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Don’t Fall for Insurance Mis-selling Trap

, May 6, 2013, 0 Comments

“The reason why insurance is stumbling in India is because of mis-selling of products and complex products.”
~ P Chidambaram, Finance Minister

Getting calls from insurance companies/agents is a common feature these days. No matter how hard you try, it’s almost impossible to avoid such unsolicited insurance marketing calls. However, you can, rather should, definitely avoid being cheated by the insurance mis-sellers. We are sharing a real life case study to make you aware of their modus operandi.

The Case
Rajeev gets a call from telecaller Aditi about a great savings, plan wherein he needs to pay minimum Rs. 30,000 per year for 5 years. At maturity, he will get the principal amount back in addition to the maturity sum assured and bonus. The sum assured would be 3 times of annual premium (i.e. R’s. 90,000). He is told by Aditi that the plan is closing soon after completing a decade of successful performance. Aditi also offers 10% discount on premium for that day only on account of 10th anniversary of the plan which will be available for the complete tenor of policy, i.e. 5 years.

Rajeev being an IT guy to do some basic calculations on excel and finds the plan lucrative as it assures double-digit returns. But, then the thought of taking a second opinion from his fee-based Certified Financial Planner comes across to him. The Financial Planner did computations on excel with the results as under:

Seeing an IRR of 22% in 5 years, the planner becomes utmost sure that there is something fishy. Rajeev and planner decide to take Aditi on conference call. The conversation that follows is as under:

Rajeev: ‘Hi, I have my Financial Planner on Iine for discussion on the savings plan suggested by you. He needs clarity on some issues. Can we discuss?’

Aditi: ‘Yes, sir.’

Financial Planner: ‘Hi Aditi, as per your discussion my client will pay Rs. 27,000 for 5 years and on maturity he will get Rs. 150,000 as principal amount, Rs. 90,000 as guaranteed sum assured and Rs. 18,000 as bonus?’

Aditi: ’Yes, sir. This is a savings plan which works like fixed deposit. You get your principal back along with the sum assured, both of which are guaranteed. The bonus is assumed at 10% and actual amount may vary depending on the future performance of the company.’

Financial Planner: ‘Aditi, is this a traditional plan?’

Aditi: ‘Yes, sir.’

Financial Planner: ‘Can you forward me the illustration mentioning the maturity benefits in writing?’

Aditi: ‘Sir, you can generate the illustration yourself by visiting our site. I will help you with this.’

Financial Planner (after generating the online illustration): ‘Aditi, the illustration nowhere mentions that the client will get back the principal amount on maturity. It only mentions  the sum assured and  the bonus as maturity benefits and that’s how all traditional plans work’.

Aditi: ‘Sir, it’s common sense now. When you deposit money in a fixed deposit you get your principal amount back along with the returns. Similarly, here also you will get your principal amount back as per IRDA guidelines as this is a savings plan. (The plan was mentioned under the savings plan category on the website of the insurer)

Financial Planner: ‘Aditi, the fixed deposit certificate mentions clearly the gross amount payable on maturity including both principal and interest. But in your plan, it is nowhere mentioned in writing that the client will get back the principal amount.’

Aditi: ‘Sir, are you doubting the #### insurance company. We work according to IRDA guidelines. This is a savings plan and the principal amount is paid back to the customer at maturity. So Rajeev Sir, can I send my representative to get the documentation done in the evening as the plan has closing today’.

Rajeev: ‘Aditi, I will get back to you in some time.’

Later, both Financial Planner and Rajeev discussed and dropped the idea of going for the plan a verbal affirmation by telecaller will have no legal validity on a later date.

The Reality
On maturity, the client will only get the sum assured and bonus i.e. R’s. 108,000 against the total premium paid amounting to Rs. 150,000. As a result, the client will get negative returns over a period of 5 years as against the lucrative 20% returns highlighted verbally by the tele-caller. Also, the client will not get tax benefit u/s 10(10D) as the sum assured is not 10 times of annual premium.

The Lesson
It was a trap to target uninformed investors by confidently highlighting features of the plan which don’t actually exist. By the time the investor will realize that he/she has been mis-sold the policy, it will be too late.

The caller provides very lucrative investment offer verbally using ‘according to IRDA guidelines’ multiple times in the conversation to generate trust amongst the prospects. Then a special limited-time offer is provided to hit upon the prospects psychologically by statements like ‘sir, this offer is available for today only. Where should I send our representative?

Use your common sense when taking financial decisions regarding your hard earned money. Had there been any investment, providing guaranteed double digit returns in a short period of 5 years, no one would be investing in riskier asset classes like stocks, mutual funds, real estate and commodities and there will be no need for financial planners and wealth managers. What looks lucrative actually turns out to be deceptive. So, be cautious next time you get such a call.

The names of persons have been changed to protect privacy of  the parties concerned. The name of the insurer has not been disclosed as the actions of a few mis-sellers don’t make the insurer guilty.






About author
Dr Naveen J Sirohi is a Ph.D. in Commerce from CCS University and a Certified Financial Planner. Currently he is Assistant Professor (Finance) in the Department of Management at BCIPS, New Delhi. He has more than 10 year of experience including HDFC Bank and Corporation Bank. His domain expertise include Personal Finance, Financial Management, Risk Analysis & Insurance Planning, Retirement Planning, Taxation, Security Analysis & Portfolio Management and Financial Statement Analysis. Dr. Naveen also runs a Consultancy firm, PRUDENT ADVICE, providing Financial Planning services assisting clients achieve financial freedom. ...more