The insurance sector, which is one of the fastest growing sectors of the economy, with life insurance penetration increasing to 3% in 2016 as compared to 1.5% in 2000 and non-life insurance penetration increasing to 0.7% to 0.5% in the same period. Life insurance contributes 79% and non-life insurance contributes the remainder 21% in the sector. Though the industry is growing steadily, sadly it is also the industry which witnesses the maximum amount of mis-selling. Mis-selling happens in both life and non-life insurance policies and is more prevalent in life insurance policies. Product mis- selling in life insurance constitute the top reason for customer grievance and accounted for 49% of the total complaints of 2,04,701 registered with IRDAI in the FY2015-16.
An insurance policy is to protect the policy buyers, the rampant practice of mis-selling in insurance has left the investors hanging in times of need. Over the years, the percentage of mis-selling in insurance has increased dramatically and it remains a huge concern in the insurance sector as more often than not investors find themselves cheated and trapped.
Here are the reasons which contribute to mis-selling in the insurance sector:
Higher Commission in Insurance policies as compared to other financial products: Commissions on the premium collected are very high in the insurance sector as compared to other financial products. Under the new regulations the commission in life insurance policies range anywhere between 40% for term plans and for bundled plans( which provide investment and insurance) it is anywhere from 15% to 35% depending on the premium paying term. This is very high when compared to other alternative investment options such as Bank FDs and mutual funds. This invariably leads to pushing insurance to customers without proper financial advisory.
Mis-selling of Insurance Policies by Banks: Banks have undergone a sea change from the traditional banking services as they have been selling third party financial products. The insurance industry is also capitalising on the huge network of various private and public sector banks to increase its penetration. Though the insurance sector has witnessed significant growth through the banking sector, higher commissions and fees involved banks have led to malpractices and mis- selling insurance policies to its customers without looking at the financial needs of an individual. Many a times customers are forced to buy insurance policies when want to avail other banking services such as processing a loan or opening a locker account.
Selling insurance plans as investments: The purpose of life insurance policies is to provide protection cover to the family of the deceased in case of an unfortunate event. Traditional term insurance plans thus offer death benefit in case of demise of the life insured and no money is paid otherwise. With the introduction of ULIPs or unit-linked insurance plans, agents started selling insurance plans as investment plans. As ULIPs invest in capital markets by through investments in individual stocks, bonds and mutual funds, an investor is assured some returns at the end of the policy. A sound financial advisor would always tell his investors the difference between insurance needs and investment needs are two different things and should not be mixed. The primary purpose of an insurance policy is protection and that of investment is to grow your wealth.
Selling Insurance as short-term plans: Life insurance policy is a long term product with the intention of providing life cover to an individual for a lifetime. Many a time, agents and advisors give incomplete product information and mis-sell policies to meet their own sales targets. In all likelihood such advisors would either change their job or company and the investor is left with a wrong policy in hand. Hence, it is extremely important to read all the documents related to the policy.
Lack of awareness in Customers: One of the biggest reasons for mis-selling in insurance is lack of knowledge and awareness among customers. Even the most educated ones forget that insurance is meant to cover risks and not generate returns. Insurance should purely be purchased with the intention to safeguard the interest of near and dear ones in times of need and should not be viewed as an investment or tax-saving instrument. Introduction of complex products in insurance has left the buyer utterly confused which has led to making wrong choices. Hence, there should be more efforts to inform customers about buying insurance for protection rather than looking at it as a short-term, tax saving investment opportunity.
Though the insurance regulator IRDAI has time and again warned against the mal-practices in the insurance sector mis-selling still happens all across the country and across all income groups. Therefore, the onus lies on the advisors and agents to not mis-sell insurance to innocent buyers.
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