Kolkata, January 22: When it comes to mis-selling of financial products, insurance is somewhere at the top. What happens in mis-selling is that you are not sold the right product. Rather you are sold a product which the agent needs to sell, often to get the most commissions. This means that you end up with a product that does not suit your needs. Also, you often end up paying high charges.
In this article, we look at one insurance product that has a notorious reputation for being mis-sold- the traditional life insurance plan.
Also known as money-back policies, these products are mis-sold rampantly. You make a fixed contribution every year, get a maturity benefit and also a life cover.
Many of us are paying high premiums for such policies which our parents bought for us or we were sold by an insurance agent.
Such plans seem attractive because of the mindset of people where they want some return on investment for money they are paying. Essentially, it mixed insurance and investment, which is not a wise thing to do.
There are a couple problems with such plans. First, the life cover is very low, only a few lakhs which is not enough. Secondly, the return on investment is very low too.
So let us say the return is 200 per cent of sum assured. It could mean that if your sum assured is Rs 5 lakh, your policy would pay you Rs 10 lakh after say, 20 years. If you calculate how much the return on investment is, it will turn out to be as low as 4 to 5 per cent. Remember, that the promised payouts are at a future time and due to inflation, the actual value of those payouts will be low.
Also, the surrender value of these policies are quite low. If you surrender the policy during the first few years, you will receive only a very small amount. The agent will not tell you this in most cases. Outlook Money has always recommended staying away from traditional policies and buying term policies instead.
Instead of buying such policies, you may get a term policy offering a much higher coverage for much cheaper. The money you save from your premiums can be invested in mutual funds to give you much higher returns. So you end up getting a higher life cover and higher returns over a period of time.
Why are these products mis-sold? The reason is simple. An insurance agent gets a high commission when you buy such a policy. If you buy a term policy from him or online, he earns lower commission. This is because you pay lower premiums.
So in all probability, your insurance agent won’t even tell you about a term insurance plan. You might still decide to buy a traditional
policy, but the agent will not even tell you about it and how it can be beneficial for you. There are other insurance products that are also mis-sold. Keep following this space for more.