“Insuring” yourself against misselling

Financial advisors often castigate insurance companies for designing products which are expensive (such as Unit Linked Insurance Plans or ULIPs) and opaque (Traditional Plans such as Endowment and Money Back Plans). This incessant barrage has galvanised the Regulator (IRDA) to make certain policies more “investor” friendly but it is yet unable to plug last-mile loopholes which occur in the form of sharp selling practices.  A couple of these are :

1. Positioning ULIPs as “3 Year Tenure” policies: This was especially prevalent prior to September 2010. Policyholders were told that they would have to pay premia only for the first three years and could then either surrender their policies or simply discontinue paying the premium. These proceeds could then be invested in another policy.

What was conveniently unstated was that a lion’s share of expenses (which includes the agent’s commission) is deducted during the first three years. In addition there are heavy surrender penalties levied on premature termination. Hence the total surrender value often amounts to only around 65-70% of the cumulative premia paid during this period.  Of course, in the interim, the market too could move against you, leaving you to nurse even larger losses.

Post September 2010 this practice has reduced for two reasons : 1. ULIPs have transformed into virtual 5 year policies because even if you surrender the policy prior to that, you will receive the proceeds only at the end of five years. 2. The agent’s commission is now spread equally over five years instead of it being front ended over the first two or three years. This compels the agent to ensure that you hold on to the policy for at least five years.

2. The sudden love for Traditional Plans : For the past few months, agents are suddenly promoting traditional plans such as endowment and money-back plans citing that they are safer as they do not dabble in the stockmarket and will not give them sleepless nights the way ULIPs may be prone to. While it is heartening to note that they have suddenly become concerned about clients’ peace of mind, the real reason  behind this is that traditional plans are lightly regulated in comparison to ULIPs. As disclosure regarding expenses and portfolios is not as stringent, agents usually do not have to answer tough questions posed by clients and prospects. Its time the IRDA tightened the norms here too…

Egregious selling practices have been the bane of the finance industry worldwide The doctrine of “Caveat Emptor” seems tailor-made for this industry….Hence it pays to be on your guard.

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