Insurance Schemes or Insurance Scams? How to Tell the Difference in 2026

Last Updated on April 23, 2026 by teamtfl

“Insurance is not bought, it is sold. And most of the time, what is sold is not what the buyer needs.” – Anonymous Financial Advisor

In 2009, I conducted a financial planning workshop for about 30 employees at a company in Jaipur. Before the session, I asked each participant to write down their insurance policies. Twenty-eight of thirty had at least one investment-linked insurance policy: a ULIP, an endowment plan, or a money-back policy. Not one had a pure term plan.

When I asked them what they were paying for insurance coverage on their lives, most did not know. They knew the premium amount. They did not know the sum assured. They did not know the maturity value versus what they would have if the same premium had been invested in a mutual fund.

That was 2009. The situation in 2026 is better, but not transformed. India still has one of the most systematically mis-sold insurance markets in the world.

Why Insurance Mis-selling Is So Widespread

The commission structure in Indian insurance is designed for selling, not advising. A term plan – the simplest, cheapest, and most useful form of life insurance – pays an agent a small first-year commission. A ULIP or endowment plan can pay the agent 25-40% of the first year’s premium, sometimes more.

This is not a criticism of every agent. Many agents genuinely believe in the products they sell. The problem is that their training, their incentives, and their performance metrics all point in the same direction: toward products that pay them more, regardless of whether those products serve the client’s actual insurance need.

IRDAI has improved disclosure norms significantly over the years. ULIPs are now considerably more transparent than they were before the 2010 reforms. The charges are better disclosed. But the fundamental problem remains: if you do not know what a term plan is, you cannot choose it over an endowment. And most investors who walk into an insurance agent’s office do not know.

The Three Mis-selling Tactics You Will Encounter

“This gives you both insurance and investment.” This is the central ULIP and endowment pitch. Combining insurance with investment sounds efficient. In practice, both components are more expensive and less effective than their standalone equivalents. The insurance component in a ULIP carries higher mortality charges than a comparable term plan. The investment component carries higher fund management charges and allocation charges than a comparable mutual fund. You pay more for insurance and more for investment by combining them.

“This is guaranteed.” Traditional endowment and money-back policies offer guaranteed maturity values. What agents routinely fail to explain is that the guaranteed return – typically 4-5% per annum over a 15-20 year period – does not beat inflation. The guarantee is real but the value is poor. Comparing the maturity amount to simply keeping the same premium in an FD shows that the “guaranteed” return is often barely better than bank deposits, with 15-20 years of lock-in.

“Only 3 years and then you can exit.” ULIPs have a 5-year lock-in (previously 3 years before 2010 reforms). But the charges are front-loaded: the premium allocation charge and policy administration charge are highest in the first few years. Surrendering early magnifies the cost of entry. An investor who was told “only 3 years” and then exits at year 3 has paid substantially to have their money in a product that delivered significantly less than the premium invested.

The Simple Framework That Protects You

Separate insurance from investment. Always. Life insurance serves one purpose: if you die, your dependents should not face financial hardship. For this purpose, a term plan is the appropriate instrument. It provides large cover at low cost. A healthy 35-year-old can get Rs 1 crore of life cover for Rs 8,000-12,000 per year through a reputable term plan. That is pure insurance.

For investment, use appropriate investment instruments: equity mutual funds for long-term wealth building, PPF or debt funds for stable capital, NPS for retirement accumulation. These serve investment purposes far more effectively than any insurance-linked product.

Calculate what you actually have. If you hold a ULIP or endowment plan, ask your insurance company for an illustration showing: the surrender value today, the projected maturity value, and the equivalent amount you would have had if the same premiums had been invested in a diversified equity fund at 12% CAGR. The comparison is usually illuminating.

Never lie on an insurance application. This deserves mention because it is both ethically clear and practically important. Any material misrepresentation on a health or life insurance application gives the insurer the right to deny the claim. The claim that matters is the one your family will file when you are no longer here. Do not compromise it for a lower premium today.

Read: Wealth Managers, Bank RMs, and Mis-Selling: What Indian Investors Need to Know

Insurance is not an investment. It is protection. The moment someone tries to sell you insurance as an investment, you are being mis-sold. The question to ask is always the same: how much would a term plan with the equivalent life cover cost me?

Avoid insurance as investment. Understand what you need, not what they want to sell.