Uncertain distribution of bonuses

In recent months, I have received many e-mails from policyholders of various insurance companies asking about the reduction in the bonuses on their participating policies. The companies explained that the bonus cuts were necessary in the light of the financial situation and indicated that the terminal bonus will be increased to give a high payout on the policies.

However, the terminal bonuses are not guaranteed and many years later, these policyholders are told that the terminal bonuses have to be cut due to some other reasons at that time. 

The insurance company claimed that the bonus rates have been approved by the appointed actuary and fairly distributed to policyholders. What is fair is subjective and may not be fair from the prespective of the policyholders - as they have no say. 

Many policyholders have found that the bonuses have been reduced compared to what they were told at the point of sale, and that the insurance company continued to make bigger profits for shareholders and pay higher managenent expenses and commissions. They are not convinced that they have been fairly treated over the years, but they have no way to exercise their contractual or legal rights.

This practice has been prevailing in some insurance companies in past years and has now spread to many other companies. It is now becoming quite common for insurance companies to treat their policyholders in this arbitrary manner.

In some countries, the regulator has insisted on the use of asset shares to determine the bonuses to be distributed to participating policyholders. They have also placed caps on the amounts of commission and expenses that can be charged to the life insurance fund.  Malaysia has introduced these measures to a satisfactory degree.  I hope that Singapore will implement similar measures for the protection of the policyholders.

While the situation remains unclear and arbitrary, it is best for consumers to avoid putting in a lot of savings in a life insurance policy. These includes endowment, whole life, critical illness and investment linked policies sold with high commissions to the agents. You have locking the savings for a long time and is likely to get a poor return. If you terminate the plan in the earlier years, you will to suffer a large loss with have to lose more than half of your savings. 

It is all right to pay a low rate of premium for a term insurance policy, including a rider that covers critical illness. The cost should be less than $2 for every $1,000 of coverage. If you cover $100,000, the premium should be kept to $200 a year, or less.

Tan Kin Lian