White Collar

What's in a name? Some insurance policies smell too sweet

Government should require the name of a product to reflect the truth to protect consumers

PUBLISHED : Monday, 11 August, 2014, 12:19pm
UPDATED : Tuesday, 12 August, 2014, 12:30am

The government should think about banning products from being called life insurance if the life coverage is too low.

New guidance issued by the Office of the Commissioner of Insurance last week on investment-linked insurance requires the insurance benefit paid on the death of the policyholder to be at least 105 per cent of the account's value.

Many of these policies now pay out only 101 per cent. The "101 insurance policies", as they are called in the industry, provide only 1 per cent of the account's value for life protection.

Because ‘bonds’ sound like a safe investment, and if a bond is safe, a minibond must be even safer

This means that if the policyholder dies and the policy account balance stands at HK$10,000, the life cover is only HK$100. The rest is, in fact, the value of the policyholder's savings or investments and has nothing to do with life insurance protection.

Many short-term, savings-oriented "insurance" products sold by banks also have limited life coverage.

Some companies, such as AIA and Prudential, have included more of an insurance component in these types of products in recent years. The new guidance will require other insurance firms and banks to follow.

"Five per cent is obviously not much better, but it's going in the right direction," Credit Suisse analyst Arjan van Veen said.

"The problem with adding a little insurance is that the product is less transparent in fees [and commissions] than, say, a straightforward mutual fund product, and consumers may be paying more for perceived insurance benefits."

Indeed, turning a "101 insurance policy" into a "105 insurance policy" does not help much. A better move would be to ban these products from being called insurance.

If you do not think the name of a product is important, consider the Lehman Brothers "minibond" fiasco a few years ago.

The minibonds became worthless after the United States firm collapsed in September 2008, sparking more than 21,000 investor complaints to Hong Kong regulators.

Why were so many retirees and elderly investors willing to buy the minibonds? Because "bonds" sound like a safe investment, and if a bond is safe, then a minibond, which sounds like a bond of a smaller size, must be even safer.

Instead of turning "101" into "105", better to require a name that reflects the truth.

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