Life insurance companies sell products that offer a guaranteed return. They may appear to be attractive to a risk adverse investor, but they generally give poor value to the consumer.
If interest rate goes up, due to inflation, the life insurance company makes a big profit. The consumer gets back the savings in depreciated dollars.
If insurance rate goes down, the life insurance company makes a loss. To avoid this loss, they get the insurance agent to convince the customer to switch to a new product (which usually contains some frills). The customer is not aware that the new product offers a poorer return. In addition, he has to suffer the upfront cost of the new product.
I have seen this unethical practice over the years, in several countries. Here is an example of the potential impact of a change of interest rate.
Read more...By: Tan Kin Lian
Dear Mr. Tan,
What are your views about life insurance products that give a guaranteed return?
REPLY
Life insurance companies sell products that offer a guaranteed return. They may appear to be attractive to a risk adverse investor, but they generally give poor value to the consumer.
If interest rate goes up, due to inflation, the life insurance company makes a big profit. The consumer gets back the savings in depreciated dollars.
If insurance rate goes down, the life insurance company makes a loss. To avoid this loss, they get the insurance agent to convince the customer to switch to a new product (which usually contains some frills). The customer is not aware that the new product offers a poorer return. In addition, he has to suffer the upfront cost of the new product.
I have seen this unethical practice over the years, in several countries. Here is an example of the potential impact of a change of interest rate.
Read more...
Life insurance companies sell products that offer a guaranteed return. They may appear to be attractive to a risk adverse investor, but they generally give poor value to the consumer.
If interest rate goes up, due to inflation, the life insurance company makes a big profit. The consumer gets back the savings in depreciated dollars.
If insurance rate goes down, the life insurance company makes a loss. To avoid this loss, they get the insurance agent to convince the customer to switch to a new product (which usually contains some frills). The customer is not aware that the new product offers a poorer return. In addition, he has to suffer the upfront cost of the new product.
I have seen this unethical practice over the years, in several countries. Here is an example of the potential impact of a change of interest rate.
Read more...
