Banks scandals never seem out of the news these days, if it isn’t PPI scams, its rigging LIBOR interest rates and don’t get me started on unfair and over-the-top charges for both individuals and businesses!
One dodgy practice that seems to be under the radar of the FCA (Financial Conduct Authority) is the almost blatant blackmail for you to take out a life insurance policy if you want that personal loan or if a business wants an overdraft.
Do you need it? – Probably not is the answer and if you do, it is virtually guaranteed that you can get it cheaper elsewhere.
This made me think so I decided to do a bit of research into life insurance in general and the insurance companies that banks use which in theory are independent from the bank but in reality owned by them.
There is no doubt that life insurance is important and needed by many of you; however, most insurance companies either tend to overstate the potential need or blatantly hide certain facts from you. All this is done so that they earn bigger profits. This doesn’t necessarily mean that banks and their agents, the insurance companies, are defrauding you; it is just that they are not as up front with you as they should be.
Not everyone needs Life Insurance
An insurance agent might well suggest that you get life insurance for everyone in the household, your kids included or the key workers in your business. However, the simple fact is that not everyone needs life insurance. Anyone who doesn’t have dependents needing financial support doesn’t and most businesses can cope if a foreman drops dead. In these circumstances life insurance is an unneeded and unnecessary expense.
Insurance Agents have biased views
The amount of commission received for life insurance providers is high. Therefore, more often than not, they tend to be biased in the services they want you to opt for. They are not necessarily thinking the best for you but the best for themselves. The more commission they get, the happier they are and it’s a fact that most bank employees are instructed to push customers hard to take out a policy that is usually either not needed, not appropriate or cheaper elsewhere, as well as earning a commission bonus for themselves.
Life Assurance isn’t great
Often banks will push the more expensive life assurance and sugar-coat the costly premium pill by suggesting life assurance is better than life insurance because you get a pay-out at the end of the term. What they don’t tell you is that life assurance is inherently flawed in the favour of the insurance company. They charge higher premiums for this service and also make the final pay-out variable. The variability comes from the fact that a percentage of the premiums is invested in investment funds (their own I might add), the performance of which directly affects the final pay-out you get.
Reviewable premiums aren’t great either
There are two types of premiums on offer: reviewable and guaranteed. Guaranteed premiums tend to stay the same throughout the course of a term life insurance policy. Reviewable premiums, on the other hand, tend to seem attractively low at first, but are then subject to review after 5 or 10 years and are likely to jump up. So if you need a policy you stand to gain a lot if you choose a life insurance plan with a guaranteed premium.
Read the fine print
With most insurance policies, the devil lies in the fine print. All life insurance policies have exclusion clauses that render your family incapable of getting the assured amount or your business that important injection of funds. These clauses include the likes of accident outside the EU, alcohol/drug abuse and partaking in risky activities for personal policies. For businesses, the list of exclusions seems endless, with you being left thinking that only an Act of God will guarantee a pay-out (Sorry, I forgot Acts of God are generally excluded).Therefore always try to read and understand the policy completely before signing on that dotted line and try and ensure that its fit for purpose.
Can banks refuse a loan if you don’t take out life insurance
In theory no, but in practice they can make life very difficult if you don’t say yes. My advice is to tell the bank’s agent that you will consider a policy once the loan or overdraft is approved in principle. Once you’ve got the offer it isn’t easy for them to withdraw it because you haven’t taken out that expensive policy. Alternatively, if they have boxed you into a corner and you desperately need the money, sign up for the policy and cancel it after the first payment.
If any of you would like more detailed information on any aspect of Small Business Advisor, send me an e-mail and I’ll be pleased to advise further.