A 67% growth should be good news, right? Not when it is in the number of complaints. The Insurance Regulatory and Development Authority (Irda) says that customer complaints against life insurance companies increased 67% in 2012-13. Almost 75% of the 1.68 lakh complaints received by the insurance regulator during the year related to malpractice, mis-selling and outright cheating.
Our cover story this week examines the modus operandi of agents who sell expensive, unsuitable and unwanted insurance to unsuspecting customers. One big lie currently doing the rounds is that some of the best-selling plans from LIC are going to be discontinued after the new Irda guidelines come into effect. From 1 January 2014, claim the rumours, policies will become costlier because you will have to pay service tax as well. In the following pages, we separate the facts from the fiction.
Agents have effectively used these half-truths to make people rush to buy insurance before the guidelines come into force. In September, the LIC sold new policies worth Rs 8,434 crore. This was 55% higher than the premium from new plans sold in September 2012. Sources reveal that Rs 2,000 crore of this amount was collected in the last two days of the month. Private insurance companies, too, were not far behind. They sold policies worth Rs 2,785 crore, up 29% from the previous year.
The original deadline of 30 September has now been extended till 31 December. This has given a lease of life to insurance companies. In fact, the Life Insurance Council says it may seek a further extension if companies are not able to launch new products that comply with the revised guidelines. The period from January to March is considered the festive season for insurance in India and no insurer wants to miss the party.
Soon, these good plans will not be available.
Some of the most widely sold endowment policies and money-back plans will soon go off the shelves. However, if you buy them before 31 December, you can enjoy their benefits. The first statement is true. The second is only partially true. While many insurance policies will be discontinued, they will be replaced by better, more customer-friendly plans. Irda's new guidelines for traditional plans have not only enhanced the surrender value of a policy, but also lay stress on longer terms and higher covers. The premiums could go down because the LIC will use revised mortality rates to assess the risk.
However, agents are pushing the existing plans by giving the false impression that customers could miss out on a great investment opportunity. As the September sales figures show, customers are biting the bait.
A large number of complaints to Irda were from people who wanted to buy single premium plans, but were sold regular premium policies. This is why you must fill up the application form yourself.
If your agent has filled it, go through it carefully. An agent can still tamper with the application form after you hand it over. To avoid being cheated, go through the policy document when you receive it, and return the policy within 15 days if you notice anything amiss.
You will be charged service tax if you buy after 31 December.
This is another halftruth that is making the customers rush to buy before the 31 December deadline. Service tax is already payable on life insurance policies and private insurers are charging customers accordingly. It's just that till now the LIC used to absorb the cost and pay from its own coffers. A company sitting on the funds of more than 1.8 lakh unclaimed policies could afford to do that. But even the LIC will start collecting service tax on all new insurance policies from 1 January 2014.
The good news is that in case of traditional policies, service tax is only 3.09% of the premium in the first year, and drops to 1.45% from the second year onwards. So, if the premium is Rs 10,000, you will have to pay roughly Rs 309 more in the first year, and Rs 145 more per year for the rest of the term. Is that a big enough reason to blindly commit thousands of rupees for a multi-year investment?
Experts believe that the increase in the annual payment due to the service tax is likely to be neutralised if the LIC passes on the burden to the customer. "The LIC was paying the service tax out of the pooled corpus. If that burden is reduced, its profits will rise and the bonus that accrues on the policy will be higher. It's a zero sum game," says a senior official of a private insurance company.
Irda is distributing the commission of sacked agents.
The failure of the regulator to lay down strict guidelines and the unwillingness of insurance companies to take action against agents who indulge in mis-selling have emboldened unscrupulous brokers. In the past 1-2 years, thousands of policies have been sold by agents masquerading as Irda employees. They call up customers with ludicrous stories. One person was told that the bonus accrued on his policy had been pocketed by the agent, but he could get a refund by taking a new policy. Another was told that Irda had sacked 55,000 agents for mis-selling and was distributing their commission among policyholders. He could get his share if he bought a new policy directly through Irda.
These are lies, and if anybody believes in such absurd stories, he deserves to be cheated. Irda is a regulatory body and does not sell insurance. It has put up a notice on its website, warning the general public against such fraudulent calls. It's noteworthy that the regulator does not see this as mis-selling but outright cheating, which should be reported to the police.
Before the policy is issued, the company calls up the buyer to confirm whether he has understood the terms and conditions. This is a good practice and buyers should confirm all their doubts during this interaction. The 15-day freelook period is another useful feature. A policy can be returned within 15 days of receiving the policy document if the terms do not match the promises made by the agent. However, fraudsters usually buy time by offering lame excuses till the 15-day free look period elapses.
Insurance companies are aware of these malpractices, but claim they are not involved. However, they cannot escape the blame completely. Despite complaints piling up on their doorsteps, very few companies have taken action against errant agents. Most prefer to look the other way because it keeps their cash registers ringing.
The bonus you get every year is as high as the premium.
Endowment policies are complex products and the average buyer has no idea of how his plan works. Don't feel exalted if you get a call from a telemarketer, who promises you an additional bonus because "you are an existing customer". The reality is that bonuses are announced every year by insurance companies and will accrue to all traditional policies. The longer the term of the policy, the higher the bonus. The bonus on LIC's bestselling Jeevan Anand plan has been an average 4.8% in the past five years.
This is used as a marketing ploy by agents. Buyers are told that they will get a bonus that is almost as high as the premium. You pay Rs 50,000 every year and the policy gives a bonus of Rs 48,000 every year. You also get life cover and tax-free money at the end of the term. Can you think of a better investment?
There is a catch here. This bonus accrues to the policy but is paid at the time of maturity. Worse, it does not compound during the term of the policy. So, if you have a 20-year policy of Rs 10 lakh, it will earn a bonus of roughly Rs 48,000 every year. However, 8% inflation will reduce the value of the bonus given in the first year to just about Rs 10,000 by the time the policy matures. Assuming an inflation rate of 8%, the purchasing power of the Rs 24 lakh bonus would have pared down to Rs 5.14 lakh.
Ulips are risky and term plan premium goes waste.
After the Irda capped the charges on Ulips in September 2010, unitlinked plans have become a viable investment. They are still not as low-cost and transparent as mutual funds, but are significantly better. The new guidelines said that the difference between the gross yield and the net yield cannot exceed 3% in case of shortterm plans of up to 10 years, and 2.25% in case of long-term plans of more than 10 years. What's more, Irda also put a cap of Rs 6,000 on the nefarious surrender charge that was levied on premature termination of a policy.
The lowering of the charges has changed the way agents looked at Ulips. They have stopped peddling the market-linked products and started pushing traditional policies. The same people who were asking you to participate in equities through Ulips 2-3 years ago, now say that equitylinked investments can be risky and should be avoided. Tell an agent that you want to buy a Ulip instead of the money-back plan he wants to sell, and the likely answer will be, "Why do you want to take a risk in this market?" For him, the choice is between earning a first-year commission of 5-6% on a Ulip, or 35-40% on a traditional plan.
Term insurance plans, which are arguably the best form of insurance, are also dismissed by agents as a "waste of money". The agents point out that if the person survives the term, he doesn't get anything because the entire premium goes into buying the risk against death. They don't reveal that this mortality charge is payable on all insurance policies, including traditional policies and Ulips. Since the break-up of the charges is not declared, buyers believe they are getting the cover for free.