Tan Kin Lian's Blog: Policy with annual payout

Sunday, November 11, 2007

Policy with annual payout

Dear Mr Tan,

An agent wanted to sell me a life insurance product with an annual payout. Is this a good product?

MY REPLY

When you pay this type of product which is offered by several insurance companies, you are paying two premiums:

1. $x is used to provide the death and maturity benefit, like an endowment policy
2. $y is being used to provide the annual payout back to you.

The problem is that the agent earns a high rate of commission on the $y and you actually get back less than $y from the second year onwards. The $y completely disappears from the first year.

It is better for the policyholder to pay $x for the endowment policy (and get a return of 3% to 4% per annum) and save the $y in a bank account. At least you get the $y back every year, with interest at say 1%. This provides better liquidity and flexibility.

Alternatively, you can invest the $y in a unit trust and take your risk and reward.

8 comments:

Anonymous said...: While many who frequent Mr Tan's blog is slamming Revosave, I happened to chance upon a similar insurance product from Income's website called Anticipation Policy. This product pays regular cash coupons every 3 years. Isn't this a product that Mr Tan would say isn't good for the consumer? Ironically, this product was designed while Mr Tan was the CEO. Perhaps Mr Tan could explain this irony.; November 06, 2007 7:34 PM
Tan Kin Lian said...: The Anticipation policy has a payout every 3 years (not 1 year).

At the time that it was introduced, it gave a yield that was quite attractive.

When and the yield on the Anticipation policy dropped due to a reduction in the bonus rate, the sale of this plan was no longer promoted.

In today's environment, there are much better plan that gives a more attractive return.; November 06, 2007 8:59 PM
Tan Kin Lian said...: This comment has been removed by the author.; November 06, 2007 8:59 PM
Anonymous said...: Hi, do you mean that if the yield is high, then high commission is OK?; November 07, 2007 8:16 PM
Anonymous said...: Come on, get the meaning of liquidity right.They are miss representing and miss-leading the product.There is no liquidity.It is a partial refund of your money and only refunded after 25 months and every end of the year.Some one should report this to the association of advertisers of Singapore for misrepresentation.
The agent should be brought to task
for blindly parroting.It is brainless
selling.; November 08, 2007 12:20 AM
Tan Kin Lian said...: When the anticipation policy was first launch, it offered a fairly attractive return (due to the high investment yield and the moderate commission rates).

The commission paid by NTUC Income was lower than the commission rates in the market.

At that time, it served a market need for people who want some earlier payout.

Today, there are better options for the public to have earlier payout, without incurring the additional charges.; November 08, 2007 9:38 AM
Anonymous said...: Best means to have liquidity is invest in a money fund. You can get about 3.5% and you have flexibility
to withdraw anytime to invest in some other instruments that will give higher return.No lock in for life. You can take premium holiday anytime.
Does revosave have these features?
A resounding NO!!!Buying revosave is like being financially locked up in prison for life , doomed and condemned.; November 08, 2007 1:14 PM
Anonymous said...: Revosave by ntuc is some sort like
what Mr. Tan described.Normally this type of products is not value for money. A lot of the premium goes to insurance agents as commission and the customer is held hostage for very long time. Meanwhile the customer is resigned to recieve mediocre return from the short changed options which don't make any sense.
Recently launched products from AIA, UOB and Manulife also belong to this group of products. They are crossed products, which like revosave deliver inferior return. They are confusing and complicated
and if you tear them apart you can see they are nothing but intended to miss-lead the customers and passing off as new. The premium you pay would give much better return if invested in well diversified portfolio.; November 12, 2007 1:16 PM