Tan Kin Lian's Blog: Two layer upfront charge

Wednesday, April 02, 2008

Two layer upfront charge

If you invest in a regular premium investment linked product (which is commonly sold in the market), you are hit with a two layer upfront charge, namely:

a) Distribution charge
b) Spread

The distribution charge is the proportion of the premium that is taken away from your savings during the first few years. Typically, this proportion is about 80% during the first year, 50% in the second year and 25% in the third and fourth years. The total taken away is 180% of the annual premium.

If you invest $500 a month, the amount taken away during the first 4 years is 180% of $500 X 12 or more than $10,000. This is the money that is taken away from your savings to pay commisison to the agent and other marketing expenses.

The net amount that is invested is subject to another upfront charge, called the spread. This could be as high as 5% of the invested amount.

For example, if you invest $500 a month during the first year, only 20% or $100 is invested each month. This invested sum has to buy the units at a spread of 5%. This is another upfront charge. After taking away this charge, the actual amount that is invested is only $95. You pay $500 and only get units worth $95.

If you are buying a regular premium ILP, you should ask about these two layer upfront charge. It is too costly. I advise you to avoid this type of investment.

11 comments:

Anonymous said...: If you have intention to invest regularly for more than 10 years, the longer the better, than Income is the better.

Though the Ideal takes away 45% in the first 3 years, the lower cost expense (around 1%)and lower spread (3.5%)will in the long run more than compensate for the 45% of annual amount invested. This is because most units trust offer by the banks typically have 1.5% to 2% management fee and offer-spread of 5%. The percentage is of the total fund invested.

A simple illustration: Annual investment amount is $1,000. Assuming only cost, the fund size in the 10th year is $10,000. Thus just for the 10th year, the extra 0.5% management fee will be $50, i.e. 5% of the annual $1000. This amount is ever increasing every year. Should you decide to sell out after 15 years, the extra 1.5% spread will cost you $225 extra, assuming only cost.

So is the $450 charge (45% of $1000) paid that really much?

The above is just mathematical calculation on the cost, there are other factors for considerations when investing besides cost.

I am an agent from Income.; April 02, 2008 10:11 AM
Anonymous said...: Ask the insurance companies that offer regular-premium ILP to go and die. With these kind of charges, there's no way for the retail investors to make money.; April 02, 2008 3:16 PM
Anonymous said...: I am very sad that I have bought this expensive investment-linked plan. I thought that's the way insuranc market works, and the agent didn't bother to offer me other plan, although I have asked for it. If this kind of insurance doesn't benefit the public, why don't just ban this kind of product or at least make a clear warning? Can government or anyone highlight this kind of insurance cost more clearly to the pubic?; April 02, 2008 11:20 PM
Anonymous said...: I think all of you have misunderstood the regular ILP plans by other companies.It is not the same as NTUC's ID2 or ID7. It is like the traditional whole life or endowment plan or even a term plan if you so wish to use this regular ILP.It is 'powered' by a fund or funds. Unlike the traditional plans you decide the plan you want.
If You want it to work like whole life or endowment or term, you decide the mix of protection and saving. LIke all traditional plans they carry high commission. This explains why so much of your premium is taken from it.
Is it a good plan? It depends. As a saving plan it is miserable like all traditional plans. As a protection plan it is very versatile and flexible.
The issue here is that the agent didn't explain and disclose to you. Most often the problem is with the seller and less of the product.Insurance agents are salesmen. They just sell the products given to them. They don't bother whether they suit or meet the clients' needs.
But there is a difference with an honest and competent and qualified adviser. He doesn't sell products. Products are solutions.
It serves you well to engage an adviser with proper qualification.
If you need one you can engage an adviser with CFP designation from
the Financial Planning Association of Singapore(FPAS).

Zhumeng:o); April 03, 2008 9:34 AM
Anonymous said...: The above NTUC agent is referring to the ID2 regular investing plan but there is one called ID7 which carries zero advisory charge and only the spread and management fee. If you are considering the ideal plan remember the ID7 is a better plan. Of course, ntuc agents will not recommend this plan.
Having said that, there are a lot of plans out there without the advisory fee too.; April 03, 2008 9:51 AM
Anonymous said...: Be patient,things will change.
Products like revosave, smart saver regular ILPs, prucash etc etc will have to be taken off if they are found to have decieved people. AGENTS WILL BE TAKEN TO TASK for mis- selling and non disclosure.
As consumers, you must continue to feedback. There are channels for you
to air your grievences in the MAS, CASE and Fridec website.; April 03, 2008 11:27 AM
Anonymous said...: Refer to the 1st anonymous comment above.

1. I can't comprehend your calculation.

2. Since the person is going to invest of a long time (as mentioned by you), if he/she save the $450 and put it in the S.A and let it grow risk free at 4%, what do you think it is the amount after 10 yrs? Yes, about $665. After 15 years? $810.

3. Alternatively $450 can feed an elderly for almost two months, 2~3 meals a day. Is it possible to get a plate of mixed rice at $2.50/plate? Still possible in heartlands and Chinatown, etc.

4. So, is $450 out of $1,000 a lot? Yes I would definitely say so. It is obscene.

5. Income should just cut away the 45% distribution charge and reduce the spread to <1%, especially since it is a cooperative.

6. If enough agents can do the right thing by not selling the high cost product, the management will listen.

R.; April 03, 2008 2:40 PM
Anonymous said...: You are right, Mr. R but, but but but, but
the agents are greedy. Their pockets first, then if any left over, the customers. There is already a ID7 regular plan without $450 advisory charge, why are the agents not recommending it. Don't you think it is a case of non disclosure?
The first poster who says he is an Income agent, appears in all honesty,tries to justify ID2 with the computation but not knowing, or pretends not to know, that there is a better plan within INCOME,ID7.
This is typical of salesmen, they don't disclose. They tell you what you like to hear. They downplay the negatives but FAA requires fulllll disclosure. So is it a breach of the law?; April 03, 2008 7:49 PM
Anonymous said...: to first anonymous comment above: learn how to calculate time value of money. i find it dishearting to hear that people that are supposed to take care of our finances doesn't even know the basic skill to do that.; April 03, 2008 10:54 PM
Anonymous said...: To Priyadi, it's not whether I know how to calculate the time of money.
I'm putting it aside to make it simpler. The point I would like to make it is that though Ideal has a charge of 45%, it should be seen in totality that a bank fund under disguise of no advisory charge, normally impose a higher management , spread and fund expense ratio. In this case, for long term, the extra amount deducted from these two expense is actually much more than the 45% charge, not even counting the time vallue.

TO others insisiting on ID7, well it has other charges too, no waiver of annual policy fees,etc. It's a product only sold through the business centre.

For most of us investing in amount of less than $200, ID2 is a good choice, as it's better to have a advisor for the little difference between ID7 and ID2.

You are free to choose, I myself think I am worth the few dollars for my service; April 07, 2008 10:20 AM
Anonymous said...: Are we getting advice or it is just another sale by ntuc agents. What advice do you provide to justify paying you 45% when there is no 45% charge for ID7.; April 07, 2008 1:33 PM