A few months ago, a university student showed me a benefit illustration for an investment linked policy that was being proposed to him. He was still studying and had no source of income. His mother wanted to buy the policy for him. He asked my advice.
The benefit illustration contained 24 pages of details. It is incomprehensible to most people, unless it is "explained" by the adviser. The student was clearly confused.
Here are the key figures. The monthly premium is $200 (which would represent 10% of the income of a graduate who started to work).
At the end of 42 years, when he reached age 65, the total premiums paid would have been $50,400 and the non-guaranteed surrender value would have been $53,900 (if the life fund earned 5% p.a.) or $185,900 (if the life fund earned 9% p.a.). The next column showed the effect of deduction to be $341,915.
What is this effect of deduction, and why is this figure so big?
Hidden on one of the 24 pages are the following explanation:
The deduction relate to all the charges taken from the policy. These include distribution costs, expenses, mortality and morbidity costs, surrender penalty, expected transfers to shareholders and expected tax payments. The figures illustrated relate to the effect of deductions based on the projected investment rate of return of 9% p.a.
Wow! This means that if the Life Fund was able to earn 9% p.a., the insurance company would take away $341,915 and leave the policyholder with a cash value at 65 of only $185,900. The policyholder would get only 35% of the total (which includes the savings). The insurance company and the adviser would get most of the remainder.
If the Life Fund earned only 5% p.a. , the insurance company would have taken away nearly all of the investment return and give back only the savings (in deflated dollars) to the the policyholder.
How many people have bought this type of policy at these astronomical charges? Maybe 1 million Singaporeans? How many each year? Maybe, 100,000 people?
Are you one of these people? Check your benefit illustration. Ask your insurance adviser (who was supposed to take care of your interest and explain this fact to you at the time of sale). Ask your insurance company. If you feel that you have been shortchanged, and was not properly advised at the time of the sale, you should lodge a complaint with the regulator (i.e. MAS).
I hope that the regulator will put a stop to these type of high and excessive charges, which is unfair to unsuspecting consumers. The adviser is likely to avoid mentioning this high charges to the consumer.
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