We should not wait for the government or the regulator to curb the mis-selling of the bancassurance products to the customers of a bank or an insurance company. We customers should be well-informed or aware of the mis-selling of these bancassurance (insurance-cum-investment) products.
Bancassurance is an agreement between a bank and an insurance company that allows the insurance company to offer its products to the bank’s customer base. This relationship has the potential to be rewarding for both firms. Banks get more money by selling insurance products, whereas insurance firms grow their client bases without growing their sales employees.
Common types of mis-selling:
A typical sort of mis-selling occurs when a client visits a bank to open a fixed deposit (FD) or a Public Provident Fund (PPF). Instead, the bank relationship manager (RM) persuades him to choose an insurance-cum-investment product, such as a unit linked insurance plan (ULIP) or a traditional insurance plan. The faith that clients have in their bank is being exploited in these cases.
When a person invests in an insurance-cum-investment product, particularly one he does not require, he incurs a mortality fee (cost of insurance), which affects his profits. The impact is particularly severe for older folks, who must pay a higher mortality fees due to their age factor.
Investors are sometimes informed that they are buying a single-premium plan when, in fact, it turns out to be a multi-premium plan. If the premium exceeds a few lakhs, investors may struggle to pay the subsequent years’ premiums. In traditional plans, abandoning the plan early results in a loss. Customers are frequently promised large returns. According to industry analysts, returns on insurance and investment products seldom reach 3 to 6%.
Misaligned incentives of the sellers:
The major cause of mis-selling is incorrect rewards. Incentives and commissions are the primary factors. With high targets to meet, the sales team of banks and insurance firms becomes inclined to neglect the interests of its consumers.
The commission system is another inducer. During the first several years, commissions from the sale of these insurance-cum-investment products might range from 30 to 50 percent. Furthermore, commissions are paid up to the bankers or insurance agents in advance. Hence the seller makes a very large commission in the first year alone. Even if the product is withdrawn by the customer half-way of the tenure, the banker or agent is unconcerned since he has made money.
Insurance products are complex and need extensive documentation that is tough to read and comprehend. Insurance products lack transparency. It might take weeks of research to comprehend a single product. Buyers are deceived when they are forced to take the seller’s word for it.
Do your own research before buying any product:
Avoid asking a bank Relationship Manager for investing advice. Perhaps, approach a SEBI-registered investment advisor for any investment related advices, as these advisors’ income is based on the fees paid by his customers rather than the commissions earned from the products that he recommends.
The responsibility is also on customers to make educated decisions. A product is mis-sold only if it is purchased without proper investigation. Devote some time in reading the product brochure and customer reviews from credible sources. Learn the product’s nature, premium payment terms, and so forth. Always request a written confirmation from the bank RM regarding the return promises, fee structure, premium payments, etc. This can be used as proof if mis-selling occurs.
Additionally, before signing the contract, customers should study the insurance policy. Read the contract conditions and confirm what the seller has disclosed in the application form on your behalf. Both the Ombudsman and the Consumer Courts make decisions based on contract conditions and statements.
Customers receive a call from the insurer before their coverage is issued. The caller outlines the product’s main characteristics. If there is a discrepancy between what the bank RM informed you and what the caller says, go with the latter and be cautious in getting the product if you are not convinced in what you are getting.
Avoid needless visits to the bank branch. Senior citizens make frequent visits to the branch to refresh their passbooks, which is when they become victims to these mis-selling by the bank RMs or the insurance agents who sit in the bank branchs to sell their products to the bank’s customers.
Post-purchase checks:
Once you receive the insurance policy document, read it carefully. If the policy does not meet your expectations, you may return it within the 15-30-day free look period. If the policy’s free-look time has expired but you believe you were mis-sold, contact the insurer’s grievance cell, the IRDAI site, and ultimately the ombudsman.
When most consumers realize that they have been deceived and have been sold a wrong product, they choose to wait for the earliest chance to cancel (after a five-year lock-in for a ULIP and two-three years in a regular plan). The loss from surrendering and departing is generally smaller than the cost of paying premiums for an inappropriate product, but most individuals fail to view it that way.
Redressal process:
First, contact the insurer’s complaints department. They are required to react within fourteen days. If you are not happy with their response, contact Bima Bharosa, the IRDAI’s complaint portal. They’re also obligated to answer within 14 days. If you are unhappy with their response, contact the insurance ombudsman. If you are dissatisfied with their ruling as well, you can appeal to a consumer court. However, obtaining justice in consumer courts might take a while.
Final thought:
Despite the numerous negatives of these insurance-cum-investment schemes, many individuals choose them. Perhaps the ‘all-in-one’ guarantee is what leads the customers into this trap.
So, what should we do? Just don’t believe any sales pitches for these insurance-cum-investment schemes. It is critical for us to separate both the insurance and investment components of these products. The insurance component of these bundled products should be examined alongside pure term insurance plans, while the investment component should be compared to pure investment products like fixed deposits, equities mutual funds, and debt mutual funds. The comparison should take into account expenses, rewards, and liquidity. On most of these metrics, a pure term plan plus a separate, typical investment product would outperform any such combined policy.
Keep in mind that in your search for all-in-one integrated product, you should not end up with a product that isn’t the ideal one for you.
