Insurance or investment? IRDAI’s proposed mis-selling rules put bank-sold policies under the scanner

You walk into a bank to renew your fixed deposit. Instead, your relationship manager pitches a life insurance plan, promising better returns along with life cover. It sounds attractive—until you need the money and discover that exiting the policy early could mean getting back only a fraction of what you paid.

This is exactly the kind of situation that the Insurance Regulatory and Development Authority of India (IRDAI) is looking to address.

In a consultation paper released on September 23, the regulator has proposed 12 practices that could be treated as mis-selling of life insurance. The rules are not final yet, but they offer an important warning for customers buying insurance through banks and other distribution channels.

When does an insurance policy start looking like an FD?

One of the biggest red flags is the way a product is presented. IRDAI has proposed treating the sale of insurance as a “fixed-income deposit” or pitching a guaranteed-return insurance savings plan as a bank deposit as mis-selling, particularly when the returns are lower or comparable to those of an FD.

The distinction matters. An FD is a deposit, while a life insurance savings product combines insurance protection with an investment or savings component. The two can have very different liquidity, costs and exit conditions.

So, if the pitch is simply “this is like an FD, but you get insurance too”, customers may need to look much more closely before signing.

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“Guaranteed returns” can be another warning sign

IRDAI has also proposed action against promises of “assured returns” on participating policies or ULIPs when those returns are not actually guaranteed.
The safest approach is to check the benefit illustration and separate guaranteed benefits from projected or non-guaranteed returns.

Another proposed mis-selling practice is selling a regular-premium policy as though it were a single-premium product. A customer who thinks they are making a one-time investment could later be surprised by recurring premium demands.
The expensive surprise: surrendering early

What happens if you change your mind?

This is where insurance can look very different from an FD. IRDAI's consultation paper cites data showing that a policyholder surrendering at the end of the first year may receive only 31% to 64% of the premium paid, depending on the product.

That makes the surrender value one of the most important numbers to check before buying.

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The regulator has also flagged selling regular-premium policies to people without a steady income or beyond their paying capacity, as well as selling ULIPs to risk-averse or older customers without adequately explaining investment risks and charges.

Five questions before you sign

Before accepting a bank's insurance pitch, ask: Is this insurance, investment or both? What exactly is guaranteed? What will I get if I stop paying? What commission does the seller earn? Can I take the documents home and read them first?

If you have already bought a policy and believe it was mis-sold, the free-look period can offer an early exit, subject to applicable deductions and rules. For older policies, customers can first complain to the insurer and then approach IRDAI's Bima Bharosa or the Insurance Ombudsman if the matter remains unresolved.

The message from the proposed framework is straightforward: if an insurance policy is being sold to you like an FD, don't judge it by the sales pitch. Read the fine print before you invest.

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