A product that has no reason to be

There is in the industry an insurance product that only exists to multiply the sales of the insurance companies and to multiply the commissions paid to financial advisors. The sale of this product involves doubtful practices which will result in most cases in the impoverishment of the customer and in certain cases in the impoverishment of the shareholders.

 This product is a Universal Life with a YRT Cost of insurance. This universal life is based on the cost structure of temporary insurance of 1 year. This is insurance where the cost increases each year. This product which is permanent insurance is unfortunately used to meet temporary needs. In the place of selling a a 10 year Term, the advisor only has to convince the customer to buy this product. Here is the result from the point of view of the commission. If the premium is 1000$ for a 10 year Term, the base commission will be 30% to 40%. Assuming 30% and a bonus of 205%, the advisor will receive 915$ in total commission. If he sells the Universal policy, the premium will be 5000$ and the base commission is 60%. Thus the total commission will be of 9150$. Ten times more… Ouch!!!

On June 18, 2010, the AMF announced the radiation of the Empresa cabinets and Insurances Luc Deguire.

Montréal, June 18, 2010

– The Autorité des marchés financiers (AMF) has suspended the registration of the firms Groupe Empresa inc. and Les Assurances Luc Deguire inc. and fined them a total of $100,000.

The AMF suspended the registration of these firms because it considered that they and their responsible officer, Luc Deguire, no longer possess the degree of honesty or abilities necessary to act  with care and competence and are no longer able to oversee the conduct of their representatives or ensure that they are complying in accordance with An Act respecting the distribution of financial products and services (the “Act”) and its regulations.

The AMF’s investigation showed that the firms and Luc Deguire implemented a scheme, developed by Luc Deguire, that was designed to collect and multiply commissions.

In addition to suspending these firms’ registration, the AMF fined them $50,000 each.

The AMF has taken the necessary steps to ensure that the client files of these firms are transferred to representatives and firms duly authorized to pursue activities in the sectors concerned.

What is important to note in this official statement is the information which does not appear. The Authority does not inform the public of the stratagem involved. However if one wants to protect the public that information would be very important to prevent the use of this stratagem and to ensure that no other customers are used in this fashion.

 This information is not given to the public because this would embarrass the insurance companies and would force the AMF to launch an investigation on those companies. 

 This product is an aberration which requires the advisor to choose between the customer and the insurance company. If he wants to act against the customer, he only has to make certain that the policy remains in force for 2 years. After 2 years, there are no chargebacks and the advisor can disappear leaving the customer with the responsibility of managing his policy not knowing that the Cost of insurance will eat his cash values and will lead to the forfeiture of the contract in 10 to 20 years. Very advantageous for the insurance companies which will have charged a permanent cost of mortality whereas they know that the policy will lapse before the payment of a death benefit.

 If the advisor chooses to act against the company, he will share his commission with the customer and will manage the policy in order to reduce the Cost of insurance of this policy therefore preserving the cash values of this policy. In fact, the advisor will maximise a flaw of this product which allows the policyowner to reduce his death benefit without triggering surrender charges. Why has insurance companies introduced this flaw in such a product. An executive told me it was to create sales but his expectation was that the policyowner would not use this option and not take advantage of this flaw.

If the policyowner reduces the coverage of this policy, this will mean the company will never recover the commissions which it has paid. Iinsurance companies understood very well how this product could be used. But wholesalers are paid on sales and not on the profitability of the company and what is right for the customers. In fact, a source told me at Manulife, most of the large insurance policies sold in 2009 in the agency channel was done on this basis with this strategy being marketed by Manulife wholesalers…

 In attempting to solve this problem, you could ask for a special quote for this product where the commission would be paid on the Cost of mortality. Using the above example, although the premium was 5000$, the commission would have been paid on the cost of mortality of 1000$. Thus the total commission paid would have been of 1830$. By reducing the commission to this level, you remove any opportunities of abuse. You should have seen my surprise when I received such a special quote.

 The Cost of insurance and therefore the recovery of the commission had not changed. The company paid 1830$ of commission but charged the customer expenses to recover 9150$ of commission. I argue against this pricing but unfortunately the company refused to change its position on this “pricing” and I could not use this solution to regulate this problem.

I have asked the AMF  why it was not taking action against insurance companies who use this stratagem through advisors such as Luc Deguire. It is the insurance companies who create the favorable environment leading to these abuses. They have a responsibility. I also asked why the Authority did not restrict and control the use of these products. It is clear in certain situations, the sale of these products are not in the interest of the public. As always, the AMF is unable to confront and regulate the insurance companies. Abuses are always the fault of the financial advisors. The AMF keeps the silence on these practices.

 The financial industry needs to change its values. It presents these advisors who use these stratagems to maximise commissions as the heroes of our industry and as an exemple of success. The heroes of this industry are not those who sell more or those who sell the largest policies. It is the financial advisor who includes/understands the needs for his customer and who meets these needs even if he makes less money. They still exist in this industry. One should celebrate them.

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