Life Insurance Mis-selling: Here Are Some Red Flags To Watch Out For

For some people, buying life insurance is a prudent step to secure their family’s future. But what if the policy they signed up for is not what it seems? A bank representative convinced Person X to purchase a plan that they were assured would double as a “fixed deposit with high returns”.

What Person X didn’t realise was that they were committing to a long-term insurance plan with hefty premiums they couldn’t sustain.

When Person X tried to exit, they were informed that their surrender value would be a fraction of what they’d paid.

This story isn’t unique. According to a LinkedIn poll by Shilpa Arora, Co-founder of Insurance Samandhan, 31 per cent of respondents reported personally experiencing misselling in insurance, and 46 per cent knew someone who had been affected. The poll reach was small, but the numbers are sobering - they highlight how pervasive life insurance mis-seling has become in India.

What is Insurance Mis-seling?

Misselling in life insurance happens when agents or bank representatives misrepresent a product, luring customers into policies that don’t suit their financial goals or needs. Often, customers are tempted by deceptive assurances, such as:

1. Promises of ‘Interest-free’ Loans: Sometimes, life insurance policies are sold under the pretence of providing quick, interest-free loans. Potential policy buyers are told they can borrow against the policy, only to to discover the terms are riddles with restrictions.

2. Assurance Of Bonus Rivival: The agents or bank representatives prey on policyholders who have any lapsed policy left with them. They would promise to recover lost bonuses if they buy a new policy however such assurances can be very misleading.

3. Gimmicky Freebies: Insurance representatives may try to lure you in with the promise of foreign trips, scholarships for children, gold coins, or even job guarantees. One must consider if such promises can ever be fulfilled against purchasing a life insurance policy.

4. Just Like An FD, Not! Some may even try to sell policies by pitching them as fixed deposits-like investments with assured high returns, especially when sold through banks. This can mislead buyers into thinking life insurance is a low-risk investment product rather than a long-term insurance commitment to guard against uncertainties of life.

Misselling, a Growing Problem

A recent survey by 1 Finance, a personal finance advisory firm, found that over 57 per cent of bank relationship managers (RMs) in India admitted to mis-selling financial products under extreme pressure to meet sales targets. This also includes the mis-selling of insurance policies.

Moreover, around 84.34 per cent of relationship managers reported feeling pressured to meet sales targets. This intense pressure often leads them to unethical practices, where over 58 per cent of RMs said they mis-sold products that may not be suitable for their clients.

How Can You Spot Such Red Flags?

Arora emphasises the need for vigilance by customers. Here are some signs that can help you identify when a life insurance policy might not be what it appears:

1. If an agent or bank representative rushes you into signing a policy without giving you time to read the terms - that’s a red flag.

2. Life insurance is primarily a risk primarily a risk management tool, not an investment with assured returns. You should be wary of high-return claims.

3. If the agent can’t clearly explain the policy benefits, tenure, or charges to you it is better to take a step back than to buy with little details.

4. If you are being offered perks like ‘free health insurance’ or ‘foreign trips’ remember that these may come with hidden costs or conditions that are not being revealed to you. Always insist on written documentation of all promises made during the sale.

Mis-selling thrives in an environment where customers have low awareness but high trust in any institution. As potential buyers, you should ask questions, consult unbiased advisors and verify claims independently before committing to a policy.