These days, you may walk into a bank for a fixed deposit and leave with an insurance product as well. But what if the policy turns out to be not what you had bargained for?
According to a senior banking ombudsman official, mis-selling of insurance products is known to occur at branches of some private sector banks. Consumers must know that mis-selling is not restricted to anonymous tele-banking executives , mentioned earlier in these columns.
Even regular executives at a bank branch could sell a product that may fall short of promises. Aggressive marketing is a reality in bancassurance — the official term for selling of insurance products by banks.
Says the official: "We have some complaints where customers have been sold unitlinked life policies without being told that these involve more than a one-time premium . When they learn about the fact during renewal and choose to opt out, they barely recover 40% of the amount they originally paid.''
In one instance, a consumer had shelled out Rs 50,000 as premium. When, after a year, he learnt that he would have to pay the amount annually over three years, he decided to withdraw.
The consumer got just Rs 20,000. The problem, the official says, is that customers sign up for policies without reading the documents . As they have an existing relation with their banks, they enjoy a certain degree of comfort, which makes them sign up without asking too many pertinent questions.
What is more unfortunate is that because the documents are signed, the banking ombudsman can do little. "The documents are signed and every form is properly filled. Also, customers are allowed a look-in period of 15 days to return the policy, but they don't. Besides, these products have the approval of IRDA. We are not in a position to help,'' the official says.
S B Mathur, secretary-general at Life Insurance Council , says a bank customer is usually well-informed , but may still be a little careless about going through the terms and conditions of a policy. "Even in the forwarding letter , if you find something wrong, you can cancel it... That's the problem, you can take the horse to the water, but cannot make it drink,'' says Mathur, admitting that there may be "aberrations' ' in the sale of unit-linked policies.
"We are talking of a total of approximately 30 crore life policies as on March 31, 2009. About 5 crore policies were added only last year,'' says Mathur, adding: "this immense growth was seen in a year of economic slowdown. It cannot be ruled out that some mis-selling may have been involved. On the whole, though , the parameters indicate a positive improvement in the quality of sales process.''
The sectoral watchdog had set up a committee to draft recommendations for the bancassurance model. IRDA officials, though, refused to comment on the progress of the initiative.
Rajesh Sinha, a 30-year-old marketing professional had five insurance policies where he was paying a premium of Rs 50,000 against each of
the policies. With such a huge premium outgo, he was under the impression that he was more than adequately insured.
But little did he realise that his actual insurance need was 10 times his annual salary which was over a crore of rupees. Against this each of his unit-linked policies (Ulip) schemes offered protection for only Rs 2.5 lakh i.e. a total cover of Rs 12.5 lakh.
The proliferation of Ulips has taken away the focus from insurance. Buying insurance needs a staggered approach and one has to review/expand the cover as s/he assumes more responsibilities such as marriage, having children or dependent parents.
HOW TO REVIEW YOUR COVER
Today single-income families are making way for more double-income families. But that doesn't reduce the financial responsibility for either of the spouses.
"The need for insurance emanates from the various obligations that the breadwinner is expected to fulfil such as children's education, retirement, health and savings. These change with the changing life stages and are driven by the individual's specific needs. Thus, each individual should put a rupee value to each need and thereafter conduct a self-risk assessment," Leena Dhankher Joshi, AV-P, life, accident & health profit centre, Tata AIG Life Insurance.
This may sound very complex, but is quite easy. Assume a complete discontinuation of your income and evaluate the implications of that on your family.
This self-assessment coupled with the current life stage and the responsibilities towards the family. For example, children's education, marriage, retirement plans and various liabilities such as home loans will help you asses your insurance needs. A ball-park figure is 10-15 times your salary, which should be the size of your insurance cover.
INSURE YOUR HOME LOAN
If you have a large home loan, it's a wise option to cover the liability. A borrower wouldn't want to pass on the financial burden to his spouse or dependent parents in case of an unexpected demise or even a disability and hence a job loss. Life insurance companies have designed home loan insurance covers in alliance with banks to cover this risk. However, a simple term plan could be a better back up than these home loan insurance cover, financial advisors say.
"Let us assume a borrower has opted for a home loan of Rs 30 lakh. Now, in case of a term cover, an individual of 35 years can opt for a term cover of Rs 30 lakh and pay an annual premium of around Rs 8,000. If an individual would have opted for home loan insurance, he would have had to pay an upfront amount of Rs 1.52 lakh as an insurance cover on the Rs 30 lakh home loan.
Now, this could prove to be loss to a customer if he prepays the loan within 10 years. Secondly, the insurance amount is calculated on a reducing balance basis. So the value of the cover falls with every passing year," Suresh Sadagopan a certified financial planner, Ladder 7 Financial Services.
BUY EARLY, BUY BIG
You can opt for a step-up option which increases the value of the sum assured over a period of time. This comes at a higher premium as it proves to be more cost-effective than buying multiple policies. For example, SBI Life offers a term product called Shield in three variants.
The first one is called a level cover, which is a fixed sum assured throughout the term of the policy. In the second and third options, a customer can increase the sum assured by 5% every year and 50% every five years. If 30-year old Mr Sinha opts for a 20-year level term policy, he would have paid an annual premium of Rs 2,504.
The 5% step-up option will cost Rs 3,552 and for the 50% step-up option the premium will be around Rs 4,189. But if Mr Sinha is planning to enhance the life insurance coverage to Rs 50 lakh (even half of his requirement), he would be better off investing in the 50% step-up option.
Even if Mr Sinha invests the difference amount (between level term policy and 50% step up option premium) in a fixed deposit at 6% even then he will have to dip into other reserves/savings to fund the premium of another policy after 42 years of age. The interest saving alone will not suffice.
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