Tan Kin Lian's Blog: A fair premium for private Shield plan

Saturday, July 19, 2008

A fair premium for private Shield plan

Are you paying a fair premium for your private Shield plan? Are you being over-charged? How can you find out?

You can look at the ratio of claims to premiums, as reported by the insurance company for this plan, in their return to MAS.

Take this example. If an insurance company has 100,000 policyholders and pays a total claim of $10 million each year, the average cost of claim is $100 per policyholder. The insurance company needs to incur expenses and to have a reasonable margin of profit. As a rule of thumb, the loading should be about 50% over the cost of claim. A reasonable premium should be $150.

The actual premium charge will differ according to the age of the policyholder and other relevant factors, but the average for all the policyholders should be $150.

If the average premium paid by the policyholder is $500, it can be considered to be excessive. Why should the policyholder pay an average premium of $500, when the average cost of claim is only $100? This means that $400 is taken away to pay commission to the agent, and profit to the insurance company.

Why is this insurance company able to get away with charging such a high premium rate to its policyholders? Here are the ways:

1. It makes it product different from its competitors, so that the policyholders cannot compare the prices.

2. It provides some special features that make the product look very attractive, but the actual claim cost is small. This is a way to mislead customers.

3. It pays high commission to incentive its agents and train the agents on how to market the product aggressively.

As a consumer, you should avoiding paying far too much for a private Shield plan. The money is taken from their Medisave savings. If you spend too much money now on unnecessary insurance, or is overcharged, you will have inadeqaute savings to pay for the medical expenses in your old age.

6 comments:

dsowerg said...: Mr Tan, would you please let us know where you find these statistics? I found some reports under "Insurance Statistics" in MAS website but I don't know how to interpret the statements. Thanks.; July 19, 2008 10:14 AM
zhummmeng said...: Good examples are revosave and vivolife from NTUC with a lot of rubbish thrown in to confuse, to make them look special,to appear 'enhanced' and all the craps. Consumers should zero in on the "core" of the plan. What do you see? That is what you are buying and not the 'embellishments'. These embellishments are to distract you from the rotten core, to cover up, to hide, to justify charging you high price, high premium . Then used highly trained in the skills of lying insurance agents, paid high commission, to 'romance' with the consumers.
As if not enough, they change to more convincing titles and peddle these products at roadshows, and with posters full of misrepresentations and misleading captions to trap the unwary passers by.
Example: I saw a poster showing tour attractions at various prices and how the cashbacks from Revosave be used for these tours.This is misrepresentation, isn't it.( the agents call it concept selling)
Is the the purchase of life insurance meant for goal like this, especailly a product with a very long lock in trap, at least 25 years.This is distraction too and there bound be some naive, ignorant and unsavvy consumers falling for this ploy.This kind of booby traps should be banned. MAS should take the manufacturers to task and fine them heavily for producing and marketing unethical products.
The consumers should sue the agents for misrepresentation and trapping them.
What's happened to CONSCIENCE?
I know animals don't have . I realised some human beings don't too.I hope medicine will not be sold this way, concept selling. (headache pills will give you a trip to fantasy land); July 19, 2008 5:47 PM
zhummmeng said...: Whole life product advocates and especially insurance agents argue that wholelife is useful during old age ,a time when one is most likely to contract dread illnesses. Apart from other economic reasons, I want to show that wholelife policies hardly kept beyond age 65.Why is it not kept beyond this age, the obvious reason is many don't believe that it is necessary and many believe in self insurance, a wise idea because liquidity at a time like this is more flexible and better choice.What if you get and what if you don't get a disease , the probability seems 50/50 but I bet it is more than 80% chance you don't get.If you do, have an H&S is enough plus what you provided for in cash as self insurance will adequately address this problem.Maintaining a wholelife at this age is expensive and a waste of money and self insurance is a better option.
Therefore the case for wholelife is weak and you are better off if you have a term insurance plus investment with better return. The chances of having a better life and retirement are best via buy term and invest the rest.
I want to show you statistics from MAS website to corroborate my argument and my findings. If you look at the life insurance persistency from 2001 to 2007 you see a pattern. You see high decline
immediately in first 2 years and henceforth persistency declines at a rate of about 4%. This pattern is seen in all the last 5 years. If i extrapolate the rate of decline to next 20 to 30 years I can see that only about about 10% or less of life policies will in force.
Assuming a 30 year old man buys a policy, by the time he is 60,65 he would have terminated or surrendered his policy. This phenomenon is supported by another statistics, the surrender statistics and it has been a whopping high of about 65% compared to maturity of about 35%.In other words a lot of people surrendered their policies earlier.
What do these figures tell you? Very few kept their policies beyond 65 years old. Why buy whole life then if you don't keep till old age? Let me tell you, it is burdensome; cash return too low.
I have done another research earlier and posted somewhere on death claim. I found no claim beyond the magical age 65, not that no one died or no one got dread disease but no one or very few kept WL beyond this age.
Death claim median age is 45 and average claimed amount is only a miserable $45K and the highest of $200k was from a term insurance.
Conclusion is insurance is most needed during time when your responsibility is the highest and you should have enough to address the needs at that point in time.Term is the best instrument, cheap and efficient.
Not some rubbish that insurance agents like to tell you about wholelife. Their argument is obvious, it is high commission for themselves and life long source of revenue and income for the insurers.
Another favourite argument of insurance salesmen is everybody has different needs, therefore WL suits some and term suits some.This is not needs but wants. The rich can afford WL, it is matter they want it or not . The majority NEED it and not they want it or not, they have to..; July 20, 2008 12:57 AM
Falcon said...: So if a man bought his Whole Life at age 30, he locked in the commission price. At age 65, he is still paying that low price he locked in 35 years ago. If he were to buy term at age 65, the commission may be as high as the locked in commission right? So the issue is whether he held on to his whole life in order to benefit from the payout. since death is certain, the longer he holds it, lets say he lived past 85, he will still be paying the price her paid 50 years ago, but if he buys term then , he would probably have to pay more than his whole life policy if the insurance company is willing to accept his insurance at age 85.; July 20, 2008 5:44 PM
zhummmeng said...: Dear Falcon,
it is not true that you pay the same cost you paid 50 years ago.You may be paying the same premium.This is the part everyone is silent, your beloved agent and the insurer.This is the part that makes insurer very happy but not you
because you will be seeing your cashvalue eroded by the COST OF INSURANCE called the mortality charge.
The mortality charge is the same for anyone of the same age regardless of when he buys the insurance.He could have bought 50 years ago or just bought if both are of the same age.
If you hold till 85 years old you might have ALL your cash value eroded by the greedy insurer. That is why I have been saying insurers love to sell wholelife products because this guarantees them a life long source of revenue or income .
Insurance premium consists of 2 components, one cost of insurance and the other a surplus which the company invests by throwing into the same pot of investment with the others.(this is a stupid pot where everybody's goal is treated the same). Your cost of insurance or mortality charge increases with age and it becomes a BOMB when you are at age 60 when the cost exceeds your premium. The difference is "stolen" from your cash value to make up the difference.I use the word 'stolen' because your insurance agent and company didn't tell you and ask your permission to use your hard earned cash value to pay your cost of insurance.
Falcon, go to MAS website and look at the rate of surrender and persistency. From these figures you know why it is idiotic to hold beyond 65 and many realised it is NOT to their advantage to hold.
I have been arguing that wholelife is a stupid plan because VERY FEW hold till wholelife.It gets more expensive as you age contrary to what your sincere and so called truthfull agent told you about paying the same premium.
Did you know insurers make a lot of money out of wholelife products?
They give you little protection and return and whatever they made from investment with YOUR MONEY they keep a lot for themselves and give you just as projected at the best ( now you know a bit about how special bonus kena manipulated)
The cost of term insurance especailly yearly renewable term insurance is very close to mortality charge and if you terminate, your loss is not much.It makes a lot of sense , therefore, to use term insurance to address your insurance needs.
Your insurance agent is dishonest.; July 20, 2008 11:17 PM
Falcon said...: But I notice that the one year, three years and ten years projection will show an increase in the returns. According to what you have said, it should be getting lesser and lesser as one ages but the projections shows an increase?; July 21, 2008 1:10 AM