Is your FD maturing? Be extra careful

Unscrupulous bank officials could plough the proceeds into a non-FD instrument, such as insurance

Now, what might a fixed deposit (FD) have to do with life insurance? Quite a bit, it seems, going by the experience of Mangesh Pai.

Pai, a heart surgeon, had gone to roll over a maturing FD in a large private sector bank into another FD, but ended up putting the maturity amount into a life insurance policy instead. He signed the papers at the prodding of a bank officer who told him this would be like an FD with life insurance cover and a minimum 10% interest.

Busy as he was, Pai never went through the papers he received from the bank. Then, about a year later, he got a notice from an insurance company intimating him that the renewal premium for his unit linked insurance policy (Ulip) was due.

He couldn’t immediately figure out when he bought a policy from this insurance company and that too for such a huge amount (the FD maturity amount was huge) over a 20-year tenure. Then it struck him, that the bank had cheated him into putting money into an Ulip, with charges as high as 35% and offering a very low life cover. He has filed a complaint with the Reserve Bank of India and is fighting against the bank.

Typically, banks hire young and inexperienced people as ‘financial advisors’ or ‘relationship officers’ to sell insurance schemes, which fetch huge commissions. These people are given targets and incentives thereon, the lure of which leads them to mis-sell insurance. It’s the same with ‘relationship managers’ of broking firms; they are trained to sell aggressively and end up pushing insurance schemes for the huge commissions these offer.

For the consumer, it is a losing proposition all the way. Indeed, there are instances galore of them being force-sold Ulips.

Take Priya Arora, who once got call from a multinational bank where she holds a credit card. Despite showing no interest in the insurance product being pitched to her, she found insurance premium being debited in her credit card bill.

Faraz Ahmed, who went to a public sector bank for opening a savings a/c, was asked to take an insurance policy. “You need to take this product along with a/c opening,” said an officer at the bank.

While the advent of private life insurance companies has definitely increased insurance penetration in India, it has also increased mis-selling of insurance products. Companies have been aggressively expanding their sales network, as a result of which one finds college students, housewives, doctors, teachers, and people with part time jobs doubling up as insurance agents. As long as they get their commission, why bother about who is being sold what?

Take for example Kamlesh, the sole earning member in his family, who has to shell out a whopping Rs 70,000 annually for an insurance cover of just Rs 5 lakh. Most of his policies are Ulips.

Predictably, most agents are typically trained on two or three Ulips and sell only those products. Ask them about endowment or term plans, and most of them won’t so much as know these exist. Ulips are best, they will tell you, for these have given 30% returns in the last 5 years.

Hence, don’t buy insurance from such part-time agents. It is possible that you will end up buying the wrong product or suffer bad service from the agent. Also, if its is a part-time pursuit, they could easily disappear, leaving you in the lurch.

If indeed it is insurance that you want to buy, determine your goals, requirements and how much insurance you need before writing out the cheque. The math should factor in your cost of living, expected cost of living, income, expected increase in earnings, dependents and their needs etc first.

Most of us get into it without knowing how big a cover to take; indeed, most would go by the premium being quoted or whatever cover the agent suggests. Thus, most of us end up being underinsured.

A trained financial planner would be a big help here, for the strategy suggested by him/her could tell you not just about your insurance needs but also other investment areas.

Do not fall for the aggressive sales pitch of either insurance agents or bank officials.

The author can be reached at aruj.agarwal@gmail.com.
(This piece first appeared in The Apnapaisa Blog, an independent editorial platform.)