The "Free Look Option," provided by insurers, sometimes proves a god-send to hoarders wanting to convert black money into white.

The modus operandi is to buy a policy with unaccounted money, cancel it and then get the insurance company to credit it to one's bank account. An entry that will normally not cause any suspicion in the minds of income tax official, given the credit is from a highly believable source such as an insurance company.

The Insurance Ombudsman office in Chennai said it has received complaints, where complainants seek to cancel the policies using the "free look option" within 15 days of purchase. In the case of S Murali Sundaram vs LIC, the complainant had apparently already taken three life insurance policies in 2015 and sought to cancel them. The Ombudsman dismissed his complaint and ruled in favour of LIC.

Buying life policies for up to Rs 50,000 and cancelling them is an age old trick to turn black money into white. Hoarders buy large insurance policies in cash from life insurance companies, cancel it within 15 days and get the money credited back to their account from the insurance company.

"Most insurance companies have started asking for PAN card number for high value cash payments. Though the cap is Rs 50,000, since last year we have stopped collecting cash payments above Rs 20,000. Also any suspicious transaction, we highlight to the financial intelligence bureau," said Mohit Rochlani, director - operations and IT, IndiaFirst Life Insurance Co.
And the process of cancellation? "You will have to submit to the insurance company reasons as to why you are dissatisfied with the policy or premium charged. Cancellation also has to be done within the 15-day window. Apart from a small cancellation charge, the rest will be credited back to your account," said Sudha Ramanujam, an IRDAI official on deputation to the Ombudsman office in Chennai. "Apart from stamp duty charges, mortality charges and medical charges (tests), the whole amount is refunded back to the customer," said Rochlani.

With the sharing of data and fraud prevention mechanism in place, insurers are trying to catch such fraudsters at the underwriting stage itself. "If we have any doubts as to the source of the money, the person is asked a more detailed questionnaire. Was it sudden liquidation of assets or money credited to one's bank account, we try to find the source," said Rochlani.

A few years ago, instances of such rapid buys and cancellations were rampant till insurance companies tightened the screws on application. "With insurance companies increasing their fraud detection measures, updating their technology, they have been able to decrease the number of such applications they entertain. But such incidents still happen," said Mohan Jayaraman, managing director, Experian Credit Information Co.

But then again insurance companies do not penalise a customer if they feel the customer has genuine concerns or it is a case of misselling. "We assess the customer and if the policy is a bad fit for him or her, we'd rather cancel and refund that have a dissatisfied customer. On a case-to-case basis we have extended the "free look option" beyond the 15-day mandate to 20 or 35 days, if the customer is genuine," said Rochlani.

Source - TOI