Financial planners never tire of telling their clients not to mix insurance with investment. “If a policy generates investment returns for you, it stops being an insurance policy. It will neither give you good protection nor good returns,” says Sanjeev Govila, a Sebi-registered investment adviser and CEO of Hum Fauji Initiatives.
Yet, almost everybody has an insurance plan in his portfolio. Many buyers fall into the trap because a close relative or family friend makes them buy an insurance plan from them.
To be fair, many insurance buyers are misled by agents and financial advisers. Banks are at the forefront of mis-selling. If you go to a branch, relationship managers pounce on you with unsolicited investment advice. This used to be a problem only in foreign establishments and private banks but now even PSU banks are indulging in these unethical practices. The hefty sales targets and lucrative earnings from commissions (sometime more than the salary) have turned relationship managers into mis-sellers of insurance.
Banks have already been warned by the RBI. “The RBI would take strict action, including heavy penalties, if the banking industry continues to mis-sell third party products,” RBI Deputy Governor S.S. Mundra said recently. He has suggested that banks put in place a system of period inspection on sale of third-party products by their own staff or direct selling agents.
However, more needs to be done. One critical step is to ban the sharing of bank account details with the sales team. Most of the mis-selling happens because the sales team knows who has how much in his bank account. The RBI also needs to strengthen the ombudsman system and make the complaint procedure more customer friendly.
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