Friday, March 06, 2009

Avoid the risk of a life insurance policy

To consumers:

When you buy a life insurance policy, you are taking a big risk. You do not know what will be the inflation and mortality rates in the future. In spite of this, you are required to commit a fixed premium payable for many years into the future.

The insurance company does not know the future rates either. So, they have to take a risk. If they guarantee you a favourable rate and the trend goes against them, the insurance company can declare bankruptcy. You will lose a large part of your savings.

If they declare a conservative rate and there is high inflation, you will lose out. The money that you have saved for many years will be paid back to you in depreciated dollars. The insurance company keeps the excess as their exceptional profit.

To overcome this uncertainty, many insurance companies have to operate on a participating fund. The insurance company guarantee a low rate of return on the participating policies, and promises to pay back a large part of the yearly surplus to the policyholder in the form of a non-guaranteed bonus.

This arrangement is fine, provided that the insurance company can be trusted to treat its policyholders fairly in the distribution of the bonuses. But you have to take another risk - can you trust your insurance company to give you a fair rate of return?

In the past, the insurance companies observe a high standard of conduct in the distribution of the surplus.  In recent years, this standard has been eroded. Many insurance companies are now prepared to short change their policyholders in the pursuit of more profit for their shareholders or for their sales growth. For example, they declare a lower rate of return on their old policies and introduce new products that give a better return to boost their sales. This is unfair and at the expense of the old policyholders.

If this happens to you, you have a recourse. There are regulations in Singapore to ensure that the policyholders are fairly treated. If you have bought a participating policy and have been given a poor rate of return, compared to other policyholders who have bought a new series of products, you can lodge a complaint with the regulator, which is the Monetary Authority of Singapore. They will take up the complaint on your behalf and will ask the insurance company to justify its stand.

If you are going to make a long term commitment in a life insurance policy, you should choose an insurance company that can be trusted to act fairly in the interest of its policyholders. There is a lot of uncertainty at this time on which insurance company can be trusted to observe this principle. It is best that you do not put your long term savings in a life insurance policy, as you are subject to the risk of being denied a fair rate of return.

It is better to buy accident or term insurance to cover your risk and to keep your savings in a low cost exchange traded fund. Many of these funds are offered in the market.

You can get more details by reading the FAQs in my website.

Tan Kin Lian

5 comments:

siewkhim said...

Kin Lian,

I think what you are trying to say is that avoid par policies and go for pure term cover. This message has been repeated very directly many in the past except this message is "you have to read in between the line"

I like to add on what you have said. Investment policies are also dangerous. One policyholders may have the same problem as with par policies as you explained. Another big one is the fact that a policyholder who have been regularly paying his premiums to date may one day find the policy under impending lapse unless "top -ups" are made. This is so because the balance of the units is unable to cover the protection cost due to falling unit values and number of units.

LOKE, AIA BERHAD. said...

To solve this problem (Investment Linked Plans), we can try not to attach any riders to it...

zhummmeng said...

I think most people don't realise there are risks in whole life and endowment products. The latest buzzword is "back to basic" implies that insurance companies are reverting to the 'old days' when they could deliver good return at low risk". This is misrepresenting. it cannot return to good old days' basic. Consumers must not be fooled by their 'twisting' of words. They are nothing but words to hoodwink.
In the good old days when annual bonus was high and terminal bonus was less risky and the net return was decent because interest rates were high.They could invest or lock in them without taking unnecessary risk. Today,the insurers are 'trying to achieve higher return by cutting the annual bonus which one insurer recently claimed it was industry's good practice .You will soon see that it was a suicide practice for the policyholders. I am not surprised the next best practice is no annual bonus practice.Ponzi scheme is eventually used to pay off older policies.
This is removing the bonus and not reshaping the bonus. There is nothing more to reshape but to gamble. Policyholders will be asked to 'trust' them to deliver higher return.Policyholders might as well trust themselves.
At the LIA AGM, MAS warned the insurers about going into investments that they are not familiar in the hope of increasing return. Does that mean the insurers know about investing in traditional asset classes? Did these insurers escape the mauling after the reshaping? No, the risk is now borne by the policyholders.
Another point raised at the AGM was under insurance. Last years the average protection was only a dismal $37000. Obvious reason is the insurance agents were pushing only whole life and endowment for higher commission. How can these products give adequate coverage? Hope LIA don't pay lip service. MAS must warn that the 'advisers' must advise and not push products or peddle products.
Not only that MAS must punish the offenders if it is serious about credibility. It has lost much of it and it better do something about damage control otherwise the man in the street will not trust MAS any more.

The said...

Insurance agents' argument against buy term and invest the rest is that term may lapse without the cleint's knowledge. Is this possible with the current efficiency of the communication system? Is it possible if you have a financial life coach?With so much safeguards in place do you think the argument is valid?
Maybe the insurance agents are talking about themselves that they are unreliable and that the sale they made is a one off. Their responsibility ends after the sale.
However, even it is not true the insurance agents continue to use the same line to frighten consumers into buying wholelife. Working on numbers there will be one sucker around to believe it.This is exactly what it is happening. Whole life and endowment products still find a market in this group of suckers. A sucker is born every second.
The mdrt , cot or tot are awards for conning suckers and they are yardsticks of the number of suckers 'closed ' by insurance agents

Anonymous said...

That is why companies are adopting the 'best practice ' to defraud the customers. Recently there was a insurance company which restructured the bonus so that it could manipulate the fund. Since it is non gauranteed it is up to the company to declare. It is more like gambling, like 4-D or TOTO. You are not sure what you will get 20, 30 years down the road. Worse insurance use the projected as if it is a sure thing. Anyway , even it is a sure thing, is 2.5% return good after 30 years?,. Only the housewifes , aunties and uncles the agents can bluff.

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