Hong Kong's Love of Expensive Life Insurance
26/05/2016 11:53:04 PM //
Coming from a developed market economy and being fortunate enough to have acquired my first property shortly after my 23rd birthday, protecting the borrowing in the event of my death was something one did and was as common as putting a few quid away for a rainy day. It was what we did, often with good independent advice and more often than not, insisted upon by the lender.
Of course, back then I was single with no intention of marriage or starting a family but it seemed normal to me and the cost was almost inconsequential.
My first mortgage was an Endowment (Interest ONLY), much maligned but it worked well for me until the advisors and issuing life offices got greedy.
My second mortgage (again Interest only) 4 years later, needed additional term insurance; this cover cost just over 1% of my monthly interest payment to cover the Capital outstanding.
A new endowment was arranged and the life cover element (term) topped up to cover the new increased liability.
What has this to do with Hong Kong’s developed market?
In the UK as a prime example, Term Insurance or Assurance is simply a commodity to be bought, the main consideration being cost, we derive the cost or price from competition, something sadly lacking in the monopolistic market that is Hong Kong and quite likely in the larger Asian market ex Japan.
Some years ago I conducted some personal research on this topic and discussed this with a prominent Actuary, when I asked ‘why do I pay twice what I would in the UK’ he matter-of-factly opined, ‘’ because they (the life companies) can get away with it’’, something that could not happen in the UK and the wider regulated developed markets. To the best of my knowledge one still cannot purchase term insurance online in Hong Kong. I have seen the go compare web sites, a tool to garner sales leads and they offer nothing. Hong Kong has very little choice in this vital cog of financial planning, but the facts are, there is no money in it, no one wants to ‘’sell it’’. Much better sell a 25 years savings plan….Yes of course life cover can be bolted onto this, see bells and whistles below, but please don’t go there.
What I have seen in Hong Kong over the last twenty plus years are expensive Whole of Life (WOL) Insurance policies, often written in such a way so as to ‘’create an estate’’, The ‘’Jumbo’’ policies, well liked I am told by the mainland Chinese.
The only argument for Whole of Life outside of Inheritance tax planning is the individual can die whenever they want, but with term, the option is restricted to dying within the term, something most of us can cope with and is designed if written properly to cover the real crucial period at the lowest possible cost.
The chickens really are coming home to roost:
Whole of Life policies are bundled offerings with bells and whistles, something I was always taught to steer well clear of.
They are sold to consumers who lack the knowledge to make an informed decision so are easily mis-sold, the promises of getting your premiums back and even making a profit are usually wide of the mark. I would also add the salespeople rarely understand the product and the implications of huge increases in premiums as the cost of business has risen in line with the cost of providing the protection, this has now started to unfold.
A recent article in The (UK) Telegraph highlighting an increase in premiums of 75% + and or a huge decrease in the original level of cover, more often than not still desperately required tells me it is a huge issue about to implode. I can also say it is something that was reasonably obvious to me back in the late 80’s and early 90’s in the UK when I worked for a major bank who offered the very plans I am talking about.
With the average mortgage term ( I had two houses but kept to my original 25 year term) around 25 years it is interesting it is coming to light around now. If we consider the UK banking scandals of the last 20-30 years this one could well be right up there with them. It will be interesting to see where this all leads as the Financial Ombudsman has received well over 10,000 complaints during the last 6 years.
Given the recent past, my guess is this will develop into another huge scandal although this time around the Life Companies will be heavily involved. Proving miss-selling is difficult enough but many of these companies employed part time sales peoples who knocked on doors in the evenings, not only are they no longer around but many of the companies have been merged, sold or acquired, the records will be extremely poor or none existent.
Maybe this is one scandal that will be contained somehow but Hong Kong and Asian Regulators would be well advised to take a closer look because it WILL be repeated here in Hong Kong and the Region.