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Three years ago, Ms TS, 52, sought to renew her Rs 2 lakh fixed deposit with a large private bank. The bank executive offered to put her money into a scheme that would generate far better returns than any fixed deposit.

Ms TS, who was then diagnosed with a critical illness, was looking for a safe investment and felt she could trust her bank, which was quite a reputed one. Three years later when Ms TS sought to redeem her investment, she was told that her investment needed 'topping up' every year for three years and since she did not do that she would get back only Rs 65,000 against the Rs 2 lakh that she had invested.

What Ms TS came to realise was that she had put money in a regular premium unit-linked insurance plan which was mis-sold to her as an 'investment'. "The guy from the bank came to my house, saw me in my wheelchair and would have known that I could not afford to pay Rs 2 lakh every year as I was struggling to pay my health bills," she says. Yet the executive encouraged her to invest in the plan and obtained her signatures on a sheaf of documents which she unwittingly signed.

In a similar incident, Ms AS, a 41-year-old homemaker, was offered an investment scheme instead of a term deposit plan. When she made it clear to her banker that she did not wish to buy insurance, he assured her that it was a short-term investment plan and not an insurance product. After issuing the cheque, she did a bit of research and discovered that the scheme was a pension plan issued by a life company and suited largely for long-term savings. She managed to get her proposal cancelled in time, but she had to contend with a grumpy branch manager who made it appear as if it were all her fault.

If you are looking at setting aside a portion of your earnings to build a retirement corpus, Ulips are a great product. If you choose to invest in a regular income Ulip you may even generate a better return than mutual funds after adjusting for the cost of protection. Why then should Ulips be mis-sold? There are two reasons. First, because it is easier to sell a short-term 'investment' product to someone searching for better returns than to convince a twenty-something to set aside funds for his retirement. Second, although it is easier to sell a single premium plan, the commissions are 17 times higher on regular premium policies.

So the best way that a distributor can increase commission is to pass off the regular premium plan as single premium one with an option to make regular payments. Banks are getting bolder in their ways as they are going unpunished by the regulator and are rewarded by insurance companies for pushing up sales.

Typically, such sharp practices come to light in the numbers. For instance, if a traditional policy were mis-sold as a single premium plan, the practice would show up in a spike in 13-month lapsations. But in Ulips, many policies have auto debit features which keep the cover and consequently the policy alive even if there is no return for the policyholder.

Source: http://economictimes.indiatimes.com/