Blatant cheating

Mr. Tan,
In your earlier blog, you mention that a life insurance company have a deduction of 50% of the accumulated premium. Which company is this? What is the significance of this 50%? What is a fair amount of deduction?

REPLY
The insurance company is a foreign company and the policy is investment-linked. When you buy a life insurance policy, you are entitled to receive a benefit illustration that discloses certain information about the product. You should look for the following information:

• value of accumulated premiums - this is the amount that your premiums will accumulate to the maturity date, based on the assumed interest rate (3.75% or 5.25% or 9%)
• effect of deduction - amount that is deducted from your accumulated premium to pay the cash value to you

In my book, Practical Guide to Financial Planning, I have given the benchmark on the amount that should be deducted from you and the balance that should be paid to you. For a 25 year policy, the maximum deduction should be 20% to cover the expenses of providing the life insurance protection (less than 10%) and the cost of investing the funds.

Most life insurance policy take away 35%, which I consider to be too high. For the specific policy mentioned above, the deduction is 50%, which I consider to be "blatant cheating". Imagine - if you work hard and save  prudently for 25 years and  the accumulated savings should be $500,000, do you like to see $250,000 taken away from you? Many people are not aware about this excessive deduction and would not have been willing to pay so much, if they knew.  

I will try my best to educate consumers in my blog and in my website, www.tankinlian.com. It is important for consumers to be educated on financial matters through my book and by attending the educational talks conducted monthly by FISCA, www.fisca.sg. 

If an insurance agent approaches you to buy a life insurance policy, you should be careful. Read my FAQ on "marketed financial products" here, www.tankinlian.com/ask.aspx. The same tip applies to any financial product that is being marketed to you, such as land banking, structured products and properties.

Tan Kin Lian