In this short article, I will show how insurance products are mis-sold to unsuspecting customers. This article also serves as an education short write-up for existing financial advisers because they are often trained to mis-sell in these fashion:
- The unsuspecting public would often be approached by an insurance salesperson who will propose an insurance product as saving element. The customer often is just a young graduate from school and would be attracted to a “saving plan” but under such circumstances, the priority for such a young person is to get protection, not saving. Hence, it is a mis-selling if saving plans were recommended if the need is for protection. The customer would than sink in a huge amount of money into the saving insurance. Later on, the customer realizes that he or she do not have any more spare cash to get a proper protection insurance. Since there is a big lost in stopping the saving plan, the customer would just continue with the saving plan without getting the proper protection. This results in a significant exposure to risk.
- Similar to the above “saving plan” approach, the latest technique is the usage of pure investment style regular premium ILP. There are at least 2 insurers offering such ILPs with no protection element. The salesperson would tell their customers that they would enjoy bonus units for the first 18 months of the plan and obtain a high rate of return and then they can stop their saving after that. Of course this is only half truth. The ILP can be as long as 20 to 25 years maturity plan. The so called bonus unit is just a gimmick because if the client wants to surrender the policy after 18 months, the surrender value is ZERO. Where is the bonus? There is none if surrendered at 18th month. It is mis-selling if only half truth is communicated to the client. The gross commission is about 105% of the first year premium. Typically they will go after those who can afford to invest about $2000 to $3000 per month. So the gross commission will be 1.05*3000*12=$37,800 for each policy sold. Assuming a banding rate of 70%, than each policy will provide 37800*70%=$26,460 in commission. They just need to find 74 customers of similar type to earn $2,000,000 in commissions. This has to be done within 18 months because the first customer would have been told that the minimum commitment period is 18 months. If the customer surrenders within the 18 months period, there is going to be a commission clawback. To get 74 customers over 18 months, the salesperson has to just find 4-5 customers per month. If the salesperson is sitting at the bank, he needs to tell such half truth to every customer who walks in. In one month, he definitely can get 4 customers easily considering the high walk-in rate of the bank. Assuming there are 20 walks in every day, the number of walk in customers per month is 20*5*4 = 400. To get 4 customers, the closing rate just need to be 1%. This is quite easily achievable. For IFA, maybe they need to work a bit harder by doing cold calls since customers do not walk-in. But since it is human nature to be greedy, finding four greedy customers per month shouldn’t be too difficult. Once the 18 months is up, the salesperson would have become a millionaire (actually $2m). But nothing will happen because these customers would have signed the benefit illustrations clearly showing a hefty penalty for early surrender. Since nobody will be punished, this continues to be practiced widely. To make the customer happy, the company would just fire the salesperson. The salesperson happily walks out of the company as millionaire. The customer has no case because of the documentation signed.
- A very common practice to 'cheat' the customer is to sell two plans. One plan is a regular premium anticipated endowment and another plan regular premium insurance (can be ILP, WL, endowment or another anticipated). An anticipated endowment is one in which the insurer pays a regular dividends or coupons based on X% of sum assured. The salesperson would prey on customers’ greed to get “cash back” and they would tell their customers that the coupons or dividends can be used to pay for the premium of the second policy. By doing this, they say the second policy becomes “free.” The customers would be enticed by greed. In reality, the overall rate of return of the two policies combined is very poor. Moreover, the second policy is not free as the client is using his own money to buy. Using the dividends or coupons of the first policy is using his own money which could have been reinvested back to the same (first) policy without cost. Saying the second policy is free is mis-selling. What is really happening is that the salesperson sold two products and thus earned double the commission. By doing this, the customer's cash flow and risk management programmed would be compromised as well.
- An old trick in the industry is to prey on the customers’ greed for return. When selling whole life, the benefit illustration will show two rates – 3.75% and 5.25%. For ILP, the two rates are 5% and 9%. The customer will be told to focus on the return. In reality, none of these rates are guaranteed. For all you know, the actual rate could be -10%. Only the guaranteed portion is guaranteed. For ILP, nothing is guaranteed. The customer will think that the product offers good return and will buy it. Saying the 5.25% return is guaranteed is mis-selling.
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