Do not accept a poor deal

Dear Mr Tan,
Thank you for your good advice; I have learnt much from your blog and your Practical Guide on Financial Planning. It is really useful! Now I have a small but decent portfolio of ETFs and individual company stocks.

When I graduated, I was not savvy enough and bought 2 policies. Based on your book, I have analysed them as follows: 

Policy 1 shows effect of deduction contributing very high, about 27.8% in year 25 of policy, but drops drastically to only 3.4% during maturity in year 28 of policy. Sounds too good to be true? What is the loophole?.

Policy 2 (ILP) shows a ridiculous low projected return. I would be better off just buying term insurance.

However, I remember you mentioned that distribution costs are mostly incurred in first 2 years. Since we have paid them, should as well continue. Is this still the best way to go? 


REPLY

For Policy 1, a large part of the projected value at maturity on year 28 is non-guaranteed. It is difficult for the policyholder to be sure that this non-guaranteed portion will be paid, especially if it shows a big jump compared to the non-guaranteed value in the earlier years. If the company give some reason at that time to be unable to pay the non-guaranteed value, or to pay less, what can you do?

For Policy 2, the effect of deduction is more than 50% of the accumulated premium. Although you have already paid the upfront distribution cost, it seems that you will continue to suffer a large loss each year due to the "effect of deduction".

I suggest that you take the following approach:

a) Ask your insurance adviser to explain the above two points to you, and address your concern.

b) If you do not get a satisfactory explanation, write to the insurance company

c) You may to lodge a complaint to MAS about the type of policy that you have been misled into buying (i.e. you would not have bought these policies if you knew what they really were). 

d) Write to the newspaper.

Do not allow people to sell you a bad product, and you have to suffer the uncertainty and poor return for a lifetime.