Tan Kin Lian's Blog: Bonus projections of life insurance policies

Thursday, April 10, 2008

Bonus projections of life insurance policies

The bonus projections of life insurance policies are not guaranteed. They depend on the future investment yield earned by the insurance company.

Long, long ago, the bonuses were distributed yearly to the policyholders based on sound actuarial principles. During the old days, you can trust the bonuses are computed fairly, and reflect the underlying economic conditions.

In the early 1990s, life insurance companies in Singapore started to "manipulate" the bonuses. They pay lower bonuses during the earlier years and jacked-up bonuses from age 60 or 65. The policy appears to give a good yield for the long term. As these bonuses are not guaranteed, the policyholder has to wait for a long time to find out if the higher bonuses will be paid. (In many cases, the actual bonuses paid were lower).

Many policies were sold on the basis of these projections. Insurance agents used the bonus projections to sell the concept that the policyholder can stop paying premiums after a certain number of years, called the "critical year". In many cases, the policyholders had to pay the premium for many years more than the projected "critical year". This affected many tens of thousands of policyholders.

I used the term "manipulated" because the bonuses do not reflect the real yield on the investments during the years. There is lack of clarity of the principles on which the bonuses were calculated.

These bonus projections are used to hide the high cost of marketing the life insurance products, which reduces the yield of the policy considerably. The effective yield is less than 2% in most cases, lower than the future rate of inflation. The policyholder is guaranteed to lose out on buying a life insurance policy.

Lesson: Do not trust this type of haphazard bonus projection. Do not trust insurance companies that offer these type of "manipulated" products.

Read this FAQ on how to invest your savings for the future:
http://www.tankinlian.com/faq/savings.html

5 comments:

Anonymous said...: This is what NTUC is doing now. Look at the Vivolife and revosave both have very low bonus in the early years just like many commercial companies.In the early years should one for some reason have to surrender the proceed will be a LOSS. This is departing from the cooperative value which made NTUC one of the most caring companies.
NOW WHERE IS THE COOPERATIVE VALUE THAT THE AGENTS ALWAYS TALK ABOUT? WHERE IS THE 98% RETURNED TO
POLICYHOLDERS?
Policyholders are NOW forced to hold till maturity which many may not and therefore lose out.
DO YOU NEED MORE MONEY WHEN YOU ARE BRINGING UP THE FAMILY OR WHEN IT IS OVER.WHEN IS THE MOST crucial PERIOD?; April 10, 2008 9:43 AM
Anonymous said...: Mr Tan,
A very insightful comment and point well made. Can never find this anywhere. Keep it up.; April 10, 2008 3:33 PM
Anonymous said...: If a higher annual bonus is vested on a policy, it becomes part of the guaranteed portion. As it becomes guaranteed, the insurer has to invest it in safer asset classes due to the risk-based capital framework stipulated by MAS. This in effect brings down the overall yield.

For the insurer to improve the yield, a way will be to hold back declaring high annual bonus and shifting it to the terminal bonus. Hence, IF the insurer is ethical, these accumulated amounts can be invested in higher risk asset classes thereby improving the overall yield eventually.

The problem boils down to TRUST. Do you trust your insurer? History has proven that in times of bad investment climate, the insurer can cut the terminal bonus.

Those with policies from the American or British insurers can ask for a post-sales illustration either this year or next. I say this because these policies are quite mature.

You can judge for yourself if the projected cash values has dropped drastically. Please keep readers of the blog updated.; April 10, 2008 7:38 PM
Anonymous said...: This is tantamount to holding the policyholders hostage to the full term.
Unlike during Mr.TanKl's time, the breakeven point was short and anyone who wished to surrender would not have to lose out or in need of cash there was substantial to make a loan.
It seems traditional products are no longer suitable as a protection or saving plan for those who might need in the early years.
There are reasons now to buy term and invest the rest.; April 10, 2008 10:04 PM
Anonymous said...: Now ntuc is manipulating the bonuses.; April 18, 2008 11:25 PM