Two key factors insurance buyers don't know

Published in the Straits Times Forum Page

 

I REFER to the reply by Mr Jeffrey Tan,

president of the Insurance and Financial Practitioners Association of Singapore
('Choice of insurance plan hinges on affordability, buyer's needs'; last Friday).

In buying a product, the consumer should be aware of its price.
This is especially important for a life insurance policy,
which requires a large sum of money to be paid over many years.
For most people, this could be the next biggest financial commitment
after the mortgage on their home.

Consumers should learn to read the benefit illustration of the life insurance policy
and look for two key items: distribution cost and accumulated savings.

The distribution cost is
the amount that is subtracted from the consumer's savings
to pay for the advice given by the agent.

Typically, the distribution cost takes away one to two years of the premium.
So, if the premium is $500 a month, the distribution cost could amount to $12,000.
Is the insurance agent's advice worth that much to the consumer?

The deduction results in a portion of the accumulated savings
being taken away from the consumer.
This portion could be more than 50 per cent after 30 years.

If the accumulated savings is $300,000,
the consumer could be giving away more than $150,000.
The net yield earned on the savings is usually insufficient to cover inflation.

So, how can the agent claim to be giving good advice to a consumer
by selling this policy?

In his reply, Mr Tan stated that not all term insurance policies
pay a lower commission than traditional whole-life and investment-linked policies.
I disagree.


If a consumer buys a term insurance to cover $300,000,
the premium should be less than $400 a year.
The agent may be able to earn $400 in commission over a few years.
If the agent sells a whole-life or investment-linked policy,
the agent may be able to earn more than several thousand dollars in commission.
Unsurprisingly, most agents prefer to sell the policy
that pays a fatter commission.
They tell consumers to avoid a term insurance policy because it does not give any return.

However, consumers are not aware of how much they will be losing
in a whole-life or investment-linked policy.

Tan Kin Lian
http://www.straitstimes.com/STForum/Story/STIStory_601304.html