Mis-Selling in Insurance and Financial Products: How to Recognise It and Protect Yourself

Last Updated on April 14, 2026 by teamtfl

Have you ever bought a financial product you did not need, did not understand, and only later realised was never meant to serve you?

If yes, you are not alone. And you are not foolish. You were systematically targeted.

The First Blog Post We Ever Wrote Was About This

When we started The Financial Literates in 2008 — which later became RetireWise — the first article we published was about mis-selling. Twelve days after we launched, SEBI banned entry loads on mutual funds, which was the biggest structural driver of mis-selling in the industry at that time.

Fifteen years later, the ban is in place. But mis-selling has not disappeared. It has evolved. New products, new tactics, new channels — but the same fundamental conflict of interest: the person advising you is paid more when you buy what is bad for you.

What Mis-Selling Actually Looks Like

Mis-selling is not always obvious. It rarely involves outright lies. More often, it involves selective truth — sharing only the parts of a product that sound attractive while hiding the parts that are harmful.

Here are the most common patterns I have seen in 25 years:

Insurance disguised as investment: A traditional endowment plan or money-back policy is presented as a savings and investment product. The agent emphasises the “guaranteed” returns and the maturity amount. He does not mention that the IRR (internal rate of return) is typically 4-5% — less than a savings account in real terms. The product looks safe. It is actually very expensive insurance combined with very poor returns.

ULIP presented as pure investment: Unit-linked insurance plans are sold as equity market investments with insurance built in. What the agent rarely explains clearly: in the early years, a significant portion of your premium goes to charges, not investment. The combination of insurance and investment in one product is almost always inferior to buying them separately — a term plan plus a mutual fund.

Mutual fund churn: An agent recommends switching from one mutual fund to another. The reason given is “better performance prospects.” The real reason is a fresh commission. Each switch generates a new entry (if the agent is working outside the direct plan) and restarts the exit load period. Your returns suffer. His income is maintained.

Wrong product for the goal: Recommending a small-cap fund to a 58-year-old pre-retiree. Recommending a 20-year endowment plan to a 25-year-old who needs flexibility. Recommending a fixed deposit to a 35-year-old with a 25-year investment horizon. The product is not fraudulent — but it is wrong for the person and the goal.

Why Mis-Selling Persists Despite SEBI and IRDAI

Both SEBI (for mutual funds and investments) and IRDAI (for insurance) have regulations designed to prevent mis-selling. Both have grievance redressal mechanisms. So why does mis-selling remain so widespread?

Three reasons.

Commission structures create incentives that regulations cannot fully override. An insurance agent earns 25-40% of the first-year premium on a traditional plan. A fee-only advisor earns the same flat fee whether you buy a product or not. The incentive structure is completely different. Regulation can mandate disclosures — it cannot change human nature.

Complexity creates information asymmetry. Most financial products — especially insurance — are deliberately complex. The customer cannot easily evaluate what they are buying. They rely on the agent. The agent has a conflict of interest. This asymmetry is the fundamental enabler of mis-selling.

Grievance processes are slow and intimidating. Filing a complaint with IRDAI or going to the Insurance Ombudsman is not something most people do for a Rs 50,000 policy. The friction of complaining keeps most mis-selling invisible.

How to Protect Yourself

Ask the simple question: What is your commission on this product? In India, distributors and agents are required to disclose their commissions if asked. If someone is unwilling to answer, that is your answer.

Calculate the IRR yourself: For any insurance-linked investment product, ask for the full premium schedule and the maturity benefit. Calculate the IRR using a simple spreadsheet or online calculator. If the IRR is below 7%, the product is almost certainly a poor investment regardless of how it has been presented.

Separate insurance from investment: This is the single most important rule. Buy term insurance for pure protection. Buy mutual funds for investment. Never mix them. Insurance is an expense, not an investment — and treating it as one costs you dearly over 20 years.

Verify the product against your goal: Before buying anything, write down: what is this product for? What goal does it serve? What is my investment horizon? Then check if the product’s structure actually matches that answer.

Use a SEBI-registered fee-only advisor: A fee-only advisor charges you for advice — not for products. Their income does not change whether you buy or don’t buy. This completely eliminates the conflict of interest that drives mis-selling. Choosing the right financial advisor is one of the most important financial decisions you will make.

If You Have Already Been Mis-Sold

This happens to good, educated people. Do not be embarrassed — be informed about your options.

For insurance products: Most traditional plans can be made paid-up after 3 years of premiums — meaning you stop paying but the policy continues at a reduced benefit. This is often better than surrendering early (when surrender values are very low) or continuing to throw good money after bad.

For ULIPs: After the 5-year lock-in, evaluate the total returns against what a comparable mutual fund would have delivered. If the gap is significant — and it often is — a structured exit makes sense.

For mutual funds bought through regular plans: Switch to direct plans. The difference in expense ratio (typically 0.5-1%) compounds significantly over a decade. Every 1% in unnecessary costs is 1% compounding against you every year.

Frequently Asked Questions on Mis-Selling

What is the difference between mis-selling and fraud in financial products?

Fraud involves outright lies — fake policies, forged signatures, non-existent products. Mis-selling is subtler and largely legal: it means recommending a product that does not suit your needs, often through selective disclosure or deliberate omission of important information. Mis-selling is far more widespread than fraud because it operates within the law, driven by commission incentives. Both cause financial harm — but mis-selling is harder to prove and challenge.

How do I know if I have been mis-sold an insurance policy?

Calculate the IRR of your policy. Take your annual premium, the policy term, and the maturity benefit. If the internal rate of return is below 6-7%, you have almost certainly been mis-sold an investment product disguised as insurance. Other signals: the agent emphasised returns rather than cover, you do not know what the life cover amount is, or the policy was described primarily as a “savings” or “investment” plan.

Can I get a refund if I was mis-sold a financial product in India?

For insurance, IRDAI’s free look period (15-30 days from policy receipt) allows cancellation with full refund. After that, surrender values apply, which are very low in early years. For mis-selling complaints beyond the free-look period, you can approach the Insurance Ombudsman (for insurance) or SEBI SCORES portal (for securities). Outcomes vary, but documented complaints have resulted in refunds in clear mis-selling cases.

Are banks more trustworthy than insurance agents for financial advice?

Not necessarily. Banks earn significant commissions selling insurance and investment products — particularly bancassurance products where the bank is a corporate agent for an insurer. A bank relationship manager has the same structural conflict of interest as an independent agent. The trustworthiness of advice depends entirely on the incentive structure, not the channel. A fee-only SEBI-registered advisor — who earns nothing from product sales — is structurally more aligned with your interests than any commission-based channel.

The financial services industry is not evil. But it is not neutral either. When someone’s income depends on what you buy, their advice will always be shaped by that incentive — consciously or not. The only way to get truly unbiased advice is to pay for it directly.

Understanding people before numbers. That is what financial planning should look like — and it is what mis-selling never delivers.