Published in Straits Times Online on 20 October 2009
Recently, I was shown the benefit illustrations for two single premium policies sold by two different insurance companies.
I was surprised to find in both cases that the surrender value on the first year is less than 75% of the single premium and that it would take 8 years or longer for the surrender value to reach the breakeven point, i.e. exceed the amount that has been invested.
Although these policies pay a death benefit that is higher than single premium in the event of death, the cost of this protection should be relatively small and should not require such a large amount to be deducted.
There could be extreme situation where a high surrender penalty is justified, such as a sharp increase in interest rate, but in normal circumstances, this type of penalty and high charges are unfair to consumers.
In both cases, the policyholders were not aware about the implication of locking up a large sum of money for long periods on an investment that gives a rather poor yield. They did not get the proper explanation from the insurance adviser and sought my assistance.
The Monetary Authority of Singapore has asked the board and senior management of financial institutions to be responsible for achieving “fair dealing outcomes” for their customers.
I hope that the MAS would ask the insurance companies that issue this type of product to explain how the product could be considered as being fair to their customers.
Tan Kin Lian
Tuesday, October 20, 2009
Monday, October 19, 2009
Sudoku - Very Difficult Puzzles
Sunday, October 18, 2009
Wider duty of a lawyer
My friend, who is now attempting the final part of his training to be a lawyer, made this statement, "The duty of a lawyer is to protect the best interest of his client".
I asked him if the lawyer has a duty to uphold the integrity of the legal process. For example, is it all right for a lawyer to act for the client in the following actions?
a) writing a prospectus that is confusing to the public?
b) arranging an investment scheme that defrauds the public?
c) intimidating the public with defamatory action without sufficient grounds?
d) helping the client to draft untrue statements?
I asked him if the lawyer has a duty to uphold the integrity of the legal process. For example, is it all right for a lawyer to act for the client in the following actions?
a) writing a prospectus that is confusing to the public?
b) arranging an investment scheme that defrauds the public?
c) intimidating the public with defamatory action without sufficient grounds?
d) helping the client to draft untrue statements?
e) drafting legal contracts that are unfair to the customers (i.e. possible contravention of the fair trading act)?
My friend found it difficult to answer my questions. The law is not clear on these matters. There are insufficient case history to rely on.
I will be asking the Law Society on these ethical questions. I hope that they can provide some guidance to their members who are practicing lawyers.
Tan Kin Lian
My friend found it difficult to answer my questions. The law is not clear on these matters. There are insufficient case history to rely on.
I will be asking the Law Society on these ethical questions. I hope that they can provide some guidance to their members who are practicing lawyers.
Tan Kin Lian
Capital Protected Product - sold in 2002
A customer invested $25,000 in the structured product sold by a local bank in early 2002. After waiting for 5 years, the customer received a return of $25,528. The gain is $528 (i.e 2.1% for 5 years, or 0.4% per year).
The formula used to compute this return is:
(a) 5% for 5 years or
(b) 45% of the smallest absolute performance of 1 stock out of 15 selected stocks.
Among the 15 selected stocks, at least 1 of them showed an absolute loss for the 5 years. So, formula (b) produced nothing.
The investor gets 5% for 5 years under formula (a), but after deducting the sales charge, the net return is only 2.1% for 5 years.
During these 5 years, the return from the 15 stocks is probably 30% or more. The customer gets 2.1%. If the customer had invested directly in the 15 stocks and taken the risk, the return would have been very attractive.
What is the logic of formula (b)? I cannot understand its logic. It seems to me, that it is designed to take advantage of the naive customers.
I cannot understand how the regulators can allow the unsavvy customers from buying into this type of product.
Tan Kin Lian
The formula used to compute this return is:
(a) 5% for 5 years or
(b) 45% of the smallest absolute performance of 1 stock out of 15 selected stocks.
Among the 15 selected stocks, at least 1 of them showed an absolute loss for the 5 years. So, formula (b) produced nothing.
The investor gets 5% for 5 years under formula (a), but after deducting the sales charge, the net return is only 2.1% for 5 years.
During these 5 years, the return from the 15 stocks is probably 30% or more. The customer gets 2.1%. If the customer had invested directly in the 15 stocks and taken the risk, the return would have been very attractive.
What is the logic of formula (b)? I cannot understand its logic. It seems to me, that it is designed to take advantage of the naive customers.
I cannot understand how the regulators can allow the unsavvy customers from buying into this type of product.
Tan Kin Lian
How the product works
| The bank invest about 85% of the money in a low risk bond that will give 100% of the capital guaranteed at the end of 5 years. It uses the remaining 15% for its marketing, purchase an option to give the 45% payout and for its profits. I have no clue how much is the option money, but it is likely to be less than 5%. At least 10% of the invested sum is wasted in expenses and profit for the bank. The chance of striking formula (b) is probably less than 5% anyway. |
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