The Commission Trap: Why You Still End Up Buying The Wrong Insurance

Every few months, a regulator issues a circular. A bank gets a rap on the knuckles. An insurer updates its disclosure forms. And yet, mis-selling in insurance continues to surface - in complaints, in lapsed policies, and in the quiet frustration of customers who realise, years later, that what they bought was never quite what they needed.

The question worth asking isn't whether something is being done. It's why the problem keeps returning despite repeated interventions.

Says Manju Dhake, head - insurance advisory practice, 1 Finance, a personal finance platform: “A significant part of the answer lies in how insurance distribution is structured in India. Commissions are embedded within premiums and vary considerably across product types. Policies that combine insurance with savings or investment elements typically offer higher upfront payouts to distributors. Pure protection products, like term plans, operate on considerably thinner margins.”

Over time, this difference in incentive has quietly shaped selling behaviour across the industry, not through any single bad actor, but through a system where the most suitable product and the most profitable product are often not the same.

Dhake said that when they published The Mis-Selling Menace report and released the MISOLD documentary, the intent was to bring this structural reality into open conversation. The findings were hard to look away from. The top 15 banks by market capitalization earned Rs 21,773 crores in commissions from selling insurance and financial products in FY24 alone.

Banks now account for 33.1 per cent of total insurance premiums underwritten —more than double their share a decade ago. Nearly 49 per cent of life insurance policies are discontinued within five years. And in the Bank RM Survey, a significant share of relationship managers candidly acknowledged that product recommendations can be shaped by commission structures rather than customer needs.

These are not isolated incidents. They reflect a consistent pattern.

To their credit, regulators have been paying attention. IRDAI has moved to strengthen disclosure requirements and tighten oversight of distribution practices. The RBI has signalled that banks should refocus on core activities rather than using customer relationships as cross-selling opportunities. The Finance Ministry has also shown greater awareness of the issue. These are meaningful steps, and the direction is right.

But rules, however well-intentioned, can only do so much when the underlying incentive structure remains intact. Regulation can set boundaries. It cannot, by itself, ensure that every customer gets advice that puts their interest first.

“Until those changes, awareness is a consumer's most practical tool. Before committing to any insurance policy, it helps to ask a few straightforward questions: How much of the premium is actually providing risk cover, and how much is going towards costs and charges? What happens if you need to exit the policy early? Is this product genuinely addressing a financial need, or is it being presented as a solution to everything?” says Dhake.

The best protection a customer has is in understanding what they are buying, and taking the time to ask why it is being recommended to them.