Tan Kin Lian's Blog: Endowment and whole life products

Friday, December 07, 2007

Endowment and whole life products

Endowment and whole life policies are useful financial products. They encourage people to save for the long term in a large, well diversified fund, called the life fund. They provide risk pooling by paying a large benefit on premature death.

The drawback of these products are:

a) The high charges (used to pay commission to the agent)
b) The high penalty on early termination of the policy

When I was chief exective of NTUC Income, I addressed the drawbacks in the following ways:

a) Reduce the commission and other distribution cost, compared to the market
b) Provide higher cash value and shorter breakeven period

I was able to benefit a million policyholders by giving them a higher return, compared to similar products offered in the market.

In recent years, there is a better choice for the consumers - buy Term and invest the difference. Many people are taking this approach by buying Unit Trusts. Many insurance agents have converted to financial advisers to tap this more competitive product.

It is possible for endowment and whole life policies to be made competitive again - to compete with Unit Trusts. The distribution cost has to be reduced. Many people will be attracted to low cost endowment or whole life. Sales productivity can be increased significantly.

6 comments:

Anonymous said...: Er.. Mr. Tan, sorry to spoil the party for you. Term Insurance has been already for decades, even before you were working in NTUC or when you were an actuary.

Unit trusts has been around for decades too... in US, we call them mutual funds.

The debate between TERM and WHOLE life is not new and has been around for the last 30 years. There has been no conclusive evidence whether "Buy Term Invest The Rest" is better or "Invest All Your Money" is better or "Buy Whole Life and Endowment" is better.

So it is not factual to claim that ONLY in the recent years (usually "recent" means 2 or 3 years) that there is a better choice ... unless your "recent" mean the last 10 years. Both Term and Mutual Funds/Unit Trust/Stocks have been around for more than that length of time.

Really, if NTUC wish to make more money from Endowment Plans and WholeLife Plans, it's ok to admit it. We know it is because the company need money to advertise, pay the agents and the staff, officers and executive management, set aside money for claims, etc.
In fact, I see more advertisements from NTUC Income than from Aviva, AIA, Prudential and GE combined.

In fact, 10 years ago, if I want to I can get a term from AIA/GE/Prud/Income and a unit trust from UOB or OCBC, I can easily do that. No need to wait until now.

Under your stewardship for the last 20 years, I believe NTUC Income has sold more Whole Life and Endowment than Term Life. Income's endowment and whole life market share is not small in Singapore. Advisors like Thomas Phua has been selling them for decades.

Income's funds like Global Equity, Prime, Trust and Enhanced Funds have more than 10 years history.

Attitude reflects leadership. Maybe after you retired as CEO, your views for whole life and endowment changed and that is ok. What you have done in the past, is now part of history and a good one too.

But to claim credit for initiating the idea of "buying term and investing the rest" is just not right.; December 07, 2007 3:28 PM
Tan Kin Lian said...: NTUC Income set up the Combined Fund in 2003. It is a large, well diversified, low cost fund.

This has been actively promoted during the past three years, prior to my retirement as chief executive.

NTUC Income also launched the i-Term, which has the lowest premium rates in Singapore, even today.

Many of the unit trusts in the market have high expense ratio and adviser's wrap fees. They are as costly to the consumers as life insurance products. The charges come in different forms.; December 07, 2007 5:27 PM
Anonymous said...: Dear Mr.3.28pm., you are right that debate about whether buying wholelife or buy term and invest the rest has been a running for decades and is not new. Mr.Tan never claimed that. The fact he is urging the public to buy term and invest the rest is because he sees this as a better strategy to give the best of both worlds,ie. protection and return. You can say a strategy that lets you have the cake and eat it.He has no vested interest and his interest is the consuming public.
Time has changed. Bond yield has change. Interest rate has changed. Both endowment and whole life rely heavily on above to drive the return.If you have these plans taken 10 year ago or longer take a look at the guaranteed portion.I am sure it is higher than today and the projection is higher too. Why?
I leave this to you to ponder.Remember the time when insurance companies reviewed and cut bonuses,.it is worse now.
Secondly did your agent tell you you don't need insurance for whole life? Agents would always tell everyone they need whole life. The obvious reason is commission. Is it your need or their needs/ Let me tell you, if your children are grown up and financially independant and you have no other dependants or leagacy after you retire it is a WASTE of money to have insurance. Insurance is NOT FREE. IT IS A BOMB at this age.This your insurance agent won't tell you.
Anyway to give a complete picture of the uses of insurance from risk management perspective and not from insurance agents' perspective requires a long dissertation .
Mr. Tan's leadership is customers centric balanced with agents' need too.; December 07, 2007 7:02 PM
Anonymous said...: Certainly, Mr. Tan is not claiming any credit for promoting buying term and invest the rest(BTIR). It might not haver been apparent long ago because of high interest rate then. During that time insurers made high projections but what happened to the projections. Insurers could not deliver and resulted in steep cutting in bonuses.At that time it was though convincing the strategy of BTIR not that it was not a good strategy but people were blinded and insurance agents were frightening people of its inherent high risk which was not true. The BTIR is no different today and it is still the best means of meeting one's protection and wealth accumulation needs.
Of course those people who bought the traditional plans would not admit being hoodwinked by their insurance agents. It is ok. Just dismiss your agent and look for new one.; December 07, 2007 11:14 PM
Anonymous said...: So does that mean that I should give up my endowment and whole life policies bought more than ten years ago because times have changed and I will be getting less and less returns? But I thought someone said that one will lose if he gives up his policies halfway? So what should one do? Give up or continue to lose?; December 12, 2007 12:43 AM
Anonymous said...: In any investing cutting losses is a decision hard to take but most of the times necessary. Bear the pain and you will be rewarded.
Remember to engage someone who is qualified to help you with investing,otherwise you may be back to square one. Avoid insurance salesmen.; December 13, 2007 12:38 PM