Life insurance gimmicks: How insurance companies trick policyholders with exit barriers?

Though these bad memories were caused purely by ULIPs, the name “Life Insurance” is taken here consciously as the moment the name “Life Insurance” is spelt today a large section of customers tend to get a feeling of fear and aversion though ULIP was not an insurance focused but Investment centric product. 

As any bad experience that has caused many victims remains as a scar in the minds of people, the old ULIPs which had many victims right from youngsters to the retired, have resulted in life insurance itself being seen as a bad omen.

While this is a wound in the long process of healing, there are other new sins which some life insurance companies are piling up, most of which are the leading players. This article attempts to highlight those for the awareness of investors, course correction of insurers and to reach the optics of the regulator.

Exit barriers

Forcing offline route for policy closures

The practice we point out here is followed by one of the top 3 players which may or may not be followed by the others. In this net-linked world, the company still hasn’t figured out a way to allow customers to exit from a policy online. The practices appear as though they intentionally have kept the online option closed for policy closures whereas they provide an online login to view status, make fund switches etc. This statement is more than supported by the practice of forcing customers to come to their office for closing the policies. 

Once the customer lands there, he is welcomed by an employee who is trained to try the best to get the proceeds from the closing policy diverted to a new policy. Stories like the new one are more beneficial and are articulated to see victory in this attempt to get a fresh sale.

As recently as about 3 weeks back a policyholder, who is a senior management employee of a leading corporation, had to make partial withdrawals from 2 policies of this company. After taking confirmation from more than one employee of the same insurance company that these processes can be completed online, he followed their advice and completed the required formalities online as suggested by them. He was waiting for the credit of the withdrawn amount in his account which never came after the prescribed time. So he landed up at their office to check the status. To his shock, the online request was not considered for processing. When he checked the reason, a new story was narrated. They informed him that the online process is applicable only for NRI customers.

This is a very illogical and unacceptable explanation. If a customer who is living within a country cannot be allowed to close a policy online, how is the same allowed for someone who lives beyond borders where physical verification is difficult/impossible as compared to a person who is resident here. If this condition was the other way round it would still sound logical. 

It needs to be borne in mind that the employees who had advised the customer to close online very much were aware that the customer is a Resident Indian and the process was applicable for Resident Indians too. So, it very clearly appears that the non-actioning of the online request was deliberate to make the customer visit their branch, so that they can try their usual gimmicks to get a new policy from him.

Killing a policy early to give a new life

Something even worse happens when investors who hold young policies of under 5 years visit their branches for some service. Executives who target such service seeking customers there, try to bad mouth or discourage the existing policy attempting to replace it with a new policy projecting that it is more beneficial than the existing one. They attempt to make the customer stop premium payment in the existing policy, though the minimum premium payment period is 5 years. 

A customer who exits before that needs to pay an exit penalty after which the current fund value moves to the discontinuance policy fund which earns a mere 4% (regulations mandate minimum 4% interest) or bit more until completion of 5 years, which is the time when you will be paid the proceeds. This means, the executives, due to pressure or greed, push the customers to take such a big hit on the existing policy in the interest of getting a new policy in that place to the credit of theirs. A policy is killed earlier before its full life term to create opportunity for sale of a new policy

For customers, this should press the caution button to remain unmoved by such dubious attempts. These said, the bad experiences mentioned above don’t pertain to term insurance policies which is the purest form of life insurance. Term life insurance is the best financial protection guard for one’s family, available at the most lucrative price, providing a huge sum assured.

The above detailed practices very evidently are barriers kept to create opportunities to get fresh sales/policies and will only lead to earning more hatred towards life insurance as a product.

The insurance companies should stop the high level of self-centricity which prevails and try to make some moves towards customer-centricity. Else, every new policy sold will pave the way to create numerous haters, as aggrieved customers tend to crib about the bad experience to as many of their acquaintances.

While it might be a revenue source for the insurer, life insurance policies, particularly Term Insurance Policies are family savers. Such an important product, also cannot be left to earn hatred because it is a life insurance product, due to the greed of the company and its employees. If such unfair practices continue the sins accumulated towards life insurance will get too thickly stained to be washed off. The Regulator IRDAI will have to jump quickly into action to save the credibility of the product and to safeguard customers from such nuisance.

ULIPs have been performing well currently due to the market uptrend and in recent months ULIPs have been the saviours for the life insurers on sales front. If the unhealthy practices are not stopped immediately, more customers may be victimised adding more stain to the already spoiled name of ULIPs.

V.Krishna Dassan, Director, Dhanavruksha Financial Services Pvt. Ltd.

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Updated: 18 Oct 2023, 09:10 AM IST