Thursday, May 26, 2016

The customer buys a 5 year policy but did not realize that the money is locked up for 10 years

If you buy a 10 year life insurance policy, you expect to pay premium for 10 years and to get the maturity benefit at the end of 10 years.

If you buy a 5 year policy, you expect to get the maturity benefit back after 5 years.

That is what an ordinary lay person will expect. However, there is a catch.

It is now quite common for an insurance company to issue a policy where the premium is payable for 5 years but the maturity benefit ill be paid at the end of 10 years.

The insurance agent, or the marketing officer of the bank, tells the customer - "I want to introduce you a 5 year life insurance policy. You only need to pay premium for five years and can get a yield of x% on maturity".

The agent does not tell the customer precisely that the maturity is at the end of 10 years. Or maybe the agent did tell the customer, but the customer does not pay attention to this point.

The agent knows that the customer does not want to lock up the money for a long period, so he or she will not emphasize this period of 10 years.

In the past, the insurance agent is required to present a benefit illustration that follows a standard format. This format will be transparent in showing the actual term of the policy.

In recent years, the insurance agent or the marketing officer started to show a modified format. This takes the form of a simplified benefit illustration or may be presented on a mobile tablet. It is easy for the agent to hide this point, or for the customer to mis-understood it.

The bank or insurance company will send the actual benefit illustration, that follows the standard format, together with a thick wad of papers. Most customers do not read all the papers. They thought that they have already understood the product. When they realize that they were misled, it would be too late.

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