A policyholder bought a 21 year anticipated endowment policy. At that time, the policy showed a projected return of 5.5% per annum. The company used 7% to project the accumulation of the triennial payments and also included reversionary and maturity bonus that were not explained in a transparent manner. However, the company did explain that the projected amounts were not guaranteed.
On maturity, the policyholder was given a payout that is about 35% lower than the initial projection. The final yield was reduced to 1.6% per annum. The insurance company explained that the low payout was due to the difficult investment climate. In my view, this is only partly true. Another major contributor was the highly optimistic assumptions used in the initial projection, to entice the consumer to buy the insurance policy.
I hope that the authority will ask the insurance company to be accountable for its initial projection. While it is acceptable for the final payout to be lower to reflect the actual investment climate, the difference should not be as much as 35%. I believe that this type of unfair treatment applies to large numbers of policyholders.
I have advised consumers not to trust the optimistic projections that are used to sell life insurance policies, unless there is a higher standard of business integrity and protection of consumer rights.
Tan Kin Lian
Monday, January 18, 2010
Benefit Illustration - Single Premium Whole Life Policy
I analysed the benefit illustration for a reader of my blog. The figures have been changed or removed to protect the identity of the policyholder.
1. You are investing a single premium of $30,000 in a life insurance policy. The distribution cost represents 7.9% of the invested sum. This is high, but it is typical of life insurance policies (where a high commission is paid to the agent).
2. If you decide to terminate the policy within 5 years, you will get a cash value that is less than the single premium. This policy, like all life insurance policies, provides poor liquidity. You cannot withdraw your investment without suffering a high penalty. As may need to withdraw your investment to meet some unexpected cash need in the future, it better to have the flexibility, especially in an uncertain world with insecure employment.
3. Here is the projected yield on your investment. If you keep the investment for 30 years, you are guaranteed a minimum cash value which represents a yield of 2.33% p.a. If the insurance company is able to earn an average yield of 3.75% on its investments in the future, they projected a non-guaranteed payout which a yield of 3.1% p.a. If they earn 5.25%, the non-guaranteed payout represents yield of 3.96% p.a. These yields are reasonable, but not attractive.
4. If you decide to invest on your own in an exchange traded fund, such as the STI ETF, and you receive an average yield, net of charges, of 5.25% over 30 years, your investment would accumulate to an amount that is 45% more than the non-guaranteed cash value provided by the life insurance policy at the end of 30 years.
5. I usually recommend to young people to learn about managing the risk of long term investments. After they understand the risk, they would usually prefer to invest in an exchange traded fund (which offers diversification of risk) and a potential better return. They will face short term fluctuation, but they understand that the fluctuation does not really affect the long term value of their investment.
6. You are offered an option for you to buy a rider that will accelerate the payment of the sum assured when you contract one of the critical illness. This “acceleration” means that the sum assured is payable earlier, rather than being paid on death. However, there is an additional cost for this “accelerated payment”. I think that the chance of making a claim is quite low, and this cost is rather high. But, I do not have the statistics to know if it is worth paying this additional premium for the accelerated benefit.
Tan Kin Lian
1. You are investing a single premium of $30,000 in a life insurance policy. The distribution cost represents 7.9% of the invested sum. This is high, but it is typical of life insurance policies (where a high commission is paid to the agent).
2. If you decide to terminate the policy within 5 years, you will get a cash value that is less than the single premium. This policy, like all life insurance policies, provides poor liquidity. You cannot withdraw your investment without suffering a high penalty. As may need to withdraw your investment to meet some unexpected cash need in the future, it better to have the flexibility, especially in an uncertain world with insecure employment.
3. Here is the projected yield on your investment. If you keep the investment for 30 years, you are guaranteed a minimum cash value which represents a yield of 2.33% p.a. If the insurance company is able to earn an average yield of 3.75% on its investments in the future, they projected a non-guaranteed payout which a yield of 3.1% p.a. If they earn 5.25%, the non-guaranteed payout represents yield of 3.96% p.a. These yields are reasonable, but not attractive.
4. If you decide to invest on your own in an exchange traded fund, such as the STI ETF, and you receive an average yield, net of charges, of 5.25% over 30 years, your investment would accumulate to an amount that is 45% more than the non-guaranteed cash value provided by the life insurance policy at the end of 30 years.
5. I usually recommend to young people to learn about managing the risk of long term investments. After they understand the risk, they would usually prefer to invest in an exchange traded fund (which offers diversification of risk) and a potential better return. They will face short term fluctuation, but they understand that the fluctuation does not really affect the long term value of their investment.
6. You are offered an option for you to buy a rider that will accelerate the payment of the sum assured when you contract one of the critical illness. This “acceleration” means that the sum assured is payable earlier, rather than being paid on death. However, there is an additional cost for this “accelerated payment”. I think that the chance of making a claim is quite low, and this cost is rather high. But, I do not have the statistics to know if it is worth paying this additional premium for the accelerated benefit.
Tan Kin Lian
Safe deposit box
Hi there,
I am looking to open a safe box(X-small) and would appreciate if you could kindly assist.
By the way I have no idea of the size, price, terms and conditions. I have very tight budget constraint.
REPLY
You can try CISCO. See here:
http://www.certissecurity.com/safedeposit/
I am looking to open a safe box(X-small) and would appreciate if you could kindly assist.
By the way I have no idea of the size, price, terms and conditions. I have very tight budget constraint.
REPLY
You can try CISCO. See here:
http://www.certissecurity.com/safedeposit/
Switching a policy will incur high front end charge
Dear Mr Tan,
I would really like to seek your comments regarding a single premium whole life policy introduced to me after realizing that my endowment and whole life policies were not worth keeping. A financial adviser recommended me a 25 year whole life plan to replace my existing policies and I asked for a 'single premium' quote on the same plan. Attached is a copy of the BI. May I seek your advice if this policy is acceptable because I’m very confused
REPLY
It is usually a bad idea to switch from one policy to another, as you have to incur the upfront cost again, and this will give good commission to the insurance agent. Generally, I would advice people not to make such a switch, unless there are clear advantages of doing so.
If you are not able to trust the agent who is making the recommendation to you, you should not buy the new policy from the agent.
I am not able to study your case in detail. If you wish to get advice, you can contact FISCA. They will get a volunteer to asssit you to understand the benefit illustration but you have to pay an admin fee of $50. You can contact FISCA at www.fisca.sg
I would really like to seek your comments regarding a single premium whole life policy introduced to me after realizing that my endowment and whole life policies were not worth keeping. A financial adviser recommended me a 25 year whole life plan to replace my existing policies and I asked for a 'single premium' quote on the same plan. Attached is a copy of the BI. May I seek your advice if this policy is acceptable because I’m very confused
REPLY
It is usually a bad idea to switch from one policy to another, as you have to incur the upfront cost again, and this will give good commission to the insurance agent. Generally, I would advice people not to make such a switch, unless there are clear advantages of doing so.
If you are not able to trust the agent who is making the recommendation to you, you should not buy the new policy from the agent.
I am not able to study your case in detail. If you wish to get advice, you can contact FISCA. They will get a volunteer to asssit you to understand the benefit illustration but you have to pay an admin fee of $50. You can contact FISCA at www.fisca.sg
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