Tan Kin Lian's Blog: Giving a fair deal to policyholders

Tuesday, December 09, 2008

Giving a fair deal to policyholders

We have to be honest in our dealings with other people. Honesty is to be transparent and fair. We have to give the relevant information to the other party, so that they can make an informed judgement.

Let us look at the opposite value, which is dishonesty or cheating. Cheating is defined as taking advantage of another person, for one’s personal benefit, at the expense of the other person.

Let us look at the example of the sale of life insurance. The policy has a high upfront charge to pay commission to the agent. The commission earned is excessive, compared to the value of the service. The policyyholder pays an average of $2,000 on a typical policy of $100 a month. This high charge is hidden from the policyholder.

It takes about 15 years for the policy to earn sufficient investment income to cover the upfront charge. If the policy is kept longer, it may show a positive return on the premium. The policyholder does not realise that the high charges take away 40% or more of the total investment income. It leaves a poor return to the policyholder, that is insufficient to cover inflation.

The policyhohlder could have inviested in other "fairer" products that have lower charges and give a better return to the customer.

The insurance agent is able to sell the life insurance contract at the high charges, because they are trained to over-sell the value of the insurance contact. It tells the customer about the importance of protecting the family from the financial loss due to the death of the breadwinner.

A more honest way is to advise the policyholder to buy term insurance, where the cost is much lower and affordable.

To prevent the excessive abuse of customers, it is important for a life insurance company to act honestly and to reduce the excessive charges. When I managed an insurance company, I observe this principle and reduce the expenses to give better value to the customers. After my departure, this organisation has increased its expenses tremendously.

In many countries, the authority sets limits to these charges, to prevent abuse of the public. In Singapore, there are no limits, so long as the commission is disclosed. Unfortunately, this approach does not work, as the public is not informed about it.

14 comments:

Anonymous said...: I doubt things will change. Just look at the way MAS handle the Minibond saga where victims face total losses. If this is how they handle it, can you expect any better for other and lesser things?

Maybe they look at the big picture or "national interest". High commissions of agents can mean more taxes collected for the gahmen. Just like more structured products sold mean higher profit for the banks, more taxes and more economic growth. More cheaper foreign labour mean lower wages and cost and higher economic growth. More expensive HDB flats mean more profit for the gahmen as well as higher prices for private property as well.

Individual interest taken care of? Forget it, unless you are lucky and it coincides with the big picture or "national" interest.; December 09, 2008 10:01 AM
Anonymous said...: Remember that your PROTECTION value and RETURN in wholelife and endowment products depend on a few factors of which COST and the return on investment play a crucial role.
Increased cost means low protection and low return.
What are the components of cost?
Operating expenses like the salaries of CEO, senior managers and other staff , the fixed cost and other variable cost(marketing etc) and Insurance agents' commissions.
All these costs have gone up and up but the return on investment has NOT. This explains why whole life and endowment products are giving miserable return and protection.
Some companies are resorting to RESTRUCTURING THE BONUS BY REDUCING ANNUAL BONUS TO FREE UP SOME MONEY FOR INVESTMENT in the HOPE TO RETURN YOU MORE MONEY IN THE FORM OF SPECIAL BONUS. High hope indeed!!!!You shall see next year's bonus declaration. Your money already got burned.!!
Restructuring is not without a price, that is , the company is putting your money to HIGHER RISK and YOU bear the risk because SPECIAL or TERMINAL BONUS is NOT guaranteed.
If this is the practice why should you let the company invest for you
where your money is put into a pot with other people's money without considering your needs, time horizon and risk.This is a "one size fits all" investment which is unfair to every policyholder.
I AM NOT SURPRISED THAT ONE DAY YOUR ANNUAL BONUS WILL BE REDUCED TO ZERO and if this doesn't work PONZI methods will be used.This will be the end of the company.
I urge consumers to understand the development of WL and endowment products is not working to your advantage.Don't let them fool you.
Those of you who had bought WL or endwoment long time ago, check the return and protection and see whether the recent ones are increasing or declining.
Currently insurers are resorting to the use of 'decorating frills' to cover up the deficiencies of the product like the protection and return which are basic to financial planning. The frills or supplementary and rubbish benefits like retrenchment, 3 times death benefit due to accident, increased in sum assured in first 15 years and conversion to annuity, limited payment term, they are intended to cover up and to distract you from the truth, from the rotten core . These are marketing ploys, some fanciful footwork at the best.Financial planning doesn't work with this type of products. They can ONLY BE SOLD as an end itself and as a product without the direction. That is why companies are training the greedy salesmen to PUSH and PEDDLE the products resulting in shortchanging you, your needs, and also miss-selling and misrepresentation.
The salesmen are also trained to lie, scheme, manipulate you. Conscience and ethics have been thrown to the wind. The mercenary instinct is kill to gratify greed.; December 09, 2008 10:30 AM
Anonymous said...: It is difficult to change unless the present government is also changed. This is because they have made a strategic error in raising their salaries. That strategic error has serious future implications for the PAP as well as for Singapore. We are but seeing just a small indirect impact of that one decision in the way companies and organisations are taking higher and higher risks and going towards the path of putting their own interests higher than the interests of the consumers, thus adopting an adversarial relationship with the customers rather than a partnership one.
In this case, the insurance companies can get away with it just as the Minibonds sellers are able to because the present government has lost its MORAL AUTHORITY to take action against such dubious practices. More importantly, more and more average citizens including hawkers and small businesses now see it acceptable to make as much profit as possible at the expense of consumers nowadays thus making life for the average consumer harder and harder.; December 09, 2008 11:00 AM
Anonymous said...: I remember reading an article in the ST by Dr. Lee Wei Ling that medicine is a calling and not a business to fleece their patients.That explains why she is not in private practice.And she gets a lot of satisfaction and meaning out of her work.
Insurance and financial planning should also be a calling and not a temporary job after retrenchment, get rich quick job or an alternative job while waiting for another job or 'to try job' or 'can make good money job'.
I notice that many of the insurance agents don't see this as a calling.The fact that many of them are not qualified and they don't bother to upgrade themselves shows that they have no interest to help their clients with best advice.
Their interest is to squeeze as much out of their clients.
These agents often cover up their lack of qualifications and competence by providing non financial services like cleaning their clients' toilet, buying them food, sending children to school or hospital ,celebrating birthday , chaufferring the clients or so forth . Some agents claim or show sincerity or caring in their dealing with clients but sincerity and caring are NOT criteria for "FIT and Proper" under the FAA but competence and honesty are.In fact agents like them create more disasters in the cleints' financial life.The minibomb saga is a testimony where trust plays the central role and not financial advice and like many cheating cases where sincerity and trusts led to disaster for the victims.
Financial planning or life insurance is a calling and when it is then it can be assured that these people give off their best to the consumers.; December 09, 2008 11:18 AM
Anonymous said...: Dear Mr Tan,
I noticed my Protection Policy from Income has its cash value dropped from the month of Oct to Nov, i.e. Oct has a higher cash value compared to Nov. Why? I thought it should increase instead ogf decrease over time. I have this policy for 17 years already. Hope you can advise what should I do?; December 09, 2008 12:19 PM
Anonymous said...: My 15-year endowment policy will mature in Jan 09 and the insurance company has notify me of the total amount of the policy upon maturity, including all declared bonuses and final bonus.
After taking the total premium I have paid, the net profit is about 3.5% to 4% p.a.. I wonder whether this is a reasonable return for a 15-year endowment plan with participation.
Can Mr Tan advise please?; December 09, 2008 1:35 PM
Anonymous said...: Bee Bee,
15 years ago policies incepted that time can give you that kind of return, relatively not bad, ie compared to others. But it is still bad because there is no REAL growth in the value of your money if you adjust for inflation.
When investing or saving you MUST beat the inflation. In your case you MAYBE just protecting your money. I say maybe, because this year's inflation is average 6.5% but over the long term it maybe 3.5-4%. So you are preserving only.

Now the new products will not give you that kind of return anymore unless "miracle" happens in the special bonus,ie the insurer doesn't lose but make a lot of money in their investment otherwise you get zero or nominal .

Don't buy endowment if you are saving. Just invest regularly in a low risk fund or funds. The overall risk is lower than an endowment. You get better return and break even point is much shorter.
Endowment is high risk if you consider the return at every stage of its life.
Insurance agents like to sell you this type of products because they earn more commission.It is not that it is a good product. In fact it is dumb product. In US the consumers spit at them.They call it a scam because there is a better alternative like above and is less risky than endowment. Insurance agents not recommending this because they earn them peanuts and how to qualify for mdrt?; December 09, 2008 3:03 PM
Anonymous said...: Anonymous 12.19PM,
see your agent and ask for explanation and hear what your agent has to say. It will be very interesting.
Let us know his or her explanation; December 09, 2008 3:05 PM
Anonymous said...: There is no more such thing as a calling once the govt has stated that if you do not pay enough they will be corrupt. Lee Wei Ling to them is just a child. What the head of the family says goes. So the people of Singapore are being led down the path of no money, no talk, not enough money, corrupt. Pay and Pay, why should that be surprising?; December 09, 2008 7:20 PM
Anonymous said...: anonymous 7.20,
so you agree that consumers should be fleeced by insurance agents.It is ok,lah.
Isn't what MR. Tan doing a calling? He gets nothing. DId anyone see he is on the take?
I can imagine how "luan" if everybody thinks like you.
It is similar to what the insurance agents think.If I don't rape her somebody will , I must as well rape her.; December 09, 2008 8:05 PM
Anonymous said...: This has a lot to o with the current business culture in the economic downturn. When times are good, you see marginal returns; so during bad times, you would expect the vultures to prey on the weak. Nothing will change in this kind of system. I'm fearful that the papies will do something to harm the uprights and heroes who dare to speak up for the weak.; December 09, 2008 8:37 PM
Anonymous said...: Anonymous 8.05 pm,
Of course not! If I agree I will be enjoying my millions instead of writing in this forum, using up my time. But the govt you voted for is leading you that way, and 66.6% obviously agreed! So there.; December 10, 2008 2:01 AM
Anonymous said...: It would be quite interesting to know how this $2,000 that the agent is earning from a $100/mth policy is derived. Is this a lumpsum or spread over 10 or 20 years?

Would Mr. Tan care to explain?

Sometimes figures like this captures the attention of readers who do not care for accurary; but of course, if one wants to be credible, one needs to support one's statement with proof.; December 10, 2008 2:39 AM
Anonymous said...: What I know is the insurance agents
get an average of 150% of your premium spread over 6 years. This can come to $2000. There are companies which pay the agents for the life of the products and the commission can be a lot more.
The products that pay agents this kind of commission are whole life and endowment and regular ILPs. This explains why agents are keen only to sell them. Agents are so well trained in selling them that they can turn black to white and back to black.They are so good that they can convince a bird to come down from a tree.
This is the reason why Mr. Tan is warning the consumers. Cost is inverse to cash value and protection. When insurance companies pay their ceos million dollars salary, and staff and insurance agents high commission they are paid at YOUR expense. You pay all of them. EG. every dollar you pay as premium probably 40 cents go into investment. The 60 cents go to pay all the fat cats.
In the past, eg. Mr. Tan's time, 40 cents pay the cost and 60 cents go into investment.
Thsi explains why wholelife and endowment products are giving very poor return and protection. To cover up these weaknesses the insurers are throwing in rubbish decorations like additional benefits so that you don't see the truth. It is getting more con job.
It is true that you are paying the insurance agents so much . How else can they qualify for those awards?; December 10, 2008 11:58 AM

Tuesday, December 09, 2008

Giving a fair deal to policyholders

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