Wealthy Investors Are Making a Costly Insurance Mistake

Twin concerns—market volatility and their families’ futures—are leading rich Chinese to buy expensive, complicated life-insurance products. For many, simpler and cheaper policies would be the better way to go.
Hong Kong’s insurance market has had an influx of mainland consumers. The value of new premiums grew by 18% from a year earlier in the first quarter, and mainland Chinese consumers account for almost one-eighth of the total premiums for new policies, according to the Office of the Commissioner of Insurance in Hong Kong.
Hong Kong offers more choice than mainland China, but it is still hard to shop for a policy. Unlike in developed markets such as the U.K., insurance companies in Asia don’t generally offer quotes online. Getting quotes from agents can be time-consuming, and products from different insurers can be hard to compare, even for financial professionals.
In other places, an insurance shopper might turn to an independent agent, not affiliated with a particular company, but they make up less than 5% of the total number of agents in China and Hong Kong, according to Arjan van Veen, an analyst at Credit Suisse. While both independent agents and agents employed directly by insurance companies sell on commission, the independents often work for advisory firms that counsel clients on other investments, too.
They can benefit from building a long-term relationship, rather than pitching policies from their own company that would provide a big short-term payoff, but might not align with the customer’s goal of getting the best product at the best price.
“Commissions for insurance brokers are very high—can be worth up to a year’s premium,” said Feisal Alibhai, founder of Hong Kong-based Qineticare, which provides healthcare advisory services to wealthy families and works with insurance agencies. “All the money for them is paid up front, so for most brokers, it’s a one-hit game.”
In steering people away from basic term-insurance policies—in which paying a fixed amount each year provides a fixed amount of coverage over a fixed number of years—agents often argue that such policies are like gambling, with the insurance company on the other side. The policyholder bets on dying during the term of the policy, and the insurance company bets the policyholder will live, they say.
Agents also compare it to renting property, appealing to a basic Chinese view that this is like throwing money away. When a term policy comes to an end, the argument goes, the policyholder has nothing, like a tenant whose lease has expired. By contrast, insurance policies with investing features have a cash value that accumulates over years, so buying one is similar to paying off a mortgage.
But basic term policies, in addition to being the cheapest option as a rule, provide what most buyers of insurance need: a payout to the survivors if the policyholder dies.
Still, these policies are less popular with investors. Instead, policies that offer investment gains or guaranteed returns are growing fast, in part because increased volatility has discouraged people from managing their own money.
Premiums paid on such products jumped by 18.6% in the first quarter from a year earlier in Hong Kong, official data show. Premiums paid on non-investment-linked savings products—which offer annual returns of 3% to 5%—were up 14.5%. Insurances agents say they are selling well in this time of low interest rates.
Insurance buyers who are looking to invest money as well as obtaining coverage have two choices. One is to buy a simple term policy with part of their money and have the rest managed by professional fund managers, which tend to be more transparent than insurance companies about their fee structure and payouts, said Wayne Yu, professor of finance at Hong Kong Polytechnic University.
The other is to have insurance companies handle it all. Families making that choice should avoid bundled products, analysts say.
“Where insurance companies make most money is when they bundle a lot of products together,” said Mr. van Veen, the Credit Suisse analyst. “Consumers don’t know how much they should be charged.”
For the consumer, stand-alone policies can offer better value. An all-in-one life-insurance policy from China Life Insurance Overseas Co.’s Hong Kong branch can be replicated by buying a similar stand-alone savings product from the same company, supplemented with a 20-year term policy from U.K. insurer Friends Provident. China Life Insurance Hong Kong didn’t return calls seeking comment.
For a client who wants 2.5 million Hong Kong dollars (US$320,000) in life-insurance protection, both plans will generate a cash value of US$600,000 after 20 years. But buying separately saves the policyholder about $1,550 a year in premiums, a savings of US$31,000 over 20 years. Agents said this kind of discrepancy is common among insurance companies. (If customers want just the protection, they can get that for US$450 a year, and invest the rest of their funds, almost US$20,000 a year, elsewhere for more flexibility.)
Most people regard life-insurance policies as something that they will never use themselves, so they pick a random one from a well-known provider. But large and complex insurance policies can be a person’s biggest investment after property, so it pays to do thorough research.
“Insurance products are never plain vanilla or commoditized, and insurance companies don’t like to give much information,” said Scott Russell, an analyst at Macquarie. “Consumers need to do a lot of comparison and cherry picking to find the best solution.”

Write to Wei Gu at wei.gu@wsj.com

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