A bad investment product

The investment-linked policy is probably one of the worst type of investment that is sold to a consumer in Singapore. Here are the reasons:

• The consumer takes the investment risks, without any commensurate return
• The consumer is locked into the policy due to the excessive upfront charge
• The insurance company levies a high fee to manage the investments
• The insurance company is not good at investing the funds (generally)

With all of these negative factors, why are consumers investing in these policies? They are given bad advice by the financial adviser, who pushes the product to earn a fat commission. Some financial advisers tell lies to mislead the consumer. Other advisers are quite naive about the nature of these products and sincerely believe, quite wrongly, that they are helping the client to get a better yield compared to CPF.

Many investment linked polices have a reduction of yield of 4% p.a. If the investment earn 6%, the net yield to the consumer is 2%. This is a poor yield for locking up the money for 25 years. It is not sufficient to cover inflation. It is a very poor yield, considering that the consumers takes all of the investment risk. I wonder why the regulator allow consumers to be given such a bad deal on their long term savings.

At least whole life and endowment policies provide some guarantee for the policyholder, in return for the low yield.

If you can find an investment linked policy that takes away less than 1% per annum for the management fee, and invest 100% of the premium from the first month (i.e. the premium is not used to pay commission and other distribution cost), then the investment linked policy is acceptable. So far, there is no such policy in the market. The best choice is to invest in the STI exchange traded fund, available in SGX.

Tan Kin Lian