Hearing a statement like this may scare most people. No, I’m not referring to being audited by tax authorities. You don’t have to pay fines or dues- at least not in the traditional sense. But what you don’t know can hurt you.
What am I referring to? When I talk about having been audited lately, I’m referring to how the average man, people like you and me, goes about fulfilling our financial needs. How relevant are the life insurance and financial services products that we currently own? How confident are we in knowing that the products we own are the most efficient and cost-effective in today’s date?
A lot of people may have purchased life insurance and financial services products years ago, from trusted advisors that they’ve known for the longest time and are in a great relationship with. Over a period of time, they tend to trust this individual completely and leave all the decisions on what needs to be purchased to this individual. This may not have been a bad solution in the yesteryears.
However, with all the information that’s available out there today, it’s in your interest to take a deeper dive into these products and services yourself to see whether what you were sold in the past is still relevant in today’s world. While your advisor may have your best interest at heart, it’s very likely that over the years they may get very accustomed to selling a certain type of product or a specific company’s product. Or if they’re a tied agent, they‘re only able to sell one company’s products. As a result, you may become short-changed by being given the same product repeatedly while you’re totally unaware of other products that are a lot more efficient, effective, and cheaper.
I’m going to give you an instance of one of our most memorable audits that we conducted 8 years ago. It was for a client who purchased life insurance policies for the sole purpose of securing collateral for his business, as he was a keyman. The bank required him to secure the borrowings by assigning a life insurance value equivalent to the value of the borrowings.
So, for a $10 million debt, the bank would require a $10 million life insurance policy in the client’s name. Essentially, if the client passed away due to unforeseen circumstances, then the insurance policy would payout to the bank, and all the debt to the business would be completely written off. Ideally, when you need a product or contract to secure financing from the bank, you’d want to find an insurer or product that can offer the cheapest product possible. In most cases, that right solution would be term life insurance.
What Would Have Been Nice
In this client’s case, purchasing a term life insurance policy would cost about 0.5% per annum for a life cover of $10 million, giving him a total premium of $50,000 which would be added to the interest rate of the bank. So, let’s say his bank secured him the loan of $10 million at 5% per annum equating to $500,000 in interest. The cost of insurance put in there would take the total cost to $550,000. This would have been the ideal scenario.
What We Actually Found
However, on doing the audit for this client, we found that he had actually purchased a whole life insurance product that charged him 3.75% per annum to purchase that same cover of $10 million. This took his total premiums up to $375,000, thereby increasing his total cost of borrowing to a whopping $875,000.
Whereas, the more cost-effective option would have been him paying the $550,000 to secure his loan. The savings of $375,000 could then have been used to pay off the bank loans quicker.
The reason that the client chose to buy these policies, is he didn’t know any better. He was sold a product by his trusted advisor who he had known for over 12-13 years. This advisor would run the entire product suite through this client’s CFO, who had been in the company for over 12-14 years at the time. My client trusted his CFO and life insurance advisor without a doubt. What I suspected, in this case, was that the CFO had been receiving a commission from the advisor, which as unethical as it is, turned out to be the unfortunate truth. The client was deceived by $375,000, only so the advisor could earn a higher commission on the premiums. Needless to say, the CFO was made redundant.
In order to clean up the mess, it was important that my client restructured his contract. When I was advising him at that point in time, canceling his overpriced product midway would have meant that he’d lose about $1 million. He chose to do that anyway because he’d rather spend $1 million on three years’ worth of premiums than continue to keep up the expenditure for 10-15 years for the duration of the loan. We then converted the product into term life insurance and secured him the same $10 million of life cover at a price of $50,000 which brought down his borrowing cost by 3% and gave him an additional profit of $300,000.
This is one instance of where an audit was conducted and the results were shocking. It’s interesting to see how taking an opinion from an outsider proved valuable despite the client having a long-term relationship with his trusted advisor. You see, information is freely available in the market. It is a matter of asking the right questions, being willing to find it and above all, being open-minded- even if it means you have to end solid relationships. As a high net worth individual, it may be that you are not in need of money as much as the masses. But any money saved can be employed to work for you, by putting it to use in various other causes or more worthwhile investments.
I would highly urge you to have your current product suite reviewed by at least one, if not more, independent advisors. And if you are an existing client of mine, I urge you to do the same too.