Insurance Mis-selling: What It Is and How Agents Can Avoid It?

Mis-selling grievances against life insurers rose by more than 14% year-on-year in FY25, exceeding 26,000 complaints as per IRDAI's annual report, even as overall grievances against the industry declined slightly. That divergence matters. It suggests mis-selling is not merely a by-product of a busy market. Instead, it is a recurring, identifiable failure that regulators are increasingly seeking to trace back to the individual who made the sale.

What Is Mis-selling in Insurance?

Mis-selling occurs when a policy is sold using false information, incomplete disclosure, or high-pressure tactics, rather than being matched to what the customer actually needs. It does not have to involve deliberate fraud to qualify as mis-selling. Withholding a material detail, overstating expected returns, or failing to explain a waiting period can all count as mis-selling even when the agent believed they were helping the client. Most agents in India are not acting in bad faith. The problem is that a small set of recurring habits, often driven by commission structure rather than intent, produce the same harmful outcome regardless of motive.

Common Mis-selling Examples Agents Should Recognise?

A few patterns show up repeatedly across IRDAI complaint data and industry reporting, and recognising them is the first step to avoiding them.

• Promising guaranteed or FD-beating returns on ULIPs: No ULIP carries a guaranteed return, since the underlying investment is market-linked, yet this is one of the most common mis-selling examples cited in consumer complaints.
• Selling life cover purely as a tax-saving instrument: Presenting a policy as primarily a tax tool, without addressing whether the sum assured actually meets the client's protection needs, is a recognised cause of mis-selling under IRDAI's own annual reporting. Agents should also ensure that clients understand the tax benefits available on life insurance rather than presenting tax savings as the primary reason to purchase a policy.
• Churning: Encouraging a client to surrender an existing policy early and buy a new one, purely to generate another first-year commission, burdens the client with a surrender value far below their total premiums paid.
• Downplaying exclusions and waiting periods: In health insurance particularly, failing to clearly explain what the policy does not cover can leave clients without the protection they expected when they need it most.
• Pushing expensive whole life or endowment plans onto clients who only need term cover: These products typically carry higher first-year commission than term plans, which can create an incentive misaligned with the client's actual protection needs.

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Why Does Mis-selling Happen Even Among Well-Intentioned Agents?

Commission structures are one contributing factor. Endowment plans and ULIPs may carry higher first-year commission than pure term insurance, depending on the insurer's Board-approved commission policy under the EOM framework. That gap creates a direct financial incentive to redirect a client toward the product that pays more rather than the product that fits.

Inadequate product training, pressure to meet monthly targets, and clients placing greater trust in an agent's word than the policy document can all contribute to mis-selling. It then becomes less a matter of dishonesty and more a matter of an incentive structure quietly working against the client's interest. This is exactly why regulators have concluded that disclosure and traceability, not agent intent, are the more effective levers for reducing it.

What Does Mis-selling Actually Cost an Agent?

The costs an agent actually feels come well before any regulatory penalty. A client who cancels during the free look period, which now extends to 30 days under IRDAI's 2024 master circular, or surrenders early, typically triggers commission clawback: the insurer recovers the commission already paid on that policy. A pattern of complaints can lead to suspension or cancellation of the agent's appointment or licence, and insurers increasingly blacklist agents whose books show recurring grievances.

The statutory framework sits behind this. Under the Insurance Act, 1938, and IRDAI's Guidelines on Appointment of Insurance Agents, an agent who contravenes the Act may face a penalty of up to ₹10,000. The larger number falls on the insurer: appointing an ineligible agent or failing to ensure compliance with the prescribed code of conduct can attract a penalty of up to ₹1 crore. That insurer-level liability is precisely why distribution partners now act quickly against agents at the first sign of a mis-selling pattern — the agent's risk is not the fine, it is the livelihood. IRDAI has also approved the Manner and Procedure for Imposition of Penalties Regulations, 2026, aimed at making enforcement more consistent and predictable across the industry.

The more significant change takes effect from January 2027, under the IRDAI (Insurance Intermediaries) (Amendment) Regulations, 2026, notified in July 2026. From that date, every proposal form, policy and certificate of insurance sold through an intermediary must record the name and functional identity of the specific person who sold it — whether they act as a Specified Person, broker-qualified person, authorised verifier, or POSP. For purely digital sales with no salesperson involved, the principal officer's contact details are recorded instead. In practice, this closes the anonymity that has historically let mis-selling disputes stall on the question of who actually made which promise. A client's complaint will now trace directly back to the seller's name, not just the insurer's.

Clients also have an easier escalation path than ever: the 30-day free look window to exit a mis-sold policy, and IRDAI's Bima Bharosa portal to register a complaint online. The easier it is for a client to act, the more a clean sales record matters.

How to Avoid Mis-selling as an Insurance Agent

Avoiding mis-selling comes down to a small number of consistent habits, applied to every sale rather than selectively.

• Lead with needs, not products. Determine what the client actually requires — protection, savings, or tax planning — before recommending a specific policy, rather than fitting the client to whichever product is already in mind.
• Explain exclusions and waiting periods as thoroughly as benefits. A client who understands what is not covered rarely files a mis-selling complaint later, even if the news at that stage is unwelcome.
• Never suggest a return that is not contractually guaranteed. For market-linked products, describe the range of realistic outcomes rather than the best-case scenario.
• Avoid encouraging early surrender purely to write a new policy. If churning would clearly cost the client more than it earns them, that is the sale not to make.
• Read the material terms aloud during the sale. It takes a few extra minutes and creates a clear record that the client was informed, which matters considerably more under a regulatory regime that now traces sales to named individuals.

Conclusion

Mis-selling rarely starts as an intent to deceive. It usually starts as a product recommendation shaped more by commission than by client need, repeated often enough that it becomes a habit. From January 2027, IRDAI links every intermediated policy directly to the individual who sold it. Agents who consistently prioritise fit over first-year commission are the ones whose books, and reputations, will hold up under closer scrutiny.