Insurance mis-sellers are back

Insurance agents have stopped selling Ulips and are pushing low-yield traditional plans to earn fatter commissions. Find out how to deal with their gameplan

    When Maria Amin deposited her first paycheque in April, her insurance agent had a few words of advice. The Noida-based school teacher could earn tax-free assured returns of 10% by investing in an endowment insurance plan. "He showed me a brochure, which stated that the returns were guaranteed. It was also mentioned on a website," she says. 
    However, her delight turned into disappointment when she checked on the insurance company's website. The brochure that the agent had shown was not official material authorised by the company. The website too was run by an insurance brokerage firm. On the official website of the LIC, the benefit illustration of the Jeevan Saral plan clearly mentioned that the returns were not guaranteed. 
What is being mis-sold? 
A few years ago, insurance agents were mis-selling high-cost Ulips to gullible buyers because they earned heavy commissions. The came down after the 2010 guidelines capped the charges on Ulips. But agents are now pushing low-yield traditional plans by projecting them as assured return options. "The returns from traditional plans are measly and rarely exceed 5%," says Jayant Pai, head of marketing, Parag Parikh Financial Advisory Services. Before the new guidelines kicked in, Ulips accounted for almost 75% of the new policies sold by insurance companies. Now, 85% of the new business comes from traditional plans (see graphic). 
    Distributors earn 30-40% commission from selling traditional policies compared with 8-12% from a Ulip. "The only person who loses out is the buyer. He doesn't know what he's getting into when he buys a traditional plan," says HDFC Life CEO and MD Amitabh Chaudhry. 
    One such buyer is Pune-based Chintan Purohit (see picture). The 25-year-old software professional has two endowment plans for 10 years each and a pension plan that matures when he is 30. Given his life stage, Purohit didn't need these plans at all. Pankaaj Maalde, head of financial planning at Apnapaisa.com, says Purohit's insurance policies do not serve any meaningful purpose in his financial planning and should be discarded. 
Who buys low-yield plans? 
The biggest draw for buyers is the tax benefit on insurance policies. They are particularly popular with high net worth individuals, who are not as concerned about the low returns as they are about the taxability of the income. Tax deduction under Section 80C is another important reason for buying these plans. However, this year's budget has proposed that an insurance plan will be eligible for tax deduction and the income will be taxfree only if it covers the policyholder for 10 times the annual premium. Experts say the net return from an endowment plan has fallen by almost 40-50 basis points to 4.1%. 
Lured by bonus 
Although announced every year, the bonus is usually paid on maturity of the plan. The problem is that it does not get compounded. So even though your policy might have got a big bonus this year, you will get it only after 15-20 years. The cash bonus is the only one that is paid to the policyholder in the year it is ann o u n c e d . "Each plan is structured differently. Ask the agent or company to clearly explain what you will receive at the end of the tenure," says Pai. 
    The good news is that Irda is now planning to crack the whip on mis selling. Earlier this year, it proposed that before a customer is sold a pol icy, the insurance company should study his needs in detail. A 6-page form with details of income, risk ap petite, even the monthly household expenses, will have to be filled up by the buyer and countersigned by the agent. The Irda wants insurers to as sess whether the buyer can afford the policy he is buying. 
Changes in the offing 
Irda has drafted new guidelines for such plans, which could change the insurance landscape once again. The most significant alteration proposed is the capping of the commissions payable on traditional plans. The longer the premium-paying tenure of the plan, the higher the ceiling. This is an incentive to push buyers to go for long-term plans, which can deliver better returns. Maalde agrees. "The returns from a 5-year or 10-year policy may not exceed 4-4.5%," he says. "Go for plans with terms of at least 20-25 years. Even so, the returns will not be higher than 5-5.5%." 
    Irda has also proposed that the minimum premium-paying term be five annual premiums. "These guidelines will ensure that insurance companies become answerable for what they offer the customer," says Suresh Agarwal, executive vice-president and head of distribution and strategic initiatives, Kotak Life Insurance.