Insurance Helpline - With Cedric Stephens

- R.L., Kingston 5.

HELPLINE: At first, I decided not to discuss your case in this column due to the minimal information that you provided and the limits that you imposed. I changed course after you gave me permission to contact your insurers and relaxed the restrictions - which I understand and respect.

This problem you described first came to my attention in 2004. Hundreds, perhaps thousands, of persons had similar problems.

INSURER'S EXPLANATION

Here is what your insurer wrote in response to my request for information:

"This is an interest sensitive Universal Life type product designed with a CV Fund and an Opportunity Fund. The current monthly premium of $341 is allocated to the CV Fund, from which a monthly charge is deducted to cover the costs of mortality and expense. The mortality charge has been increasing over the years in accordance with his attained age, and the CV Fund is no longer sufficient to meet the monthly charges, resulting in a negative fund balance.

"In addition, the fund was affected by withdrawals from the policy and changes in market conditions, not least of which was the reduction in interest rates resulting from the Jamaica Debt Exchange programme, which will continue to be a factor in the years ahead - we will be contacting him to discuss some options to address his concerns regarding fund accumulation on his policy."

THE BACKSTORY

This is only part of the story. In August 2004, I wrote a three-part article headlined: 'Were buyers of Universal Life insurance duped?' Five years later, it was followed by 'Taken for a ride on my Universal Life policy'.

The essence of that article was captured in a photograph of two jackasses in an empty field. The fifth article, 'Shelter Life offers no haven 20 years later', was written in October 2011. None of the information in those five articles was the subject of any dispute.

Interest-sensitive, Universal Life-type insurance products are based on a number of guesses or, to use a more important-sounding word, assumptions. One guess had to do with the rate of interest that the company would earn on the premiums that it collected. Those guesses were used in sales brochures and in face-to-face sales conversations about life insurance.

History has now shown that the guesses about interest rates were wrong. This is what your insurer's reference to 'changes in market conditions which will continue to be a factor in the years ahead' actually means.

For example, the average time deposit rate for the period ending December 31, 1990, according to the Bank of Jamaica, was 24.5 per cent. The rate last year was 3.9 per cent - a reduction of nearly 84.1 per cent.

The three withdrawals from the policy plus lower rates of returns have contributed to the negative fund balance and to the disappearance of the CV Fund.

Your insurers have not provided me with any details to support their argument. However, their response plus the research that I have previously done on this subject leads me to the conclusion that they are probably telling the truth.

WERE POLICIES MIS-SOLD?

Benefits offered under Universal Life type policies are not guaranteed. They move up and down according to the market values of the funds. I have not seen your policy but, I suspect that it contains a condition to that effect. And that there is another clause giving the company the right to increase the premium and the expenses associated with the investment of the funds when necessary.

If the wording of your policy is similar to those that I have examined in the past, chances are the company's actions are in keeping with the terms of the contract.

Investopedia - http://www.investopedia.com/terms/m/misselling.asp#ixzz2KGJvelzU - defines mis-selling as "the ethically questionable practice of a salesperson misrepresenting or misleading an investor about the characteristics of a product or service".

This is done "in an effort to make a sale to a potential customer, a salesperson could leave out certain information or describe (the) product as something the investor urgently needs, even though sound financial judgment would come to the opposite conclusion".

It uses a life insurance industry example to illustrate mis-selling.

Another source, the Guardian newspaper in the UK, reported on February 5 this year that the venerable Barclays Bank "added another £600m to its existing £2 billion payment protection insurance (PPI) bill".

The bill refers to a fund that was created to compensate customers for the mis-selling of PPI. Were persons like you who bought universal life insurance policies during the 1980s and 1990s mis-sold or were just plain naïve? The verdict is yours.

Cedric E. Stephens provides independent information and free advice about the management of risks and insurance. Send feedback to aegis@cwjamaica.com or SMS/text message to 812-7233