risk-averse investors, it is easy to give in to the lure of guaranteed returns. Add to it, the prospect of such returns being tax-free, and many are convinced of such policies’ value in their portfolios. Often, it’s senior citizens who fall prey to such sales pitches by bank officials, only to realise at the time of renewal that the product involves recurring premium payment commitment over 5-10 years or more. Also, elderly individuals end up paying for the life cover' mortality charges when it is unnecessary as they do not have dependents.
Instead of letting them – or other intermediaries – talk about absolute pay-outs that the policy will entitle you to, ask them to quote IRR (internal rate of return) figures. The returns under guaranteed traditional policies range between 4 percent and 7 percent over the long term. Exiting early if you find the policy to be unsuitable later comes at a cost - loss of part of your premiums - even though surrender value regulations are now more policyholder-friendly than before.
In fact, insurance is not at all about income or return but protection. And the protection element in such policies is much lower. Instead, look at buying adequate term insurance covers, which are available at affordable premiums.
Also read: Why traditional life insurance policies aren't great long-term investments
‘Life insurance policy offers triple benefit of life cover, tax savings and investments’
The oldest and most common sales pitch, particularly deployed during the tax planning months of January, February and March, it continues to appeal to salaried employees who are in a hurry to make tax-saver investments during this period.
To save on taxes under section 80C at the last minute, which offers tax deductions of up to Rs 1.5 lakh on certain instruments, including life insurance premiums, many end up buying life insurance covers that they may not need at all.
In fact, it is likely that many would not need to make any tax-saver investments as other 80C components such as Employees’ Provident Fund (EPF) contribution and children’s tuition fee paid during the year would take care of the Rs 1.5 lakh limit.
It is best to not treat tax planning as an isolated exercise. It should be part of your overall financial plan that is drawn up at the beginning of the year. Invest every month and through the year, instead of completing the task closer to the deadline.
‘Buy a guaranteed policy to avoid the market volatility risks’
With life insurance companies increasing their focus on non-linked, non-participating, guaranteed endowment policies, such products are being promoted heavily due to the assured maturity proceeds they are promised.
This is in contrast with Ulips where returns are market-linked. Moreover, while participating endowment policies, too, yield secure returns, they do not offer a fixed maturity amount as the final corpus depends on annual and terminal bonuses declared during the tenure.
While policyholders with lower risk appetite might find guaranteed payouts to be a source of comfort, the fact remains that they stand to earn only 4-7 percent annualised returns despite staying invested over the long term.
Only high networth individuals (HNI) who are unlikely to need the proceeds in the interim and are looking for assured-return instruments that offer tax benefits could find value in these products as maturity proceeds under life insurance policies are tax-free.
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