The reverse side of the flexibility coin is the extraordinary degree of abuse possible by all parties concerned. The great strength of life insurance, it's flexibility, is at the same time it's great weakness. Policyholders have abused the structures by putting silly assets into the policies, for example one Client who "wrapped" his yacht in a policy. Clients who have "wrapped" their art collections is another. Anecdotal evidence suggests that some brokers have misinformed Clients as to the advantages, at times telling Clients outright nonsense to get the business. Moreover, there is evidence that brokers and other intermediaries have helped set up structures that make no sense in the context of the Client to get the commissions. Some brokers have allegedly negotiated additional kickbacks from asset managers based on a percentage of the value of the underlying policy assets in return for bringing the business. Some insurance companies have allegedly gone along with the abuse:
- Catering to the whims of brokers, asset managers and Clients
- Selling policies which, in substance, make little sense
- Allowing costs of maintenance of the policies to become ridiculously high
Furthermore, some insurers have apparently ignored their fiduciary responsibilities to Clients with respect to how portfolios are managed and the suitability of assets underlying the policies. Far and away the worse offenders are some asset managers who have loaded portfolios with expensive, questionable financial products (investment funds and structured products) paying high kickbacks, thereby plundering Client accounts. The incentive of taking in high additional fees has lead to some extraordinary and unjustifiably high costs in managing the assets, thereby destroying Client wealth.
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