Mis-selling is the term which is prevalent in insurance sector. Generally the people esp senior citizens buying insurance does not have enough information while buying a policy. Many times, risk is not explained properly and half or misleading information is given. Senior citizens have sizable retirement fund at their disposal which makes them easy target for the agents to mis-sell the policy to them.
How would we know if we have been mis-sold a policy:
- If it does not meet our objective
- Return does not match with what is specified in the policy
- Maturity benefit does not meet our requirement
When it comes to senior citizens, it is rather easy to mis-sell a policy to them. In a national prevalence survey conducted by the Federal Trade Commission (FTC), 7.3% of adults aged 65–74 and 6.5% of adults aged 75 and older reported fraud in the year 2015. They sometimes, tend to skip the terms and conditions while purchasing an insurance policy. That is why it is good to discuss hidden terms and conditions with any financial advisor before getting into any insurance product.
Here are few pointers which can help senior citizens to avoid getting duped –
- Say NO to guarantee return policies:
Senior citizens do not need life insurance policy as 90% Indians do not work after retiring. Because of this there is no regular flow of income. Another thing is, there is no such things as ‘guarantee return’ policy. If there is any then they are for very long term such as 10yrs. Also, their premium is very very high. The return of such policies is as low as 5%! Thus, senior citizens should never go for such type of policies. Period!
- Never go for Single Premium Plans:
Single premium plans are the plans where you need to pay the premium once and get the life cover for many years. ULIPs, traditional plans and term life plans all come in single premium plans variants also. Now, the general belief is that proceeds from life insurance are exempt from tax. Above statement does not holds true for maturity benefit!
As per section 10(10D) of the Income Tax Act, “For the maturity benefit to be exempt from tax, the annual premium for the Life insurance plan must be less than 10% of the Death Sum Assured (death benefit) for all the policy years i.e. Life Cover should be at least 10 times the annual premium”.
For regular premium products, investors below 45 years of age are safe from taxation viewpoint since the life cover will be at least 10 times annual premium. For investors above 45, the minimum multiple is only 7 (has to be 10 for tax-free maturity proceeds). Thus, these plans with low returns and tax on maturity benefit, can turn out to be a nightmare for senior citizens.
- Never buy an insurance policy from the bank
Banks sell insurance policies as they have tie ups with several insurance companies. Now, most of the mis-selling takes place here as senior citizens mostly trust the bank. The bank relationship manager convinces the senior citizens to buy a bunch of policies in the name of their children or grandchildren. Annual premiums of such policies may range from Rs 1 lakh to 5 lakh, which becomes almost impossible to pay for seniors. As a result, these policies collapse. Upon complaining, they are rejected stating that free look-in period is over and also their signature are there on the forms.
Bank refuses to take the responsibility because of the signature without any other written proof. As a result, after knowledge of the mis-selling nothing can be done and seniors have to let go of their hard earned money.
- Don’t go for Ulips
ULIPs( Unit Linked Insurance Plans) give dual benefit of insurance and investment as they invest in mutual funds. Owing to this, their returns are higher. But they have a lock-in period of five years before which they can not exit the policy. Since senior citizens are looking for regular flow of income after the retirement, this plan does not suit them.
One important thing to note regarding Ulip is that in order to be eligible for tax benefits under Section 80C, the premium needs to be 10% of the sum assured. if it is more than 10%, only a maximum of 10% is eligible for deduction, and the maturity proceeds are added to income and taxed at applicable rates.
Surprising truth is that senior citizens should not get indulged in purchasing any life insurance policies barring few cases. These cases are
– If your child is still dependent upon you
– If you have liabilities and unpaid debt.
– you are earning post retirement.
In absence of above mentioned reasons, experts suggests seniors not to invest in life insurance because
– They do not need it.
– They can not afford it.
– The returns from these policies are poor.
There are several ways in which they can invest their hard earned money which we will talk in our next blog. Doing this, they will be saved by agents from fooling them.
Be Alert! Be Safe!