How do agents defraud customers and mis-sell life insurance policies?

Life insurance policies are meant to provide financial security and peace of mind to the family members in case of any unfortunate death of the policyholder. However, many insurance agents misrepresent the terms and conditions of the policy and make customers fall prey to mis-sold insurance policies. These deceptive practices affect both policyholders and the reputation of insurance companies. In this blog, we will discuss a real-life case related to mis-selling and delve into the ways in which agents can defraud customers and sell wrong policies. 

Dr. Virendra Pal Kapoor vs. Union of India & ors

In the present case, the petitioner, a senior citizen, lodged a complaint about an insurance company. They entered into a contract with SBI Life within the premises of SBI, under its banner and logo. Unfortunately, they were victims of mis-sold insurance policies due to the deceptive actions of an agent affiliated with SBI, acting under an agreement between SBI and SBI Life. This agent misled the petitioner into signing a contract that included both investment and insurance components. The contract started with two options, which went against IRDA regulations, particularly given the petitioner's age. Despite this, the petitioner was led to sign a standard form contract supposedly approved by IRDA, without proper explanation of its details. Over the span of five years, a combination of administrative charges, fund management fees, and mortality charges caused the investment in the 'Growth' option to dwindle from Rs. 50,000/- to a mere Rs. 248/-. This situation was problematic right from the beginning of the contract. As the investment neared Rs. 10,000/-, a termination clause that could have protected the investment was deliberately removed. The insurance company only provided information to the petitioner without obtaining proper consent or confirming the receipt of communication. This series of actions was clearly preconceived and calculated to erode the petitioner's investment through high charges disguised as mortality fees. The terms and conditions of the contract, while claiming to follow IRDA guidelines, actually led to the complete loss of the petitioner's investment, making the contract unconscionable.

The petitioner was never properly informed about the potential risks and consequences, even though the contract offered a "free look" period and a switch-over option, both of which were inadequately explained. The petitioner ultimately received only Rs. 248/- without satisfactory explanation, leading them to seek answers through the RTI Act and eventually filing this writ petition. However, even the counter affidavit failed to clarify the terms and conditions that resulted in the loss of their investment.

During the prolonged hearing, the counsel representing SBI Life attempted to justify the terms and conditions, claiming tacit approval from IRDA. This included the removal of the termination clause when the investment value fell below Rs. 10,000/-. However, no evidence of IRDA's approval or acknowledgment was provided.

Based on these presented facts, it becomes evident that SBI Life, a subsidiary of SBI, engaged in the mis-selling of insurance policies, specifically the "SBI Life Unit Plus II - Single" unit-linked product with unapproved twin options. The contract's unfair imposition of excessive mortality charges led to the reduction of the petitioner's investment. Recognizing the document as arbitrary, illegal, and unconscionable, the court declared it void and unenforceable.

In light of this judgment, SBI Life is instructed to refund the original investment of Rs. 50,000/- to the petitioner within one month. Moreover, the Insurance Regulatory and Development Authority (IRDA) is tasked with conducting a thorough review of all SBI Life policies, ensuring their alignment with guidelines, transparency, and the absence of hidden terms. Any policies found to violate these standards must be discontinued, with investors receiving full refunds. Failure to comply may result in legal actions.

Furthermore, SBI Life is directed to compensate the petitioner with Rs. 10,000/- to cover costs incurred. With these resolutions, the writ petition has been satisfactorily resolved and disposed off.

Tactics used by insurance agents to mis-sell life insurance policies

Every day, there are thousands of complaints about insurance companies related to mis-selling of policies. Here are the tactics used by agents to defraud customers. 

1. Misinformation about the benefits: Agents may exaggerate the benefits of the policy. They often claim that policies give better returns as compared to FD. But this is to note that life insurance policies give protection by giving a "sum assured". This "sum assured" is the premium that policyholders pay to get the benefit. Thus, you must not compare life insurance policies with the benefits of a FD. 

2. Giving false impressions about claims: Agents often engage in mis-selling insurance policies by giving incorrect information about what can be claimed under a policy to entice customers. 

3. Incorrect information about premiums: Agents persuade customers to buy the policies by giving incorrect information about premiums. They focus on the low initial premium of the policy, diverting attention from long-term costs. 

4. Hiding terms and conditions: Agents mislead customers about the benefits of the policy. They avoid discussing the exclusions of the policy, which later leads to the rejection of claims. 

Conclusion

 

To prevent yourself from falling victim to mis-sold insurance policies, make sure to read the terms and conditions thoroughly. If you have already purchased the wrong insurance policy and want to get out of the trap, you can approach insurance subject matter experts to help you get the right coverage.