Thursday, March 5, 2009
Avoid the risk of a life insurance policy
To consumers:
When you buy a life insurance policy, you are taking a big risk. You do not know what will be the inflation and mortality rates in the future. In spite of this, you are required to commit a fixed premium payable for many years into the future.
The insurance company does not know the future rates either. So, they have to take a risk. If they guarantee you a favourable rate and the trend goes against them, the insurance company can declare bankruptcy. You will lose a large part of your savings.
If they declare a conservative rate and there is high inflation, you will lose out. The money that you have saved for many years will be paid back to you in depreciated dollars. The insurance company keeps the excess as their exceptional profit.
To overcome this uncertainty, many insurance companies have to operate on a participating fund. The insurance company guarantee a low rate of return on the participating policies, and promises to pay back a large part of the yearly surplus to the policyholder in the form of a non-guaranteed bonus.
This arrangement is fine, provided that the insurance company can be trusted to treat its policyholders fairly in the distribution of the bonuses. But you have to take another risk - can you trust your insurance company to give you a fair rate of return?
When you buy a life insurance policy, you are taking a big risk. You do not know what will be the inflation and mortality rates in the future. In spite of this, you are required to commit a fixed premium payable for many years into the future.
The insurance company does not know the future rates either. So, they have to take a risk. If they guarantee you a favourable rate and the trend goes against them, the insurance company can declare bankruptcy. You will lose a large part of your savings.
If they declare a conservative rate and there is high inflation, you will lose out. The money that you have saved for many years will be paid back to you in depreciated dollars. The insurance company keeps the excess as their exceptional profit.
To overcome this uncertainty, many insurance companies have to operate on a participating fund. The insurance company guarantee a low rate of return on the participating policies, and promises to pay back a large part of the yearly surplus to the policyholder in the form of a non-guaranteed bonus.
This arrangement is fine, provided that the insurance company can be trusted to treat its policyholders fairly in the distribution of the bonuses. But you have to take another risk - can you trust your insurance company to give you a fair rate of return?
In the past, the insurance companies observe a high standard of conduct in the distribution of the surplus. In recent years, this standard has been eroded. Many insurance companies are now prepared to short change their policyholders in the pursuit of more profit for their shareholders or for their sales growth. For example, they declare a lower rate of return on their old policies and introduce new products that give a better return to boost their sales. This is unfair and at the expense of the old policyholders.
If this happens to you, you have a recourse. There are regulations in Singapore to ensure that the policyholders are fairly treated. If you have bought a participating policy and have been given a poor rate of return, compared to other policyholders who have bought a new series of products, you can lodge a complaint with the regulator, which is the Monetary Authority of Singapore. They will take up the complaint on your behalf and will ask the insurance company to justify its stand.
If you are going to make a long term commitment in a life insurance policy, you should choose an insurance company that can be trusted to act fairly in the interest of its policyholders. There is a lot of uncertainty at this time on which insurance company can be trusted to observe this principle. It is best that you do not put your long term savings in a life insurance policy, as you are subject to the risk of being denied a fair rate of return.
It is better to buy accident or term insurance to cover your risk and to keep your savings in a low cost exchange traded fund. Many of these funds are offered in the market.
You can get more details by reading the FAQs in my website.
Tan Kin Lian
If this happens to you, you have a recourse. There are regulations in Singapore to ensure that the policyholders are fairly treated. If you have bought a participating policy and have been given a poor rate of return, compared to other policyholders who have bought a new series of products, you can lodge a complaint with the regulator, which is the Monetary Authority of Singapore. They will take up the complaint on your behalf and will ask the insurance company to justify its stand.
If you are going to make a long term commitment in a life insurance policy, you should choose an insurance company that can be trusted to act fairly in the interest of its policyholders. There is a lot of uncertainty at this time on which insurance company can be trusted to observe this principle. It is best that you do not put your long term savings in a life insurance policy, as you are subject to the risk of being denied a fair rate of return.
It is better to buy accident or term insurance to cover your risk and to keep your savings in a low cost exchange traded fund. Many of these funds are offered in the market.
You can get more details by reading the FAQs in my website.
Tan Kin Lian
Twisting a policy
Dear Mr Tan,
I was deeply troubled by a 20 year limited premium policy that bought from NTUC Income 2 years ago. I bought the policy for my daughter to provide her with lifetime coverage by paying the policy premium for 20 years.
Recently, NTUC Income no longer accept new policy for the product and was replaced it with a similar limited premium product called Revo Life. My agent said that my existing policy is inferior to the new Revo Life:
1. My existing policy is more costly for the same amount of coverage
2. Revo Life took a much shorter period to breakeven
3. Revo Life provides extra benefit of 3X payments on accident coverage.
Why is the original product more costly with less coverage, where the contract already specified the % of premium that represented the distribution cost in maintaining the policy.
Could this be due to some miscalculation that caused the higher cost in initial policy?
As the consumer has not been notify of this difference, people who purchase the original 20 years limited will continue to pay more for less for the remaining year!
Do you think the consumer have the right to ask for some kind of bridging arrangement to the newer policy with minimum loss? I was suggested by the underwriter (through my agent) that I should cancel my policy (with a huge loss of course) and buy the new policy. Do you think this is a fair suggestion?
REPLY
You should ask the agent to present a detailed comparison of the cash value of the old policy and the new policy after 5, 10, 15, 20 years and the premium. You can read the FAQ in my website, www.tankinlian.com/faq
You should also consider this point. By stopping the old policy and taking a new policy, you are suffering the high front end charge again (which can take up more than one year of your savings).
Normally, it is unethical for an agent to advise a client to stop an old policy and take up a new policy, as it is against the interest of the client. This is called "twisting a policy". You can lodge a complaint to NTUC Income against this unethical practice.
It is not correct for an insurance company to introduce a new product that offer a better return compared to an old product. This is unfair to existing customers. It is their duty to ensure that existing customers are given a fair return, through higher bonus, compared to new customers. You can ask NTUC Income's management to give their comment on this point.
I was deeply troubled by a 20 year limited premium policy that bought from NTUC Income 2 years ago. I bought the policy for my daughter to provide her with lifetime coverage by paying the policy premium for 20 years.
Recently, NTUC Income no longer accept new policy for the product and was replaced it with a similar limited premium product called Revo Life. My agent said that my existing policy is inferior to the new Revo Life:
1. My existing policy is more costly for the same amount of coverage
2. Revo Life took a much shorter period to breakeven
3. Revo Life provides extra benefit of 3X payments on accident coverage.
Why is the original product more costly with less coverage, where the contract already specified the % of premium that represented the distribution cost in maintaining the policy.
Could this be due to some miscalculation that caused the higher cost in initial policy?
As the consumer has not been notify of this difference, people who purchase the original 20 years limited will continue to pay more for less for the remaining year!
Do you think the consumer have the right to ask for some kind of bridging arrangement to the newer policy with minimum loss? I was suggested by the underwriter (through my agent) that I should cancel my policy (with a huge loss of course) and buy the new policy. Do you think this is a fair suggestion?
REPLY
You should ask the agent to present a detailed comparison of the cash value of the old policy and the new policy after 5, 10, 15, 20 years and the premium. You can read the FAQ in my website, www.tankinlian.com/faq
You should also consider this point. By stopping the old policy and taking a new policy, you are suffering the high front end charge again (which can take up more than one year of your savings).
Normally, it is unethical for an agent to advise a client to stop an old policy and take up a new policy, as it is against the interest of the client. This is called "twisting a policy". You can lodge a complaint to NTUC Income against this unethical practice.
It is not correct for an insurance company to introduce a new product that offer a better return compared to an old product. This is unfair to existing customers. It is their duty to ensure that existing customers are given a fair return, through higher bonus, compared to new customers. You can ask NTUC Income's management to give their comment on this point.
You can also raise this matter with the Monetary Authority of Singapore. They will ask NTUC Income to give you an explanation. If you are not satisfied with the reply, you can discuss with MAS.
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