It is easy to be cheated (4) - Participating policies

A participating life insurance policy offers a low guaranteed rate of return for the premiums paid over many years. The insurance company promised that, if the insurance fund earns a higher rate of return than the assumed rate (used to compute the premium), the additional return will be distributed in the from of non-guaranteed bonuses.

They project the bonus to show a fairly attractive return on the policy after it matures in many years time. The snag is that the bonuses are not guaranteed.

The consumer believed in the sales pitch by the insurance agent and buys the policy for the projected return. 

After the policy is issued, the insurance company may reduce the bonuses due to the low investment yield. However, the consumer cannot tell if the reduction is fair or is more than required. 

By paying a low rate of bonus, the insurance company is able to use the additional profits to strengthen its financial position, but this is at the expense of the policyholder. 

The low bonuses results makes the policy unattractive. To increase the sales, the insurance company introduces a new series of policies that give a more attactive return than the old policies, and trains the agent to sell the new series.  

If the policyholders decide to terminate the policies, they will suffer a large penalty as the cash value may represent less than half of the premiums paid. 

The insurance agents tell the policyholders that the low cash values is due to the insurance coverage provided by the policy. The real cost of the insurance coverage is less than one-fifth of the amount taken away. Most of the premium are taken away to pay commissions and expenses. 

Recently, many insurance companies reduce their annual bonuses and increase the terminal bonuses on the maturity of the policies or on death.  They use the terminal bonuses to show an attractive payout. However, the terminal bonuses are not guaranteed and may be reduced or withdrawn close to the payout date. 

If the policies are surrendered, these terminal bonuses are usually not paid, or paid at a lower rate than what is fairly due to the policyholders. There is no way that the policyholders can find out if they have been give a fair payout. 

In some countries. there are stronger measures to protect the interests of the policyholders and ensure that they are fairly treated. In other countries, the level of protection of the policyholders are weak. 

Tan Kin Lian