Low yield for policies with restructured bonuses

FIRST POSTED ON 10 MAY 2008

NTUC Income earned an investment yield of 10.7% on the participating fund in 2007. The average long term yield (computed over the past 10 years) is 7.8% per annum.

I have two policies that are affected by the restructuring of the bonues. I calculated the yields on these policies as follows.

1. GROWTH (LG SERIES)
This policy commenced in December 2003 with a single premium of $75,000. The estimated cash value at December 2008 (5 year duration) is $85,127, giving a policy yield of 2.5%. There is a gap of 5.3% compared to the fund yield of 7.8%.

If I keep the policy to the maturity date in December 2013, the projected maturity benefit is $112,795 giving a yield of 4.2%. This is still somewhat low, giving a gap of 3.6% compared to the fund yield.

This single premium policy has low expenses and low cost of insurance. I estimate that a fair reduction in yield should be 1%. The actual gap is somewhat high.

2. LIVING (LW SERIES)
This policy commenced in October 1996 with an annual premium of $2,567. The estimated cash value in October 2008 (12 year duration) is $28,383, giving a negative yield of -1.5%. There is a gap of 9.3% compared to the fund yield.

Although a Living policy has higher expenses and a bigger cost of insurance protection, the gap appears to be excessive.

Over the next 3 years, the cash value grows by only 1.8% per annum. This is low compared to the fund yield.

I have three other policies not affected by the restructuring of the bonus. The cash value for two policies increase by more than 4% per annum over the next 3 years and by 2.8% for the Living policy.

CONCLUSION
I believe that the policies affected by the bonus restructuring have not been given a fair rate of annual and special bonuses. This has resulted in a poor policy yield, compared to the long term average yield.

False advertising

I passed by a shop in Toa Payoh. They were playing a recorded advertisement, announcing that the shop is closing down and they have to sell the products at a low price. I looked at the price labels and found that they were actually charging more than other shops. This is false advertising and amounts to cheating.

There is a similar situation with financial products sold by agents. The agents are able to make mis-representation on the products that are not backed by the printed materials. The printed materials are quite confusing, so the buyer needs an agent to explain the product. The agent has the opportunity to make a mis-representation and get away with it.

Many types of high cost, poor value financial products are sold in this way. You should avoid these products.