Sunday, September 27, 2015

What's Wrong #3 - Mis-selling of life insurance policy in a bank

An elderly lady, who was not conversant in English, went to a bank with a deposit of $100,000.

A wealth manager advised her to invest in a life insurance policy with an annual premium of $40,000 payable for 5 years. He told her that she could rent out her apartment for a rental of $2,000 a month to pay the balance of the premium.

The elderly lady took his advice.

After paying the premium for two years, she could not afford to make the third payment. She was not able to rent out her apartment due to the weak market.

She asked for the annual premium to be reduced by half. The insurance company told her that she had to forfeit the excess premium that was paid during the first two years, amounting to $40,000. She would have to suffer this loss.

What's Wrong
The wealth manager had to meet his sales target. He is young and inexperienced and is not aware about the financial harm that he can cause to the elderly lady by encouraging her to buy a life insurance policy that she cannot afford.

How to put it right
The regulator, i.e. Monetary Authority of Singapore, should ensure that all life insurance policies provide a reasonable cash surrender value to the policyholder on the early termination of the policy. The expenses incurred in the terminated policy should be shared between the policyholder and the insurance company, and not borne entirely by the policyholder. The insurance company should not make a profit on the terminated policy.

If the insurance company suffers a loss on a terminated policy, they will introduce measures to avoid the loss.


Red Dot Heartlander said...

Mr Tan, I have been following your blog and you have highlighted many such cases. What I cannot understand is how did this policy get approved by the insurance company in the first place. Isn't it the job of the underwriting dept to make sure that this elderly lady had “insurable interest”, as well as the financial ability to sustain the policy?

I feel that the biggest culpable party is the company, followed by the agent. The poor old lady probably didn't know what's going on. How can the company approve the policy when it knows full well the policy is unsustainable?

It is very clear that besides the agent who was looking at his humongous commission, the company was also wide-eyed when they saw the $40k premium. Can you imagine that? What would an elderly lady need to insure that she pays $40k premium a year for? She's a multi-millionaire who has to pay huge estate duty upon death or what?

There should also be a way where the regulatory body is empowered to take the company to task for such irresponsible sales that do policy holders more harm than good. We cannot go on allowing insurance companies to hide behind the argument “the buyer is aware”, when clearly in this case she is not.

Kin Lian Tan said...

The insurance company is happy to approve the policy as it becomes part of their sales. They consider sales to be the most important measure of their performance. It is their life blood.

The insurance company makes a profit when the policy is surrendered. Out of the $40,000 that is lost by the elderly lady, the insurance company probably makes a profit of $20,000. Isn't it a good way to make a profit?

The culprit is the regulator, the Monetary Authority of Singapore. They should never have allowed such type of policy, with low surrender value, to be approved for sale to the public.

Red Dot Heartlander said...

She intended 100k fixed dep. Even if the agent had suggested $20k annual premium for 5 yrs, it would have been sustainable, although not very wise because it leaves no room for contingency or emergency.

But the agent was greedy and he/she doubled the "tolerance limit". Likewise, the greedy company was complicit. I still feel that it is the company that is most culpable and the agent second to it.

Anonymous said...

Ya, the bank and the insurance don't how this case was closed or whether the poor old lady could continue with the premium. To both the bank and insurer and the salesman/wealth manager, the case is a revenue and commission to them. Everyone is happy except the old lady when she found out that she could not pay and the loss of part of her saving.
This is RAMPANT in the industry even with the so called 'raised' standard of advice by LIA the salesmen and their insurance companies are circumventing it. The cart before the horse appraoch is common, ie sell the product first then think of how to write the fact find to justify the recommendation. All is done with collaboration of all parties in the chain of command, ie from the salesman to supervisor and to the independant auditor , all with the blessing of the company CEO.
Why is MAS so naive or ignorant to know what is going on in the insurance companies and the banks? Why? why? The regulator must be beholden? have vested interest? or obeying directives from the top top boss or the politicians?
Perhaps, this issue of miss-selling should be brought up at the Hong Lim pPark to protest against the authority for burying their heads in the cow dung. We don't hear of any enforcement by the regulator against insurance agents and the insurance companies and fine them heavily. MAS is S...H...I...Tttttttttt.

Fern Vale said...

The Regulator should disallow all banks from selling life insurance products.Many a times I see counter staff when serving a customer try to persuade them to switch to insurance products instead of depositing and when customer sort of sound interested they will refer them to a "wealth manager"Who wouldn't be interested if by depositing we get 0.01% against over 2-3% "interest" by switching over to an insurance product. In the minds of most depositors, they assume that they are actually depositing into the bank.

Anonymous said...

@Fern Vale,
this practice has been outlawed by MAS yet it is still being practiced by the bank tellers in cahoot with RMs. The minibond saga was disastrous because the RMs had access through the tellers their clients' wealth.
Between the FDs and insurance products the risk is vast apart. FDs almost risk free and liquid whereas the insurance endowment is risky. The risk of endowment is NEVER conveyed to the customers and therefore could be a case for legal suit by the customers.

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