How to avoid being mis-sold life insurance

Many insurance agents resort to luring customers into buying life insurance products by promising very high returns or selling policies that are simply not suitable for the prospective customers. The real motive of these agents behind mis-selling such insurance products is to earn a fat commission on the sales.

To avoid being sold a life insurance policy that will neither offer the returns being promised by the agent nor meet the financial goals or your insurance needs, you need to know the basic features of various insurance products available in the market and the benefits offered by these products. One can categorize insurance policies into three broad types: namely, term policies, endowment policies and equity-linked policies.

Term life insurance plans are pure life insurance policies that may offer only insurance cover to the insured for the specific term of the policy and may not offer any maturity benefit. In the event of the death of the insured during the policy period, the nominees of the insured will get the amount of sum assured. These policies are available at a nominal cost and provide highest amount of insurance cover to the policyholder. Hence, if any agent promises maturity benefit for a term plan, check out the amount of premium for the policy as it would be higher than a plan that does not offer maturity benefit. One can also get accident benefit insurance cover or health insurance cover for specified illnesses by buying riders with the term plan.

Endowment policies offer life insurance cover for a specified period and maturity benefit at the end of the policy term to the insured. The insurer may declare bonus during the policy term and the bonuses declared will be added to the sum assured. The premium paying period may be less than the policy term or equal to the policy term. Agents may seek to inflate the bonus being declared by the insurer and thereby try to inflate the maturity benefit that may be available to the insured. Also, bonuses are available only to the policyholder who opts for a ‘with-profit’ policy for which the premium may be higher than a ‘without-profit’ policy for which a policyholder is not entitled to receive bonuses declared by the insurer from time to time. So one needs to be sure whether the policy is ‘with-profit’ or ‘without-profit’. Also, the lump sum payment on maturity may not be as high as the agent might claim it to be.

Finally, there are market-linked plans called as the Unit-Linked Insurance Plans (ULIPs) which provide insurance cover during the policy term along with market-linked returns. In the event of the death of the insured, the insurer pay the sum assured to the nominees of the insured. However, since the corpus of ULIP is majorly invested in equities and equity-oriented instruments, these policies may offer the highest return at the end of the policy term, but these also carry the highest amount of risk. The agents are prone to promise the moon to the prospective buyers of these policies by waxing eloquently about the extraordinary returns generated by the stock market in the past, without even saying a word about the attendant risk associated with equity investing.