Insurance products: How to protect yourself against mis-selling

Sunil Sharma

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One of the problems with insurance products is that they are not physical objects but policy contracts. They cannot be felt, smelled or tasted.  In order to fully understand the mis-selling, I would like to take an example of non-financial transaction.

Let’s say you were looking to buy a computer. You told the shop assistant that you planned to watch DVDs on it, and they recommended a model. Then you took it home and found that it didn’t have a DVD drive. There’s nothing wrong with the computer itself — it’s not faulty — but it’s not what you needed. The computer was mis-sold to you as it did not meet the need and you were told by the shop assistant that this will be able to play DVD.

It’s just the same when you’re sold a financial product. The person who advises you to buy must recommend something suitable for your needs and explain properly what it can and can’t do. They should make sure that you know the risks. If they don’t do this, you may not be able to understand the product fully.

Insurance products are complex in nature and not very well understood by the less financially sophisticated people. There are various types of life insurance products in the market such as term assurance, unit-linked, non-participating guaranteed products, with-profit endowment plans, pension plans, annuity plans and various riders, which meet the needs of wide variety of customers. It is worth noting that each individual’s circumstances require different types of product and therefore they have different needs.

It is important that the product sold by a distributor to an individual meets the need of that customer. Further, the customer must be fully explained the features and options in the product. The customer must ask distributor relevant questions and understand how the product will fit the individual’s long-term protection and saving needs.

What are companies and regulator doing to stop mis-selling?

Insurance companies and the insurance regulator are taking a lot of initiatives to curb the mis-selling. The level of transparency and availability of information to the policyholder to take right decision has been enhanced significantly. The agent/distributor is required to explain the product to a potential buyer and explain how the product meets the specific needs of the customer. Customised benefit illustration is mandatorily required to be shown to policyholders showing the premiums, charges and the benefits payable under the policy. This is required to be shown at an assumed interest rate of 4% and 8% which helps a policyholder to understand the level of benefits payable under the policy. In order to protect the policyholders from mis-selling, there is a provision for the free look period. As per the free look provision, in case a policyholder is not agreeable to any of the provisions stated in the policy, then he/she has the option of returning the policy, stating the reasons thereof within 15 days (30 days for policies sold via direct marketing)   from the date of the receipt of the policy. On receipt of letter along with the original policy document arrangement shall be made to refund the non-allocated premium plus charges levied by cancellation of units plus fund value at the date of cancellation, after deducting proportionate risk charges, stamp duty, cost of medical examination, if any, and other expenses in accordance with the IRDA (Protection of Policyholders’ Interests) Regulations, 2000.

Read brochure details carefully before finalising the product

• Understand the product being offered to you and that it’s meeting the needs in future lifetime in terms of
• Protection (risk cover)
• Future maturity benefits
• Any survival benefit/income benefit payments during the term of the policy are at the time when you need the cash inflow
• The buyer should fully understand the policyholder’s obligation and the term for which the premiums are payable
• The policyholders must ensure that he/she can comfortably pay the premiums under the policy for the premium payment term
• Read the marketing brochure and details how does the product work. One should ask relevant questions from the sales person
• Understand any exclusions under the policy
• When you receive the policy contract, ensure to read it immediately and call up the agent or the service representative on the insurer’s call centre. If the benefits are in line with your needs, you can exercise the option to cancel the policy within free look period by writing formally to your insurance company

The author is Chief Actuary, Kotak Mahindra Old Mutual Life Insurance. The views expressed in this article are his own