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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Seduced or terrorized to buy an insurance policy?

I am certain that your bank has sold you, or at least tried to sell you, an insurance policy (even though you didn't need one at all).

And, I am also certain that you were lured into buying a policy, either
(i) by promises of (non-existent) exceptional returns, or
(ii) pressurized by some (non-existent) rules and regulations.

Insurance pays the highest commission to its agents, as compared to Post Office Schemes, Mutual Funds and various other investments. And, this continues year after year, till you are paying your premiums. Naturally, therefore, it is in agent's interest to sell you insurance.

However, it is quite likely that insurance is not the right product for you. Hence, we have a classic case of conflict of interest. It is hardly surprising that we repeatedly come across instances of misselling of insurance policies.

In this regards, Insurance Regulatory and Development Authority of India (IRDAI) has been receiving numerous complaints from the policyholders regarding misselling of insurance policies by Banks and NBFCs (who are defined as Corporate Agents).

Taking cognizance of this rampant unethical practice, IRDAI has recently issued a circular on Complaints of Misselling / Unfair Business Practices by Banks / NBFCs

Salient aspects of the same are detailed below.

Based on the nature of complaints received, IRDAI has noted five key instances where Banks / NBFCs have either forcibly sold or missold insurance policy(s) to its unsuspecting and gullible customers.

1. When people apply for a home loan or other kinds of loans, an insurance policy is often "compulsorily" bundled with the same.

Nothing in the law says that you have to buy the two together. You have every right to obtain a standalone loan, with no strings attached. Therefore, don't be intimidated or threatened by your banker. Don't buy an insurance plan along with the loan, if you don't need one.

Remember, there is enough competition around and you can always walk into another bank. Better do so. Don't end-up carrying a millstone around your neck for years together, just to save a few minutes of inconvenience.

Yes, it is good to insure your loan — especially a high-value long-tenure home loan. But, you will probably get a much better policy and at a much lower cost, if you hunt for one on your own, instead of trusting your banker.

2. For providing locker facility too, banks often put insurance policy as a pre-condition.

Please note that this is not a mandatory requirement. RBI guidelines clearly specify that banks cannot have such pre-conditions while renting out the locker facilities. In fact, apart from insurance, many banks force people to open a Fixed Deposit. This too is absolutely illegal and unlawful.

Therefore, don't be blackmailed by your banker. You have every right to complaint to RBI and you MUST do so. You cannot, and should not, have a laidback attitude against injustice. You must fight back. It is for your benefit only.

Must Read: My name is Insurance and I am not an Investment

3. Single-premium insurance policies are issued instead of Fixed Deposit.

By luring people with (false) promises of better returns, many customers have been forced to invest in single-premium insurance plans instead of their preferred choice i.e. fixed deposits. In fact, in many instances these are retired senior citizens who don't need insurance cover at all. Besides, they need their money to be liquid for any emergency medical requirements. Whereas in insurance, their money gets locked-in for (many) many years.

Isn't it cruel to put such helpless people to all this misery? Guilty bank officials should be jailed for such unethical conduct.

Don't be tantalized or blackmailed into buying an insurance policy you don't need.

4. Regular premium policies were issued in place of single-premium policies.

In many cases, the single-premium policies opted for by the customers were slyly converted and issued as regular premium policies. When people complained, the answer as usual was that this was in their best interest, as these would double their payment on maturity.

Again a clear cut case of misselling. Many self-employed people don't earn regular income. As such, whenever they receive any lump sum money, they prefer buying a one-time investment. A regular premium policy often becomes difficult to service during the years when income is low. Result... the policy lapses and people end-up losing their investment.

This kind of practice too deserves no mercy, at all.

5.    Insurance policies were issued without their consent.

Many people have complained that they did not sign any policy proposal form or document. Either the banks falsely obtained their signatures stating that these were loan or some account related documents. Or it was a case of outright forgery, where someone else had signed on their behalf.

Rigorous imprisonment is obviously the most appropriate punishment for such criminal activities.

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When IRDAI took up this serious matter with the banks / insurance companies, the stock answer was that we have taken action against the employee concerned; or the employee has quit the job; or we have refunded the premium to the customer. Meanwhile, it is business as usual... and the misselling continues unabated.

Therefore, IRDAI has clarified that refund etc. is not the solution. More important is to have appropriate systems in place to "proactively detect and discourage such kinds of misselling / forced selling / wrong selling".

It has also warned the banks / insurance companies that as per Regulations on Corporate Agents
- compelling people to buy insurance is strictly forbidden and
- corporate agents should give details of specified persons selling insurance, so that they can be individually held responsible for any misselling. 

Given that IRDAI was able to stop the misselling of ULIPs few years back, let's hope that they successfully put an end to this menace too.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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