Why is Insurance Mis-Sold in India ?

“Come on !! If you are a really good friend of mine, you ought to buy a life insurance policy from me”

Sounds Familiar ?? How many times we keep hearing this argument from a close friend (?) or a relative to buy an insurance policy from him. Ever imagined how much this approach has contributed to the mis-selling of insurance in our country ? You will be surprised to know that India is both uninsured and under-insured largely because of mis-selling.

Uninsured , because till date less than 25% of the population of the country has life insurance.

Under-insured, because the average life risk cover of the insured population still remains below Rs. 1.5 Lakhs which is highly inadequate for the family, if there were an unfortunate death of the earning member.

So what can be the prime reason for the mis-selling of insurance in our country ? Lets try and find out:

1. Lack of awareness and knowledge about insurance

Its not difficult to find a huge chunk of population which is very “Optimistic” and still thinks that insurance is an unnecessary expense.

Then there are others who buy insurance just to “Save Tax” ( I really wonder if tomorrow the government allows a tax deduction for throwing money into the river, these people might even consider doing that).

Then there is a third category of people who want to get insured and earn returns on the premium paid.

In all the above cases, the very basic principle of life insurance seems lost. I am not suggesting to be pessimistic, but try imagining only for a couple of minutes, who will shoulder the financial liability of the family if the earning member is not there. So, insurance is a must. And buy insurance with the view of only life risk cover. Trying to mix n match investments with it, ensures your planning to go for a toss.

2. Short term views by the agents fraternity

Now that IRDA remains firms on its stand to pay heavy upfront commissions to the insurance agents, this short term view by the insurance agents might stay for some time. Lets take an example of a typical insurance selling happening:

Mr. Raghav (imaginary character) is an insurance agent who visits Mr. Abhijeet (imaginary character) who is a software professional. Now, Raghav convinces Abhijeet to take life insurance from the point of view of “Tax Saving” and also some investments. Raghav is finally able to sell a traditional endowment type of a plan and bag a commission of 35% for the first year (out of which he has also passed back 20% to Abhijeet). Abhijeet is also happy for the time being, as he has saved tax, insured himself and also got some part of the premium back. So in his calculations, he has got the best deal.

3 years later, Raghav comes back to Abhijeet, telling him that there is a new plan launched in the market which is much better than the plan he had bought earlier. The new plan will give him much better returns (Readers have guessed it right. Its a ULIP that Raghav is now talking about). He recommends that Abhijeet surrenders the old plan and gets into the new one.

Now, the story is, on surrendering the old plan, Abhijeet incurs heavy charges and gets less than 70% of what he had invested (forget about getting any returns on investments). Now, Abhijeet invests into a ULIP for which Mr. Raghav again bags a commission of 30-40%. The real reason to change the policy here was, Raghav was not happy with the small(?) renewal commission coming in from Abhijeet’s policy. So he made sure to change Abhijeet’s policy after every 3 years so that his upfront commission is secured.

What is worth noting here is, at whose cost did these deals happen? No prizes for guessing, its Abhijeet. His investment plans kept going for a toss and so did his life risk cover. All that he could get was a “Tax Saving” and some (illegal) passback from Raghav.

It is solely the short term view by the agent, wherein he is keeping his interests before those of the client, thereby making short term gains. But such agents also lose clients and business in the long term as they lose trust of the clients.

3. Minimum qualification requirement of the insurance advisor

It is surprising to note that the minimum educational qualification requirement by most insurance companies for a rural sector is 10th passed and urban sector is 12th Passed. Few days back I came across a Panwala and a car driver who were life insurance agents. I have nothing against Panwalas and Car drivers, but then these guys did not have a remote idea even about the tax slabs (forget about 80C or any other intricacies). I was just wondering, if this is the level of dilution of the insurance advisory, then naturally it would create a repulsion towards insurance. Imagine the reaction of a Doctor on getting advise from his driver regarding which insurance he should be buying.

The argument we keep hearing for the same is “We are creating employment for these less educated people”. Ok, but at whose cost ? Is it ok to let the investors get cheated so that these people get employment  ?

To control mis-selling, the minimum qualification level required to be an insurance advisor should be at least a graduate level. Till the time the regulator does not make such rules, its time we look at the qualification and knowledge of the advisor before we buy a policy.

4. Life Insurance as a part time business

We also come across several people being highly interested in working part-time and thus taking a life insurance agency. Again, I am not against people working part-time, but the question remains is, are they taking it as a serious business or a “time-pass”.

Taking an example, Mrs Archana (imaginary character) is a homemaker and wants to take up a life insurance agency as a hobby(!!). She has some contacts in her society, friends and other relatives. She manages to sell some policies in her closed circle by pushing her relations. But after a couple of years, all her contacts are exhausted and even she is “bored” of this business. She decides to stop the business and start doing some other business from home.

Now imagine, what would be happening to the people who have bought the policy from her.  If they have a service issue or a query related to their policy, whom should they contact. Because Mrs. Archana has a single reply, “ I have stopped doing business of life insurance. Please do not bug me on that”.

In most cases, this part-time business model works more like a “Hit and Run” business wherein the agent sells maximum policies to his/ her contacts in 1-2 years and then change the business. The victims are the people who bought policies just to “maintain good relations” with them.

5. Selling on Catchy names

We also have a category of investors who buy insurance because they happen to like the name, than to have look at the product features. Please refer to my blog “What’s there in the name ?” (https://professorbajaj.wordpress.com/2010/06/17/whats-there-in-the-name/)to have more idea about the misleading nomenclatures of the financial products.

To cut it short, the following steps could be taken to prevent mis-selling of insurance:

  1. Till the time mis-selling is difficult to stop, we can ensure that we don’t do a mis-buying of insurance.
  2. Keep updating your knowledge on your insurance needs. Don’t buy for emotional reasons.
  3. Never mix insurance with investments. Go for term plans and take a good amount of life risk cover at a lower cost.
  4. Buy insurance solely for the purpose of insurance and not to “Save Tax”. (The reason to state this explicitly is, if tomorrow the tax incentive is gone, do not give up on insurance premiums).
  5. Check the quality of advice for insurance than get lured by “passbacks”. Do not expect a free lunch. Free lunches might prove to be costly.
  6. Stop the blame game. Do your own homework before buying insurance. As they say “It is easier to protect your feet with slippers than to cover the earth with carpet”.

We look forward to your feedback and comments on the above article. Please feel free to contact us on saurabh.nidhiinvestments@gmail.comif you have any questions.

(The views mentioned in the article are personal opinion of the author. The readers are advised to use their own judgement and consult their investment advisor before making any investment decisions.)



Published by professorbajaj

Prof. Saurabh Bajaj is an Author, Mentor, Motivational Speaker and Wealth Planner. He has done his MBA from Narsee Monjee Institute of Management Studies (NMIMS) Mumbai, one of the top 10 management institutes in India. He holds the prestigious FRM (Financial Risk Manager) degree awarded by Global Association of Risk Professionals (GARP), USA. Till date, there are less than 15,000 professionals in the world, who have been honored with this degree. He has also been awarded CFGP (Chartered Financial Goal Planner) Certification by AAFM (American Academy of Financial Management). After his MBA, he joined J P Morgan, the second largest Investment Bank in the world. He has worked with J P Morgan as Risk Analyst for more than two years. Prof. Bajaj also holds an Advisory certification awarded by AMFI (Association of Mutual Funds of India). During his stint at Bombay Stock Exchange, he has handled Investment Management and Treasury operations of the BSE Corpus. He has set up an entrepreneurship venture in the field of Wealth Planning and Investment Consulting under the name “Nidhi Investments” and holds the profile of CEO. Prof. Bajaj sits on the Expert Panel of CAClubindia.com and MBAClubindia.com as Investment Expert. He is actively involved in investor education through his blog www.professorbajaj.com which has a readership from 78 Countries all over the world. His articles are also regularly published in caclubindia.com , mbaclubindia.com , totalca.com , charteredclub.com, bankbazaar.com and lawyersclubindia.com . He has been awarded the title of “Best Article Writer” from caclubIndia.com in Jan 2012 and has been selected amongst “Top 5 Technical Writers” from all over India in Feb 2013. He has been invited by various TV Channels like SPIN TV, CNBC TV18, UTV Bloomberg Etc for programs like "Expert Advice" , "What Markets Want ", "Budget Analysis" etc. He has been invited by Several organisations like Lions Club, Rotary Club, Agrawal Welfare Foundation, Rajasthan Mandal, Agroha Vikas Trust, Union MF, UTI MF, Arthamitra Gurukulam, Vidyalankar Institute of Technology etc for expert lecture on "Smart Investing", "Life is A Celebration", "Financial Freedom", "The Digital IFA" etc. He was ranked 8th Merit at All India level NMAT which got him selected for MBA programme at NMIMS, Mumbai. He did his MBA with Capital Markets as his specialisation. Soft Skills has become an inevitable part of every selection process and teaching learning process these days. The students from small towns and tier II cities, in spite of being talented and well equipped with technical skills, are seen struggling in the selection process. This is because of their lack of exposure to these soft skills. Mr. Bajaj has a zeal for training candidates to develop these skills and has been imparting the same on since last two years. This zeal and passion inspired him to set up his own firm called “Knowledge Circle” which aims to train candidates for soft skills. Till date, he has trained more than 5000 participants from over 220 organizations across various fields of soft skills. He has been associated with MSBTE (Maharashtra State Board of Technical Education) to conduct Soft skills training workshop for the faculties of Polytechnic Colleges in Entire Maharashtra (Mumbai Region, Pune Region, Aurangabad Region and Nagpur Region) since last 8 years. He has also been associated with ICAI (Institute of Chartered Accountants of India) for training CA Students on various topics related to Communications skills, Group Discussions etc. He was invited by Fr. Agnel Polytechnic College, Vashi for a motivational workshop for faculties. He was also invited by Vivekanad Polytechnic College for "Communication Skills and Email Etiquette" training for non-teaching staff. Apart from these, he has conducted “Capacity Building Soft Skills workshop for Faculties” at ITI Gunj, ITI Pusad, ITI Digras and ITI Umarkhed. This was the first ever soft skills workshop for faculties in the history of ITI’s in Vidarbha. He was also invited by Shivaji Education Society to conduct similar Soft skills workshops for the faculties and office staff of Shivaji Junior College Pusad, Shivaji High School Pusad, Shivaji Vidyalaya Belora and Shivaji Vidyalaya Bhojla. He has conducted training workshop on “Effective Presentation Skills” for the relationship managers of HDFC Mutual Fund, Andheri Branch, Mumbai. He has also been invited at College of Management and Computer Science, Yavatmal, College of Dairy Technology, Warud, B N College of Engineering, Pusad, B D College of Engineering, Wardha, College of Engineering and Technology, Akola, Dr.N.P.Hirani Institute of Polytechnic, Pusad etc. for the Guest lecture on “Developing Interview Skills”.

23 thoughts on “Why is Insurance Mis-Sold in India ?

  1. Bhai G…. Namaskaar…. sahi mayne me meri aankhe khol rahe ho aap… words nahi h mere paas aapka dhanywaad dene k liye…. mujhe lutne se bachane k liye many many thanks… jab b india aaunga aapse milna jaroor chahunga…

  2. Its really Great and Applaudable Saurabh Bro 🙂
    Many Peoples dont know about it, and is Cheated by these Agents and Squeezed as much they can, but You are generating a Good Step towards Opening Peoples’ Eyes and making them Conscious about these 🙂
    Keep Going and Keep it up 🙂
    Really Nice 🙂

  3. Great Eye-Opener Sir !!

    Feels like Completely my story !!

    Thank you so much once again. Request you to write on health insurance as well.


    1. Thanks for your feedback Sir.

      And also thanks for the valuable suggestion. I will make it a point to write on one health insurance soon.

      Look forward to more visits and feedback in future. Thanks again.

  4. hi buddy !!! mast hai ,when ever agent comes in contact watever we see that wateveris shown to us.
    thanks for alerting!!!
    Abhijit(not imaginary)

    1. Very True Buddy !!

      And thus, this is an effort to alert the investors from being victimised.

      Thank you so much for your visit and feedback. Looking forward to more.

  5. Very Well Written Article !!

    I liked the “Life Insurance as a part time business” wala point too much.

    This indeed is one serious problem that even I have come across.

    Your illustrations and examples make it interesting and simpler to understand.

    Good Work !!

    1. Thank you so much for your comments dear.

      Yes indeed it is a serious problem, and we need to be alert so that we do not get victimized.

      Looking forward to more visits and feedbacks. Thanks again.

  6. very true..very helpful…making people aware of why they don’t get good returns because most of the policies we buy are sold to us for agents commission :(… I should have read it long back 😉

    1. Thanks for the compliments Bhabhi !!

      You are right !! Most agents put their interests before ours due to which we incur loss.

      Thanks again for your visit and feedback. Looking forward to more in future !!

  7. I’m amazed, I must say. Seldom do I come across a blog that’s both educative and entertaining,
    and without a doubt, you have hit the nail on the head.
    The issue is something that not enough people are speaking intelligently about.

    I’m very happy that I came across this during my hunt for something relating to this.

  8. Great blog! Do you have any hints for aspiring writers?
    I’m hoping to start my own blog soon but I’m a little lost on everything.
    Would you propose starting with a free platform
    like WordPress or go for a paid option? There are so many choices out there that I’m completely confused ..
    Any recommendations? Appreciate it!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: