“If Insurance Commissioners could be charged with dereliction of duty, they would all be in jail, having repaid their salaries, and forfeited their pensions.” -Brian Fechtel
All Cash Value Life Insurance, Not Just ILAS, Is Exploitative
Up till now, The Rape of Hong Kong has focused on exposing ILAS scams, but that’s about to change.
A glance at OCI’s annual statistics reveals that ILAS is not even close to being Hong Kong’s biggest problem. Other types of “insurance”, such as whole life, cause far more damage in terms of total wealth destruction.
In the chart above, one will see that term life made up only 0.7% of new life insurance premiums collected by Hong Kong insurers in 2013.
This is notable because, generally speaking, every type of life insurance product, except for term life, is a ripoff.
These ripoff products are collectively known as “cash value” life insurance, because policyholders get cash back when a policy matures or is surrendered. The products are a hybrid of investment and insurance. Examples include whole life, universal life, endowment policies, and ILAS. These products are more accurately described as life investment products, since only a small fraction of the premiums pay for life insurance (e.g., one tenth). The rest of the money is placed in an investment account. Typically, the first year of premiums (or more) goes into the pocket of the salesperson. An investor needs a decade or more to earn back what they lose in hidden upfront fees and commissions. Cash value life products are extremely dangerous. Most investors surrender them early and suffer huge losses. Investors who hold the policies throughout their entire lives often receive poor returns.
Linked vs. Non-Linked
If consumers purchase life investment products other than ILAS, the insurance company acts as the fund manager. If consumers purchase ILAS, they are permitted to choose outside fund managers—but they still have to pay extortionate middleman fees to the insurer. These fees are often twice as large as the fees paid to the extravagantly overpaid outside fund managers.
ILAS is notorious for its deceptive fee structure and lack of disclosure about the impact of fees. Other life investment products are even less transparent. Insurers typically reveal nothing about how much they charge for their asset management and insurance services. This allows them to excessively overcharge.
Life Investment Products Should Be Held to the Same Regulatory Standards as Other Investment Products
The reason insurers and their sales force are able to get away with swindling consumers is because they do not have to comply with the same rules that everyone else does. The industry largely regulates itself, which means it doesn’t regulate much at all.
Consumers aren’t the only ones who suffer as a result. Companies which offer superior investment products are unable to compete since they do not use the same unethical sales tactics that insurance companies use—fraud and bribery (i.e., deceptive fee structures and massive secret brokerage commissions).
Going forward, insurers should be required to clearly disclose the costs of insurance, the costs of asset management (in the same way a mutual fund discloses it), and the costs of salespeople’s “service” (i.e., commissions).
Ideally, commissions should be banned. At the very least, life investment commissions should be drastically reduced, so that they are commensurate with commissions paid for selling other investment products. It is neither fair nor reasonable that consumers should give away their first years of premiums to pay for commissions. No other investment products exploit consumers so badly. If insurance salespeople believe they deserve such large payments, they should ask consumers to pay directly, rather than accept kickbacks from insurers, who extract money from consumers through fraudulent methods.
Sellers of life investment products should also be better educated, arguably SFC-licensed, since they cannot give informed, unbiased investment advice unless they are knowledgeable about the many other, much cheaper, more flexible, more transparent investment products available on the market.
Life Investment Products Are Tax Avoidance Schemes, Not Suitable for Most Hong Kongers
In America, it is widely acknowledged that cash value life insurance is mainly useful to rich people for the primary purpose of avoiding taxes. However, the products are only effective as tax avoidance schemes if the fees and commissions don’t destroy all the tax savings.
According to one expert, approximately 95% of all cash value life insurance products are ripoffs, meaning they are not even useful for tax avoidance.
Hong Kongers do not pay any sort of investment or estate taxes, which means most Hong Kongers have no good reason to buy cash value life insurance products, even if the products aren’t ripoffs.
They can invest more profitably elsewhere.
The Greed of Insurers Has Jeopardized the Future Livelihoods of Millions of Hong Kongers
Most of the billions of dollars of savings which have been misdirected into ripoff life investment products should have been placed in superior investment products, such as low-cost index funds. The reason all this money was instead funneled into the coffers of insurers can be summarized in just three words: obscenely large commissions.
Victims of this scandal will accumulate only a fraction of the retirement savings that they should have accumulated, which means they will suffer from a lower quality of life when they are retired.
Millions of Hong Kongers are destined to be poorer so that insurance executives can be richer.
Hong Kong’s Life Investment Industry Must Dramatically Shrink
The only type of life insurance product which the vast majority of Hong Kongers should own is term life, yet it only made up 0.7% of new premiums last year.
Hong Kong is littered with skyscrapers adorned with the logos of insurance companies. It is difficult not to feel both nauseous and outraged when thinking about how these companies earned the money to pay for these buildings.
If insurance companies were suddenly required to behave ethically, the entire industry would collapse. Hong Kong’s skyline would and should look a lot different.
Educating Hong Kong’s Clueless Regulators
In the coming weeks, I will be posting a lot of info about ripoff life investment products other than ILAS, in an attempt to inform Hong Kong’s regulators about the sad state of the industry, not just in Hong Kong, but throughout the world. I hope regulators will take some time to look and learn.
The legislative committee for the Insurance Companies (Amendment) Bill is scheduled to meet tomorrow. Before that meeting, I urge participants read the following articles:
The articles describe problems in the life insurance industry in the United States and the United Kingdom. They also describe solutions to those problems.
Because Hong Kong is plagued by the same troubles as the US and UK, Hong Kong regulators and legislators should find these articles to be worthwhile reading.