What's wrong with Investment Linked Policies?

Most investment linked policies marketed in Singapore have the following features:

a) designed to hide the high upfront charges
b) high charges for insurance cover
c) not tranparent

The upfront charge can be as high as two years of premium. If the savings is $300 a month, an amount of $7,200 can be taken away to pay commission and upfront charges. The consumer is not told directly about these charges. Here are the ways adopted to hide these charges, as adopted by different insurance companies:

a) The consumer is told that x% of the premium is allocated for investment. This means that (100-x)% is taken away. But the non-savvy consumer may not be aware about its significance.

b) The consumer is told that 100% is allocated for investment, but is not aware about the annual charge that is taken away to pay the distribution cost and the surrender penalty that is imposed if the policy is terminated within a certain period, say 10 years. Even if the consumer is told, the consumer is usually not aware about its significance

c) The consumer is told that the total amount allocated for investment is more than the premiums paid after a certain period, say 20 years or longer, but is not told that there is an additional charge (usually 5%) deducted from each premium that is invested. The actual amount invested will be less than the premiums, due to the upfront charges.

The charges for the insurance cover is usually much higher than the same cover provided by a separate term insurance or critical illness policy that can be bought in the market. The consumer is not aware that there is a choice to buy the cover separately or about the lower cost that is available in the market (but not from the insurer that markets the investment-linked product).

The consumer is not told and is not aware that the same premium can be invested in a unit trust that offers the same potential return, but does not incur the high upfront charge that is used to pay commission to the agent.

The terms of the investment-linked products are confusing to the consumer. In this environment, an agent can mislead the consumer into buying a product that pays a high commission to the agent, gives a high profit margin to the insurer, but provides a low return (relative to the risk) to the consumer.

Most informed consumers will never accept these high charges. This is why many insurers have devised ways to hide these charges from the consumer.

I will write a separate blog to describes the features of a good investment-linked product and to encourage insurance companies to adopt these features.

Tan Kin Lian