Monday, February 23, 2009

6 ways in which an insurance agent robs you




Friends, since we are in what insurance guys dream about and call the JFM quarter , I thought it would be prudent to drop few tips to our readers on how to be safe while planning for their taxes this JFM. Why is JFM such a big thing for insurance selling fraternity? Simple, because it is during this qtr that they do most of their yearly business and hence a quarter full of excitement for them.But , in their excitement to garner maximum pie of the business on offer there are times when the agents selling these products try and shove the product down a customer throat without really understanding his needs. Why do they do it ??They do it coz they want to make the most of the JFM qtr and most fundamentally because insurance is a complex product where the sale has to be recommended basis the customers need and requirement. Also as per Philip Kotler, Insurance is an "unsought product" ie a product which people generally dont look to buy. All this makes it a tough proposition to sell. Hence , misselling.

Hence , its very important to understand the various ways in which an agent might try and mis sell an ill suited insurance product to you.

1. Mis-selling by overstating the benefits of the policy

The most common way of enticing customers into buying insurance is by overstating the benefits of the policy. They generally inflate the expected maturity amount or rate of return on the plan. For instance, in ULIPS as per IRDA the projected rate of returns for the 3 funds should as under(approx):

1. Debt Fund - 4-5%

2. Balanced Fund- 6%

3 Equity Fund -8%

All companies are required to have these indicative rates on their BI(Benefit Illustration), but agents sometimes inflate these rates . One should never trust them on rates coz no one can guarantee any rate of return on ULIPS. For traditional plans always refer the BI.

2. Mis-Selling by not disclosing the exclusions of the policy

Almost all policies have some exclusions to it.Insurance companies expect all the applicants to fully disclose any medical history. For example , none of the life insurance policies cover suicide by the policyholder in first year of the policy cover. But agents may not tell you about it and hence you may loose out on potential claim. Medical policies should be carefully bought post reading /checking all the exclusions.

3. Mis-selling by asking applicant not to disclose fully his medical/family history

Insurance companies want all the applicants to disclose their complete medical history in the proposal form. They also expect them to fully disclose his nature of job etc. This is done to fully assess the risk on the applicants life and accordingly either approve /reject his case. But since an agent will never want to loose out on any case, he sometimes may tell applicant not to disclose his medical history convincing him by telling him the ills of doing so. This way even though the policy gets issued the insurance company may not approve claim in future citing wrongful disclosure on your part. But guess what is the agent moaning about it ?? No , he would probably be watching movie on his home theater he bought from commission he made on your sale.

4. Mis-selling by repackaging the product

You would easily come across agents/brokers who would sell you ULIPs as an ideal investment product offering you benefits of both mutual fund and insurance. This is partly true in the sense that it does offer you the flexibility of investing in market like mutual funds while giving you insurance cover as well. What they don't tell you is that it charges you atrociously higher charges in the name of admin fee,fund management fee etc unlike mutual funds. So you end up paying huge part of your money towards these unnecessary and meaningless charges. Stay away from them.

5. Mis-selling on tenure

Some people want to save tax right , but don't want the lock in of 10-15 years that insurance funds have. To tap to this segment, agents sometimes give a spin to their pitch by presenting ULIPS as a product with a tenure of just 3 years (some plans) which is not the case in true sense. The ULIPS do have lockin on 3 years post which the premium may not be paid if one wishes so ,but the fund continues to deduct the mortality charges out of the residual fund value till the fund value is less than the mortality charges after which the policy might lapse.So invest in ULIPS for the long term not for the short term.

6.Mis-Selling by exploiting the Switch Option

Most of the ULIPS offer "switch"option where one can choose to switch between the various funds available under the same plan. For instance, ULIP having option of Debt Fund, Balanced Fund and equity fund offers its investors to choose any one of this at the time of getting into the fund and the same may be changed subsequently using the switch option . 3 switches in a year is free with most funds. When policyholder switches the agent does not get anything. So what he does is that he gets the old plan surrendered at surrender value and gets the client into a new plan itself. Why does he do so ?? Simple coz in a new plan the agent gets hefty commission coz its like a sourcing a new client for that plan. How is the client impacted. He is royally cheated. He gets minuscule amount as surrender value in the first fund and then out of this ends up paying huge commission to the agent . This is off course possible with unsuspecting clients only.











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