In recent years, many life insurance companies have introduced a life policy with annual recurring payment. The agents sold this product actively and earned high commisison. The policy gives a very low yield to the policyholder. and is worse than an endowment policy. It is easy for the agent to sell the attraction of the annual cash payment to a consumer who is not aware that that he or she is actually taking back a part of the premium.
A endowment policy already gives a poor yield, due to the high charges. The guaranteed return is about 2% per annum and the non-guaranteed bonus may add another 1% or 2% to the yield.
The insurance company design the annual cash payment by increasing the premium rate on the underlhying whole life or endowment policy and use the increased premium, less expenses, to make the cash payment to the policy.
Take this example. The endowment policy requires an annual premium of (say) $3,000. To make the annual cash payment, the insurance company increases the premium by (say) $1.000 and makes a cash payment of $900 to the policyholder from the second year. There is no payment for the first year, as the additonal premium is used to pay commission to the agent.
Why should a policyholder take a polcy that requires an additional premuim of $1,000 and pays back only $900 a year.? Surely, it is more sensible for the policyholder to keep the $1,000 in the bank account, rather than give it to the insurance company and receive back only $900?
This type of policy does not make sense to the policyholder, but the insurance agent loves to sell it, as they can earn additional commission on the additional premium.
The yield on this type of policy is lower than for an endowment policy. It could reduce the yield (which is already low) by another 1%. I undersand that most of these type of annul cash payment policy gives a guaranteed yield of only 1%.
The insurance agent is highly trained to sell this type of product to the customer, even though it gives a poor yield. Many of the customers are not aware about the true nature of the product and can be easily taken for a ride. How sad!
Tan Kin Lian
Wednesday, June 10, 2009
It is easy to be cheated (12) - Buying shares
There is also a risk of buying shares. Are you able to monitor the shares and make sure that the dividents are paid to you each year? If there is an administrative mistake, will you overlook to receive the dividend? Do you have the time to keep track of your personal share investments?
There is a bigger risk of making a loss, when there is a right issue. Usually, the rights issue results in dilution of the shares and a drop in the share price. If you take up the rights issue, you can get the additional shares at a lower price, so it will compensate for the drop in price.
However, some investors overlook to take up the rights issue. They may be travelling, too busy to check their mail, or the mail may have got lost. This oversight can cost a lot of money. Some investors do not have the additional capital to ake up the rights issue. They can sell their rights in the market (only if they remember to). The amount that they get for the rights should compensate for the drop in price due to the rights issue. However, if they forget to sell the rights, they will suffer a loss.
If you are too busy to monitor the shares, it is better to invest in a unit trust or exchange traded fund. The fund manager will take care of the monitoring on behalf of the investors.
Tan Kin Lian
There is a bigger risk of making a loss, when there is a right issue. Usually, the rights issue results in dilution of the shares and a drop in the share price. If you take up the rights issue, you can get the additional shares at a lower price, so it will compensate for the drop in price.
However, some investors overlook to take up the rights issue. They may be travelling, too busy to check their mail, or the mail may have got lost. This oversight can cost a lot of money. Some investors do not have the additional capital to ake up the rights issue. They can sell their rights in the market (only if they remember to). The amount that they get for the rights should compensate for the drop in price due to the rights issue. However, if they forget to sell the rights, they will suffer a loss.
If you are too busy to monitor the shares, it is better to invest in a unit trust or exchange traded fund. The fund manager will take care of the monitoring on behalf of the investors.
Tan Kin Lian
High Executive Pay
Remuneration committees of the board of directors approve high pay for CEOs on the reasoning that it is needed to attract other top talents to join the organisation.
To justify the high pay, the CEOs and top managers have to improve the profits, i.e. to "increase sharehholder value". This has led to a culture of excessive risk taking and taking advantage of customers. This is the reason for the bad business ethics that was seen in recent years.
Singapore has gone into this bad phase, which has led to a serious loss of trust in business and government institutions. I hope that corrective steps are now taken to improve the business ethics and enviornment in Singapore.
Tan Kin Lian
To justify the high pay, the CEOs and top managers have to improve the profits, i.e. to "increase sharehholder value". This has led to a culture of excessive risk taking and taking advantage of customers. This is the reason for the bad business ethics that was seen in recent years.
Singapore has gone into this bad phase, which has led to a serious loss of trust in business and government institutions. I hope that corrective steps are now taken to improve the business ethics and enviornment in Singapore.
Tan Kin Lian
TKL Intelligence Quz
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Cut in maturity benefit just before maturity
Mr Tan,
I have a policy with X where I paid premium for 12 years which will mature in July. On 31 March 2009, upon my request I was given at estimated maturity sum. On April 24, I received a letter stating a maturity sum which differed by almost 10% lower.
I have emailed and spoken to X but without making much headway. Can an insurance company provide you with an estimate barely 3 months before maturity and then slashed it down by such a large sum?
I have emailed MAS and am thinking of approaching FIDREC. I would appreciate advice from you.
REPLY
X owes you a satisfactory explanation for the lower maturity sum. Between 31 March and now, the investment market had improved considerably. If there is any change, the maturity value should have been higher.
You can lodge a complaint with FIDREC. It will cost you only $50. If you wish to strengthen your case, you can consider asking CASE for help as well.
I have a policy with X where I paid premium for 12 years which will mature in July. On 31 March 2009, upon my request I was given at estimated maturity sum. On April 24, I received a letter stating a maturity sum which differed by almost 10% lower.
I have emailed and spoken to X but without making much headway. Can an insurance company provide you with an estimate barely 3 months before maturity and then slashed it down by such a large sum?
I have emailed MAS and am thinking of approaching FIDREC. I would appreciate advice from you.
REPLY
X owes you a satisfactory explanation for the lower maturity sum. Between 31 March and now, the investment market had improved considerably. If there is any change, the maturity value should have been higher.
You can lodge a complaint with FIDREC. It will cost you only $50. If you wish to strengthen your case, you can consider asking CASE for help as well.
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