Here is an example of a life insurance policy sold by a bank to its customers, who trusted the bank to offer them a reliable investment product. The product is designed by a life insurance company. The bank earns a commission from selling the product.

1. The customer pays an annual premium of $12,000 for 5 years. At the end of 5 years, the surrender value of the policy is $38,000. The customer loses $22,000 if he (or she) withdraws the money.

2. If the customer dies within this period, the customer gets a death benefit that is about 5% higher than the total premiums paid. This means that the life insurance policy effectively provides no insurance protection as the 5% is the interest that is earned from the premium.

3. Why does the customer wants to give away $60,000 to get back only $38,000? Who knows? Only an unsuspecting customer will buy such an investment product. But, many policies of this kind are being sold by our bank branches every day!

4. The customer has to wait for another 10 years to get back a modest return. At the end of 15 years, the projected maturity benefit is $80,000 of which the guaranteed sum is $44,000 and the non-guaranteed sum is $36,000. This means that after paying $60,000 and waiting for 15 years, the customer may not even get back the total amount of saving. The customer can only hope that the life insurance company will pay the non-guaranteed amount. If the company states that the investment earnings has been low, the poor customer does not have any right to demand payment of the projected amount.

5. The benefit illustration shows the surrender value based on a projected investment return of 4.75%. The sales representative points out this figure to suggest that the return on the life insurance policy is 4.75%. That is not true. The actual return for the 15 years is 2.2%.

6. There is a figure called "effect of deduction". This is the difference between the "accumulated premium" and the maturity benefit at the end of 15 years. Here is an explanation. If the insurance company was able to earn an annual yield of 4.75% over the 15 years, the accumulated premium with interest would be $110,000. This is $50,000 more than the premium of $60,000. The insurance company takes away $30,000 and gives only $20,000 to the customer.

7. Why should a customer leave the money to be invested by the insurance company and take all of the investment risk and allow the insurance company to take away $30,000 and leave only $20,000 for the customer? Who knows?

8. Why does the bank sell such an investment product to its customers and allow the insurance company to make the bulk of the profit? Well, the bank was interested to earn the commission by selling the policy. The distribution cost, which is the amount paid to the bank, is $5,000. The rest of the profit goes to the insurance company. It looks like the smartest party in the transaction is the insurance company. No wonder they make so much profit each year!