Royal Liver Assurance has been fined £550,000 for misselling with-profits savings policies to older customers.
The firm sold customers policies which contained life insurance to people who had no need for life cover or for whom the life cover was not suitable, the Financial Services Authority (FSA) said in a statement.
As a result, thousands of customers who were nearing their retirement and who wanted general savings policies were sold policies that could pay back less than the total value of the premiums they had paid.
"This was a serious case of mis-selling, particularly as a significant number of Royal Liver Assurance's customers were nearing retirement age and did not need the cover they were sold," Margaret Cole, the FSA's director of enforcement, said in the statement.
"The failings were systemic and arose from weaknesses in the firm's sales and compliance processes and persisted over a long period of time."
Royal Liver is a mutual insurance company that offers life assurance, savings and pensions. During the period in question - July 1, 1999 and September 15, 2003 - Royal Liver sold nearly 28,000 with-profits savings policies, of which 3,569 were to people aged 60 and above.
In a separate document, the FSA said that Royal Liver had chosen not to appeal against the fine and had already refunded premiums to 2,342 customers totalling £2.24 million together with interest of £246,000.
With-profits policies aim to pay bonuses to policyholders by using some of the return in good investment years to keep up payments when markets fall.
These policies were the bedrock of the UK life insurance industry, but the equity market slump between 2000 and 2003 forced insurers to slash bonuses, while tens of thousands of customers were found to have been sold inappropriate policies, which caused subsequent sales of these policies to collapse.
A Royal Liver spokeswoman said: "Royal Liver Assurance acknowledges and accepts the official announcement of the outcome of FSA enforcement proceedings.
"The relevant contracts were withdrawn in the UK in 2004 and all policyholders affected have been contacted and offered a full refund of premiums plus interest at an appropriate rate.
"Royal Liver has worked with the FSA on this issue to ensure that the appropriate lessons have been learned and controls have been strengthened as a result."