Friday, April 11, 2008

Bonuses under Life Insurance Policies

Policyholders who try to analyse the bonuses paid under different life insurance policies found them to be complex and inconsistent. There is no reason why the bonuses should change significantly at certain durations and differ between different plans from the same company.

Here is the explanation. Life insurance companies have been "manipulating" their bonuses to allow their agents to sell the policies on the hope of a good yield, if they keep the policies for a long, long time. The yield on the earlier durations is extremely poor. The "manipulated" bonuses do not reflect the actual investment yield earned during the year.

Here are two big shortcomings:
a) Many people will not be keep the policies for the long duration, due to change in circumstance.
b) The jacked-up bonus at the "magic" duration is not guaranteed.

Due to the low investment yield (obtained from investing in low risk bonds) and the high marketing expenses (i.e advertisments and agent's commission), the life insurance policies give a poor yield. The company has to "manipulate" their bonuses to make them appear to give a good yield at the "magic" durations.

My advice:
a) Do not waste your time to understand the rationale of the bonuses. There is none.
b) Do not trust any life insurance company that has to resort to manipulating their bonuses.

Buy low cost insurance (i.e. term insurance) to protect your future earnings and invest in a low cost investment fund. Read these FAQs:

http://www.tankinlian.com/faq/savings.html
http://www.tankinlian.com/faq/low.html
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3 comments:

Anonymous said...

Mr Tan
Thanks for the honest and objective comments on the types of insurance products. I guess the gist of your message is to get low cost insurance product and fund. Like many of your readers, I have already bought quite a numbers of life insurance products for myself and children. Like many, I must confess that I was a bit dazed when my agent-cum-my-friend explaining to me all the details. Anyway, I bought them. Over the years, from time to time, I would take out my insurance policies and trying to understand again what I'd bought. Well, you can call me naive.
Now that, as one of your readers, I have a better understanding especially on certain products, mentioned in your posts, that I should not have invested. Thanks !
I think the next logical question is that should we terminate these policies. Yes, you had pointed your readers asking similar question to FAQ. But, I thoght, it would do us a lot better if you or anyone reading this post could come up an excel file avail for public use to help to assess if one should drop any particular policy bought, based on certain inputs mentioned in the insurance product.
Just a suggestion!

Withd best regards

April 11, 2008 8:55 AM
Anonymous said...

I find it very difficult to get information on the bonus this year with NTUC Income. In spite of the fact that the bonus is declard in April. My repeated trips down yielded no answer and they referred me to their advertisement which is meant for the unsuspecting public to buy more policies from them. They do not bother to keep their existing customers updated in spite of repeated requests. This shows how sincere they are in keeping with their pledge of fairness and transparency. If they are really sincere they should give out the information readily to existing policy holders. So we have frontline staff who are unable to help and an uncaring, unresponsive and indifferent management. How to continue paying them every month to get such lousy service?

April 12, 2008 3:48 AM
Anonymous said...

When the devil talks about honesty do you believe it?
For crying out loud with a full page advertisement in the Strait Times just to tell us that is blatant squandering of policyholders' bonuses. It is time to review the company and its agents.

April 12, 2008 11:39 AM

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