Tuesday, May 24, 2016

Hybrid products sold be banks should be banned

Some banks sell hybrid products, such as the following example.

You can get a higher interest rate on your fixed deposit provided that you also invest in a life insurance policy.

The bank may offer an interest rate of 3.3% on the deposit (when the normal interest rate is say 1% lower) provided that a certain amount is invested in the insurance product.

I have come across many cases where the customer is not properly informed about the insurance product. As it is sold as a secondary product, the customer does not pay sufficient attention to understand the features of the product.

In some cases, they think that they are investing in another investment and are not aware that it is a life insurance policy that has a high penalty if the regular premium is not paid.

In some cases, they were given the impression that it is a 5 year policy when the 5 year is the period of premium payment and the policy will only mature after 10 years.

In some cases, they were not aware that the policy requires the premiums to be paid for several years. They were under the impression that it is a one time investment.

The customers are usually assured that they can get back their money at any time, and were not aware that the withdrawal amount, or surrender value, is far less than the invested amount. They have to suffer a large penalty on withdrawal before the maturity date. In other words, the investment could be locked up for 5 years, 10 years or even longer.

The risk of mis-selling is high when the life insurance is sold as a secondary investment to accompany a higher rate of interest paid on the fixed deposit.

Due to this risk of mis-selling, which is quite rampant, the Monetary Authority of Singapore should ban the sale of these hybrid products.

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