The Great Indian Insurance Scam

In living rooms across India, it often starts with a cup of tea and a familiar face.

"Beta, ek policy hai... tax bhi bachega, paise bhi badhenge."  Sounds harmless, right?

Welcome to the Insurance Mis-selling Pandemic. In our financial planning work, we’ve seen this scenario unfold far too often - clients locked into long-term, low-return insurance-cum-investment products. And the real kicker? These weren’t sold by slick salespeople from a call centre - but by family friends, colleagues’ relatives, neighbours or the friendly bank RM.

The Familiar Trap: Bad Investments, Worse Insurance

When we dig into our clients' portfolios, we often find:

• Money-back policies

• Guaranteed Return plans

• Wealth Builder plans

• Children’s future plans
  

These policies look like savings. They even sound safe. But peel back the layers and the financials are horrific. Worse still, the clients are often underinsured - the life cover from these plans is a fraction of what they actually need.

The Investment That Isn’t

Let’s look at a real example sent to one of us.

• You pay ₹10L per year for 3 years.

• You get ₹69L back after 15 years (tax-free)

• The “guaranteed” part? Only ₹52L.

  
  

This is a non-linked, participating plan. Sounds technical - but here’s what matters:

• Return (XIRR): 3.87% to 5.88%

• Lock-in: 15 years

• Liquidity: Nil

• Real Wealth Creation: None

You could have just bought a NIFTY ETF (like NIFTYBEES) and a term insurance policy and ended up with way more wealth, way more insurance cover.

The Hidden Charges No One Talks About

These plans come with a buffet of hidden charges. Most people don't see them because they’re buried in fine print. One of the biggest?

Policy Allocation Charges (PAC) - aka, commissions.

Year	Typical PAC/Commission
1st year	8-10% of premium
2nd year	3-5%
3rd year onwards	1-2%

That’s money that could have been invested for your future - but instead goes to the person who sold you the plan.

Surrendering is Financial Suicide?

Let’s say you realize your mistake halfway through. Can you get out?

• Low surrender values mean you’ll take a huge loss.

• These products rely on your loss aversion - you’re likely to stay in just to “avoid losing money,” even if it means poor returns forever. There is a point early enough in the policy term where it makes sense to take the loss and get out.

• Mortality charges increase over time - especially as the “death benefit” increases, further dragging down your returns.

ULIPs – Same Trap, Different Marketing

Unit Linked Insurance Plans (ULIPs) are often marketed as market-linked, tax-efficient options.  While they ostensibly let you avoid the tax (premiums are capped at 2.5L per year overall), the problems with high commissions is still present.

If you are wondering if a directly bought policy (e.g., HDFC Click2Life), which avoids commissions, can be better as it can earn market returns and avoid the LTCG at the end under Sec 10(10D) of Income Tax Act. Of course, this assumes that the insurance cover was, in fact, needed.

But are they better? No!

We compared:

• A ULIP with ₹10L premiums for 3 years

• A direct mutual fund with the same cash flows

Assumptions:

• 12% market return

• ULIP fund fee: 1.35%

• Mutual Fund fee: 0.5%

• 12.5% tax on MF gains at maturity

• Horizon: 15 years

Results:

• ULIP: ₹1.24 Cr (CAGR: 10.4%)

• MF: ₹1.28 Cr (CAGR: 10.6%)

Despite tax advantages, ULIPs lose out due to high ongoing costs.

So Why Is This Still Happening?

It’s not just poor financial literacy - it's a cocktail of demand-side misunderstanding and supply-side perverse incentives.

1. Nobody Wants Pure Insurance

Most people hate paying for something they hope they’ll never use. That’s what term insurance feels like. So insurers bundle investments to make the product more “appealing.”

2. The Industry Doesn’t Want to Sell Term Plans

Pure term plans generate only 3–6% of total life insurance premium income. Why? Because they’re not profitable for insurers or agents.

3. Massive Misaligned Incentives

Selling a ₹10L per year savings plan can earn an agent ₹80,000–₹1L in the first year alone.

Our Advice? Simple and Unchanging

Never, ever buy an insurance-cum-investment plan.

No matter how polished the brochure or how friendly the face selling it. No matter what they call it - Wealth Plan, Retirement Builder, Golden Advantage - it’s likely just a shiny wrapper over a slow drain on your wealth.

Because the biggest mistake isn’t just losing money - it’s wasting 15 years doing it.