Dear Mr. Tan,
What are your views about life insurance products that give a guaranteed return?
REPLY
Life insurance companies sell products that offer a guaranteed return. They may appear to be attractive to a risk adverse investor, but they generally give poor value to the consumer.
If interest rate goes up, due to inflation, the life insurance company makes a big profit. The consumer gets back the savings in depreciated dollars.
If insurance rate goes down, the life insurance company makes a loss. To avoid this loss, they get the insurance agent to convince the customer to switch to a new product (which usually contains some frills). The customer is not aware that the new product offers a poorer return. In addition, he has to suffer the upfront cost of the new product.
I have seen this unethical practice over the years, in several countries. Here is an example of the potential impact of a change of interest rate.
1. Take the case of a 30 year endowment policy with a guaranteed return of 4% per annum. An annual premium of $5,000 will produce a guaranteed maturity amount of $280,000.
2. If the actual interest rate earned by the fund over 30 years is 6% per annum, the premiums paid will accumulate to $395,000. The insurance company pays out the guaranteed amount of $280,000 and makes a profit of $115,000.
3. If the actual interest rate earned by the fund over 30 years is 2% per annum, the premiums will accumlate to $203,000. The insurance company should suffer a loss of $77,000. The insurance company can avoid this loss by getting the insurance agent to make the customer switch to a new product.
Lesson: If you are making regular savings in the future, it is better to invest in a transparent product, such as a low cost unit trust, and keep the return for yourself. Do not give the return away by buying a guaranted return.
If you have bought a guaranteed product, do not allow the agent or employee of the company to talk you into switching to a new product.
This is something new. Thanks for your views Mr. Tan.
ReplyDeleteGuaranteed return means also guaranteed low return.
ReplyDeleteNot sure if such thing happens in Singapore. Guaranteed a certain amount, did not deliver and a agent managed to convince customer to switch to a plan which gives lower returns.
ReplyDeleteIf this is true in an efficient market like Singapore, think most people will have complained against the insurance company and MAS alerted.
Either the agents are unscrupulous or customers are foolish.
For most who read this posting, they will say that agents are unscrupulous and not the other way round.
The customers are idiots, it is a fact. The insurance agents are unscrupulous and unethical, it is also a fact. A sale can only take place when we have two of these matching characters coming together. This has been happening all these past years and it is still happening.
ReplyDeleteUnless something happens to either one mis-selling,misrepresentation,
unethicalness, and cheats will not be detected because the buyers don't know.