By CFP Poonam Rungta
Mis-selling of insurance is rampant. It is disheartening that even when it is a known fact then also this menace remains to be uncontrolled. As much as it is essential to have a life and health insurance, it isn’t easy to buy the right product. Sometimes the consumer does not understand the product, the agent either hide specific details or lies about them or even worse at times the agent themselves do not understand the policy.
When your requirements are not fulfilled by the product sold to you, it is pure mis-selling. It’s like buying a medicine pushed by the chemist which will not help you in curing your ailment. Spending on such medicine will not only affect your budget but also aggravate your illness.
Let’s understand this with an example.
Pankaj Agarwal is 30 years of age. He has a 2-year-old son and wife is a homemaker. His salary is Rs 40,000 a month. Pankaj has a home loan of Rs 10 lakh for which he pays an EMI of Rs. 10,000 every month and is saving around Rs 25000 in a year.
An agent approaches him and convinces him to buy insurance. Pankaj is an IT graduate and is not well versed with insurance. He follows the advice of the agent and buys an endowment plan of Rs 5 lakh sum assured with premium 25000 pa. This is a classic case of mis-selling. Here, Pankaj needed to get appropriate risk cover, for his family security of approximately Rs 1 Crore. Instead, due to bad advice, he bought a traditional product which took care of his premium budget and not his insurance requirement. He needed a term cover of minimum Rs 1 crore sum assured, and not any traditional product, as his budget is limited.
To avoid being a victim of such Mis-selling you should keep the following points in mind:
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Insurance is not an investment
An insurance policy is not an investment product. It is a protection that you buy for bad health or to take care of your family members if the earning member dies. The basic principle of insurance is risk cover. Hence, it would be best if you bought insurance for covering the risk of your life, property, health and vehicle. Calculate the value of your financial life through the human life value method or income replacement method and cover yourself for that much amount for the period till your retirement. Once the primary objective is fulfilled, you can buy an insurance product for investment. The Insurance product on maturity gives you a return of 7% approximately.
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Don’t get tempted by return promises
Don’t get lured by high returns charts of Unit Linked Insurance Plans(ULIP) policies. ULIP returns are market-linked, and hence the presentation chart shown by an agent is a projection of future returns which may or may not happen.
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Long- term perspective
Buy insurance for the long term, i.e. at a young age. The correct age is the day when you start earning. Buying insurance at a young age has many advantages- less premium and less medical examinations.
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Understand the tax deduction
Under section 80C of the Income Tax Act, a tax deduction of Rs 1.5 lakh is available on the premiums paid for Insurance policies. You must ensure that the premium paid in a financial year is 20% of the sum assured amount of the policy, if the policy was issued before 31s March 2012. For policies issued after 1st April 2012, the tax deductions are applicable if the amount of premium paid in a financial year is 10% of the sum assured
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Know your financial goals
It is essential to know the inflation-adjusted financial value of your financial goal, along with the entire total investment period. As per these two factors, you have to arrive at the required Insurance amount.
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Underinsurance and over insurance
Both are bad for your financial planning. Underinsurance means your family security is not enough. And Overinsurance means you are paying more premium than required, which you could otherwise invest somewhere else and earn more returns.
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Consult a professional before making any decision
Since it is essential to buy proper risk cover, it is better to consult a professional who will help you arrive at an appropriate figure of risk cover and also the time period for which insurance is required. This way, you get the right product.
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If your best friend has brought a policy, doesn’t mean you also need it.
One product may not be suitable for two people who are best friends. Hence do not duplicate. Understand the need, then buy.
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Monitor your requirement of insurance yearly
With an increase in income and expenditure, the requirement of insurance also increases.
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Disclose all the details in the form
It is very important to disclose all your financial and medical details in the form. Do not avoid or misrepresent any fact even if told to do so by your agent. This can lead to severe problems at the time of claim settlement.
Buying the right insurance product can make or break your Financial planning. Hence, consult a professional before making any insurance decision.
