## Saturday, July 26, 2008

### Did you buy a high cost ILP?

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.

siewkhim said...

Let me reiterate: Avoid participating and investment-linked policies of any companies. You are better just buying term policies and invest the difference.

These participating and investment-linked policies are big con-job.

Khiat Han Hwee Adrian said...

The adviser should explain them systematically which I doubt they will.

In my experience, most people do not know about their ILP charges. I'd posted something about this before. Just a humble sharing.

http://akhiat.blogspot.com/2008/06/4-ilp-charges-that-reduce-your-returns.html

Raymond T said...

Good thing I've never... ever... bought any ILPs before. Whew! =)

Still, my endowment, wholelife and critical illness plans no doubt also lined the pockets of many an agent =(

Techno said...

With regards to the "buy term invest the diff" remark, it's important to get your advisor to explain the risks in such an approach. Insurance is part of risk management (or disaster planning). In planning for disaster, remember that the expected unexpected may not develop as expected...

It's hard enough to get an advisor who's willing to happily sell you term only, much less say one who can advise you properly for such low (term) commission.

Good luck.

Wayne Koh 许伟源 said...

I have one recent example of "Buy term invest the rest".
http://www.waynekoh.com/2008/07/btitr.html

And better yet, reduce income taxes!
I've realized that tied agents do not educate people enough on using SRS.

zhummmeng said...

Tied agents are salesmen. They are not financial planners. They sell and push their companies' products only.
What tax do they know?

siewkhim said...

A professor of a local U has a sign written on her door:

" Dogs and insurance agents not allowed"

Raymond T said...

Hahahaha that is so funny.... but I thought dogs are a man's best friend? Anyway, not all insurance policies and agents are bad. You have to sift thru them to find the gems. I think Term insurance and low cost funds are the way to go in future.

zhummmeng said...

SiewKim, i would suggest that the sign be more specific and explicit so to be all inclusive to avoid argument.
The sign should read,
"Dogs and bitches and insurance agents not allowed"

Fleur.de.Fleur said...

How come no one ever thot of making use of the flexibility of ILP to reduce the protection coverage upon old age? The high cost is due to mortality charges. Client may purchase a limited pay along the way to make sure he has enough coverage for old age.

Between on earlier reply to cancelation of policy, how come Mr tan asked the person not to cancel NTUC ILP policies and he actually asked to cancel other company ILP policies?

zhummmeng said...

In most regular ILPs (except NTUC) the distribution cost is the culprit.The mortality charge is low in the early years and if enough fund accumulated it also can pay the increased mortality charge after 65.
The problem with this regular ILP is that policyholders lose at least 26 months of the premium to the greedy agents and thier company like whole life and endowment products. The breakeven point is far and it takes high return every year to offset the charges , very often it is not easy. The cost is too much, too expensive.
Mr. Tan advised to cancel this type of ILPs.

siewkhim said...

Dear Guys and Kin Lian,

Let me tell you how the Bank Negara did it in Malaysia to curb excession selling cost on investmet-linked policies (ILPs)

BNM required that starting from 2005, all investment-linked policies will have 2 components. The first component is the insurance component which must not exceed RM5,000 premium per annum. There is a prescribed formula to compute the insurance component. The second component is the investment component. This is equal to total premium paid less insurance premium component.

For example for a certain sum assured, the prescribed formula will be able the insurer to compute the insurance premium say Rm500. So if the total annual premium payable is Rm1500 then the investment premium = 1500 - 500 = 1,000. What so big deal then?

Well the commission for insurance premium follows that of the normal whole life/endownment rates BUT for the investment premium, the commission is limited to 3.45%.

Riders that are attached to ILPs through unit deductions are not allowed to be paid any commisson. But premium paying riders are allowed to be paid commission based on insurance premium rate.

In this way BNM has more or less protect the interest of the insuring public.

What do you guys think?