Churning and twisting

Once a policyholder has been paying into a whole life insurance policy for some time, its cash value builds up, making the policy more valuable. Some unscrupulous life insurance agents then convince their customers to use the built-up cash value of their existing policies to buy a "new, improved" policy - one with more coverage, different features, or a different payment schedule.

What these agents neglect to tell their customers is their existing policies are usually quite adequate for their needs, and when they use the built-up cash value to purchase a new policy, they start from square one in building up cash value in the new policy. This practice is called "churning" or "twisting." It's unethical - and illegal.

The fallout from churning isn't immediately apparent. A customer doesn't have to shell out any money up front because the built-up cash value of the existing policy pays the initial premiums of the new one. Once you use the cash value, however, it's gone.

A policy's cash value is actual money the policyholder owns, although usually just on paper. Cash value can be used as security for a loan or converted into an annuity. If a policyholder decides to cancel a life insurance policy with built-up cash value, he's entitled to that money, minus the surrender charge.

Vanishing premiums

During the past  5- 6 years the Unit Linked policies have become very popular mainly because the stock markets have been on the boom and the NAV of the units started growing higher  reflecting good returns. Some life insurance agents started projecting that the returns from investing today's policy premiums would eventually pay for future premiums. The sales pitch is that the customer would have to pay premiums for a few years only and the returns on the insurance company's investments would pay for the policy after that.

For example, some agents are giving out information leaflets that assure a maturity value of Rs.3.38 crores at the end of 20 years on an annual investment of Rs.1 lakh over a period of three years, projecting a growth of 25% per annum. As per IRDA guidelines, insurers are allowed to show projections of 6% and 10% only, with a clear understanding that even these returns are subject to market conditions.

IRDA Chairman C S RAO says, “My suggestion to investors is that they should not believe any information that is not clearly approved by the insurance company or the regulator”