What Are The Kinds Of Insurance Misselling? How To Stay Out Of Its Trap?

The fact that insurance gets missold is now widely known. Insurance agents and bank executives continue to lure unsuspecting policyholders into the insurance misselling trap thanks to a hefty commission structure. There are different kinds of misselling and due to its complex structure, the seller takes the liberty to sell the wrong plans to the people. And this is a big fraud. 

Mis-selling, as the name suggests means selling someone something that is not the right fit for the person’s needs. For example, if you are going to Canada in winter and someone sells you a jacket that is just about right for the Delhi winters, that is misselling. In financial products, mis-selling usually happens through someone you trust, an agent or a relationship manager (RM) in your bank. 

According to a recent study by LocalCircles, people who resort to online insurance sales and service platforms have experienced dark patterns such as nagging, subscription traps, and forced action. According to the survey, around 61 per cent of those who purchased an insurance policy online experienced a subscription trap where the platform made it difficult for them to cancel it. 

Here are different kinds of misselling: 

ULIPs: Unit-linked insurance policies (ULIPs) are one of the most common forms of misselling. ULIPs are insurance products that provide higher commissions to agents, creating a potential conflict of interest where the focus is mainly on maximizing commissions rather than the client’s benefits. Moreover, ULIPs offer a mix of life cover and investments and it has tax benefits on premium payments (under Section 80C) and tax-free maturity proceeds (under Section 10(10)), which adds to its appeal. 

Says Anant Ladha, founder, Invest Aaj For Kal, a financial advisory firm: “ULIPs were sold as an alternative to mutual funds. That is the primary method of mis-selling. When you sell ULIPs as mutual funds, then people tend to believe that the returns on a ULIP can happen as fast as in mutual funds.” 

Most ULIP salespersons do not disclose that the loading in ULIPs is much higher than in the case of mutual funds. In the case of funds, the typical expense ratio is below two per cent for equity funds. “In the case of ULIPs, the loading is 60 per cent for a 20-year ULIP which implies three per cent annualized loading,” says Ladha. 

ULIPs are also mis-sold as fixed deposits (FDs). While FDs provide guaranteed returns, ULIPs do not, as they are linked to the markets. 

Bundling Of Life Insurance Plans With Microfinance Loans: Often when poor farmers approach microfinance institutions (MFIs) for loans, which are small-ticket, unsecured loans, small finance banks force them to take bundled life insurance products along with it. Otherwise, they refuse to give the loan. Being helpless and dependent on the MFIs, the borrowers end up taking insurance whether they need it or not. 

Misrepresentation: A lot of time an insurance agent or a bank executive gives false information about an insurance product, which is equal to misrepresenting a product. For example, a customer is sold a regular insurance policy as a single or flexible premium. This leads to misselling. 

Promising Better Returns Than Normal Savings Plan: An insurance agent may claim that an insurance policy is providing better returns than normal savings options such as an FD or a public provident fund (PPF). But that is never true. Anytime a customer is made such an offer, he must take it as a red flag and avoid falling for such a trap. 

Vague Explanations Of Policy Benefits: You are offered benefits that are not part of the insurance contract. The contract is made based on the proposal form and all terms and conditions are mentioned in the proposal form. As soon as you get the policy document, try to read it properly. Go through the terms and conditions thoroughly. In case there is anything suspicious, you could always opt for the free look period cancellation. You can cancel within 15 days of the free-look period or 30 days if you have been sold online. 

Offer Of Recovering Bonus Of A Lapsed Policy: Sometimes a customer who has lapsed policies gets an offer from an agent to recover money from his policies if he purchases three new insurance policies. In case they get lured by this, they are in for fraud. It’s important not to get misled by this. 

Offer Of Free Health Insurance: Suppose, you get a call from a telemarketer offering you a free health insurance policy. He explains it as a limited-time offer from a renowned insurance company. Also, he explains the benefits that come with it, such as coverage for a wide range of medical expenses, including hospital stays, surgeries, and prescription medications. He also assures you that you would not have to pay any premium for the first year, and only a minimal fee later. Listening to his pitch, you might get excited and go for it. But, in such cases, you should be very careful, as this could be a fraud. You need to read detailed information or read the fine print before opting for it. While the policy certainly offers free coverage for the first year, it comes with hidden administrative fees that you weren’t aware of during the call. 

How To Stay Out Of Its Trap: 

Here are certain things you must follow to stay out of its trap: 

Do Your Own Due Diligence: You must be very aware of insurance, how it works, and the kind of coverage it needs to stay out of its trap. You must educate yourself on common insurance terms and conditions. Do a thorough research and speak to experts before opting for a policy. 

Check Credentials: You must make sure the insurer and the agent you are dealing with are licensed and reputable. You must verify their credentials, reviews, and ratings through official channels such as regulatory bodies or consumer protection agencies. 

Ask Questions: While dealing with an insurance agent or anyone selling your insurance policy, you must ask as many detailed questions as possible about coverage details, exclusions, premium costs, waiting periods, claim process, renewal terms, and any other aspect of the policy that is not clear. 

Read The Fine Print: Do remember to carefully read the entire policy document, which includes the fine print. Particularly, pay attention to exclusions, limitations, terms and conditions. Try to fully understand what is and is not covered. 

Compare Policies: Try not to settle for the first policy you come across. Do compare multiple policies from different insurers to find out the one that best meets your needs and budget. Try to look for unbiased reviews and ratings. 

Take Independent Advice: Seek independent advice from independent financial advisors or insurance experts who are not associated with any insurance company. They would give you unbiased views and help you understand the best option in your situation. 

Be Very Clear About Your Needs: When you plan to buy an insurance policy, be very clear about what you need it for. You must ensure that the policy aligns with your current circumstances and future needs, and provide adequate coverage. 

Be Very Aware Of High-Pressure Sales Tactics: Be very wary of insurance agents who manipulate you into buying a policy, using high-pressure sales tactics. Try to be aware and not succumb to such tricks. 

Try To Get Everything In Writing: You must ensure all your promises, guarantees, and policy details, are given to you in writing. Assurances with only word-of-mouth often lead to misunderstanding. 

Look For Hidden Costs: You must always be on the lookout for any hidden fees, charges, or penalties associated with the policy. Try to understand the total cost of the policy, including any potential future increases in premiums.