[Pt. 2] DO NOT DO THIS After Selling Endowment Policies to Brokers
Updated: Mar 3
Previously on part 1, we wrote a post about what should not be done after selling endowment policies to brokers and why that is so. After sharing the post, we received numerous feedback, seeking clarity on the moral hazard we are referring to. Hence we will address it here in part 2 with an example.
But first, here are the four parties in an insurance contract:
Life assured (person whose life is covered, cannot be changed)
Owner (person/entity who owns the policy, can be changed)
Payer (person/entity who pays the premium, can be changed)
Beneficiary (person/entity who benefits from policy pay-out, can be changed)
Next, supposed we have two individuals, Rey and Austin (both full names), who each bought a brand-new pay-10-year endowment policy. Their respective insurance contracts would look like this (simplified):
4 years and 11 months later, Rey and Austin had decided to sell and had sold their endowment policies to a broker "[Broker]" for fast cash. After sale and absolute assignment (paperwork and back-end) done, the respective insurance contracts would look like this (simplified):
Then, [Broker] asked Rey and Austin if they would like to be interviewed and be featured in the news about their endowment policy selling experience. Austin accepted the interview offer, while Rey decided to keep his head down and declined it.
Later on, Vince (full name) was watching TV, where he saw the news about Austin and [Broker] being interviewed about the option to sell endowment policies for fast cash. Austin's name and appearance was clearly visible in the news, something like this:
At this point, Vince knew that Austin has sold an endowment policy to [Broker] and knows how Austin looks like in appearance, but Vince did not know that Rey had done so as well, as Rey had declined the interview offer.
After the news, Vince contacted [Broker], asking if he could buy-over an endowment policy, whereby the life assured is Austin, and also buy-over another similar one, which happens to be originally owned by Rey. Supposed [Broker] decided to and had re-sold both endowment policies to Vince, after resale and absolute assignment done, the respective insurance contracts would look like this (simplified):
After that, when Vince logged-in to his account and generated the revised policy illustration of policy #00316, it looked like this:
Supposed Vince paid $68,000 to buy-over policy #00316, and this day is end of policy-year-5 .
If Austin passed on and the passing was not reported to the insurer, policy #00316 would continue to be in-force as though Austin was still alive.
However, if the same thing happened and the passing was then reported to the insurer, Vince would be the one receiving the death benefit payout of $82,227 and policy #00316 would then be terminated. This way, Vince would have made a profit of 20.9% in just a month! This, combining with Vince's privileged information on Austin's appearance as seen in the news, Vince will be more motivated for Austin to meet with a mishap (accident or otherwise)!
On the other hand, because Rey declined the interview offer and was not in the news, Vince would not have known Rey's appearance. Hence, it would be harder for Vince to track Rey down for the death benefit, than Austin's.
To sum up:
This moral hazard had already increased when Austin accepted the interview offer from [Broker] and revealed himself in public in the news, with full name and appearance clearly visible. This gave others like Vince an opportunity to possibly make a quick profit out of Austin's passing.
Rey made a wise choice by declining the interview offer to prevent such increase in moral hazard that Austin was exposed to.
And hence we sent the message in Part 1, that if you have sold endowment policies to brokers, be like Rey:
DO NOT reveal yourself to the public, with name and appearance, that you have done so to the broker.
DO NOT share with anyone, other than your immediate family members and your servicing financial advisor as stated in the endowment policy, that you have done so to the broker.
We hope we have clarified on the moral hazard we are referring to. If you still have queries about this post, do reach us via our website chat-box or our Facebook page.
(In figures 1 and 4, we have concealed the identity of the endowment policy seller and the news publisher to protect their respective identities.)