Wednesday, June 03, 2009

It is easy to be cheated (4) - Participating policies

A participating life insurance policy offers a low guaranteed rate of return for the premiums paid over many years. The insurance company promised that, if the insurance fund earns a higher rate of return than the assumed rate (used to compute the premium), the additional return will be distributed in the from of non-guaranteed bonuses.
They project the bonus to show a fairly attractive return on the policy after it matures in many years time. The snag is that the bonuses are not guaranteed.
The consumer believed in the sales pitch by the insurance agent and buys the policy for the projected return. 
After the policy is issued, the insurance company may reduce the bonuses due to the low investment yield. However, the consumer cannot tell if the reduction is fair or is more than required. 
By paying a low rate of bonus, the insurance company is able to use the additional profits to strengthen its financial position, but this is at the expense of the policyholder. 
The low bonuses results makes the policy unattractive. To increase the sales, the insurance company introduces a new series of policies that give a more attactive return than the old policies, and trains the agent to sell the new series.  
If the policyholders decide to terminate the policies, they will suffer a large penalty as the cash value may represent less than half of the premiums paid. 
The insurance agents tell the policyholders that the low cash values is due to the insurance coverage provided by the policy. The real cost of the insurance coverage is less than one-fifth of the amount taken away. Most of the premium are taken away to pay commissions and expenses. 
Recently, many insurance companies reduce their annual bonuses and increase the terminal bonuses on the maturity of the policies or on death.  They use the terminal bonuses to show an attractive payout. However, the terminal bonuses are not guaranteed and may be reduced or withdrawn close to the payout date. 
If the policies are surrendered, these terminal bonuses are usually not paid, or paid at a lower rate than what is fairly due to the policyholders. There is no way that the policyholders can find out if they have been give a fair payout. 
In some countries. there are stronger measures to protect the interests of the policyholders and ensure that they are fairly treated. In other countries, the level of protection of the policyholders are weak. 
Tan Kin Lian


Anonymous said...

Hi Mr. Tan

Am I right to say that Terminal Bonuse in any particular year depends on the performance of the fund during the 'particular year' that your policy matures, so if you are unlucky to have policies maturing, say, this year, you suffer by having negligible terminal bonus added to your maturing policy?

The fact that most insurance companies are reducing bonuses on old polices, whilst trotting out newer products that pays higher returns, smacks of punishing old policyholders after making their money from them. These people, like me, will never buy the newer products because, if they can do this to the old policyholders, they will do it to the new policyholders as well, when the time comes.

Lost Citizen

zhummmeng said...

I was shown an endowment policy that breaks even same time as maturity. I was shocked. What if the policyholder holds 1 year lesser than the term , does that mean he or she loses for not holding it to maturity? What is rationele ? Is this not forcing the policyholder to hold it to maturity? This is akin to blackmailing the policyholders.

Then that is another limited pay whole life product that breaks even at the premium term, eg, 10 years. It may appear fast but that is all to it. It stops increasing until for another 10-20 years when it starts slowly increasing to hit a projected return of 2%+ and about 25 years to hit projected 3%.
This is miserable. How on earth can the despicable agents tell their customers that it is good product.On top of it it may or may not achieve the paltry projected return with so much higher risk.
Consumers must know that wholelife and endowment have higher risk now after the reshaping of the bonus. Are consumers told? If they are not, it is misrepresenting and it is cheating.

Anonymous said...

It goes to show that Capitalism (or a government which is too pro-business) is bad for everyone except those with the title of CEO.

Anonymous said...

Tnis is exactly what happened to my policies bought from NTUC Income. Matured policies are paid out less than projection done two decades ago. Existing policies have their bonuses cut and terminal bonuses promised. How to trust that when even policies that have matured are not able to meet projected returns in booming years?
To hear that new policies are now paid more returns smack of dishonest dealings yet our NTUC ministers turn a blind eye to all these even though there are constant complaints about it. This clearly shows how concerned the NTUC ministers are to ordinary Singaporeans plight inspite of their repeated verbal assurances. The only way we can protest is to withdraw our votes for these supposed representatives of our people when the time comes.

Tan Kin Lian said...

Hi Lost Citizen (4:27 PM)
It is true that the Terminal Bonus can be highly uncertain and can be withdrawn or severely reduced in a bad year, when the investment market is down.

The timing of the maturity is outside of the control of the policyholder. A severely reduced Terminal bonus can be very painful to a policyholder who has been saving for many years.

This has happened on several occasions in past years.

To make matters worse, the policyholder is not given a clear explanation on why the Terminal bonus has to be reduced by that extent.

Different policyholders may be treated differently. There is lack of transparency in this type of system.

Everlearning said...

I have two of my insurance policies matured this year and a third of the non-guaranteed bonuses were paid out to me.

These policies were taken decades ago and if not for the guaranteed bonuses I would have regretted taking up insurance policies.

zhummmeng said...

Whole life and endowment products are obsolete. They have lost its uses as far as consumers are concerned. Of course they are great products with the insurance agents and their companies.
The agents can earn high commission at the expense of the customers.
For the companies they are a source of revenue and cheap capital.
For the consumers they never get decent and enough protection and return.
Statistics from LIA prove that with these products people are under insured. In the LIA report released on 30th April, death claim was average $43K.
Is $43K enough to provide for the deceased's loved ones? No..but a devastated future.
Why? so low claim? In 2008 only $37K sum assured was sold.Why so low? because insurance agents only sold whole life to them and consumers can never afford enough coverage with whole life unless they are rich. But insurance agents only want to sell whole life because they give them high commission. So, you see the conflict of interest.
The so called sincere and caring agents have forgotten their ethics and conscience. They are actually cheats and evil.They care for themselves, their pockets.
I have no respect for those agents who qualified for the mdrt, COT and TOT. I know how they qualified. They qualified at the expense of their customers and their misery.
In my view these awards are awards of unethical practices and cheats.These qualifiers have robbed their customers of their future.

Anonymous said...

Below is a confession from an ex-insurance agent who was guilt stricken. What he did caused untold suffering to his client's family .It will be indelibly etched in his memory.

"When I was young and less wise, I became an insurance agent for a major insurance company.In my second month I sold a whole life policy to a young couple in their 20s with 2 young children.The premium was high but the sum assured was only $30,000. Three years later the husband, the insured, died in a car accident, leaving the kids with no father and the family without an income.
When the wife made the claim she received $30000+. The money barely covered the funeral expenses and a few months of living expenses.
I realized that had I done what was good for this family instead of what was good for me and the insurance company I would have sold the family a term policy. For the same premium I could have sold the family about $1 million of life insurance without the rubbish saving plan and the claim proceed would have taken care of the family and children for the next 20 years until the children became financially independent.
This experience shook me emotionally so badly that i quit the life insurance business forever. I honestly felt because of my knowledge and the lack of it that I stripped this family of the protection and the help they really needed."

Anonymous said...

INCOME policies bought long time ago gave attractive returns for conservative people.
I bought a Growth Policy for $3000 in year 1994. It will mature this year (ie after 15 year) and I would be getting $6363 soon.
I am quite happy with this return.


Anonymous said...

......... at least 4.4 billion dollars in insurance company funds are invested in companies whose affiliates produce cigarettes, cigars and chewing tobacco.

"Despite calls upon the insurance industry to get out of the tobacco business by physicians and others, insurers continue to put their profits above people's health," said Boyd, a faculty member of Harvard Medical School.

"It's clear their top priority is making money, not safeguarding people's well-being," he wrote."

They should go into illegal drugs.

Similarly, Life insurance companies in Singapore are still rolling out whole life and endowment, especially cashback anticipated endowment that they know are useless for consumers for protection and saving. Insurance agents too have no qualms pushing them. These people are driven by greed and money and have no interest of the consumers at heart.
They would stoop to anything so long they can profit from it.
Retribution will surely come to these people. They will be paid with their own coins.

Anonymous said...

that is about 5%. This was possible when Mr. TanKL was the ceo and when bonus was high. Can you get same return in the future?
This was Mr. TanKL's well kept secret but someone is using it for his face.

Anonymous said...

Anon 7.33pm,
The current PAR policies give lousy returns. The old PAR policies at least gave decent returns.
What went wrong?

zhummmeng said...

These are causes.
insurance agents want high commissions, incentives, trips, gift vouchers, high bonuses
CEO and senior management want high salary, higher operating cost, higher year end bonuses, higher rentals etc all on the rise. Who pays for this cost? Suckers, of course. eg. for every dollar premium 95 cents go to pay the cost and mortality charge in the first few years.Mortality charge rises with age.

Interest rates:
low, very low, not worthwhile to be locked in; as a result more money is used and locked to guarantee the guaranteed component of the policy

Investment return:
low return in all asset classes; volatility. Portfolio too conservative.

The par value products depend on the investment because it is the only area that can give higher return to offset the high cost and low interest rate but it is non guaranteed( special bonus) and it is high risk. As a result par products like endowment, wholelife increase in risk.
Even the investment returns high return you are NOT given higher than projected. The rest is held back for 'smoothing' and to defray the cost of operation(eg. like salaries and staff bonuses)
If consumers have to bear higher risk for WL and endowment for low return, eg 3.5% over 30 years, it is better for consumers to invest on their own using DCA and buy term for protection to mimic WL. For endowment just use DCA and don't waste money on term for protection .
By adopting this strategy you get higher return, higher protection and low risk in the medium to long term.
WL and endowment is a scam and non transparent and these are the products that insurance agents want to sell because of the high commission and for the company it is a source of cheap capital to build their assets and long term source of revenue for the company.Operating cost and mortality charge come from this source.
Friends , no insurance agent and company will disclose to you all these figures. They continue to bluff you and tell all the rubbish why WL and endowment are good and don't tell you why they are not good.If you combine half truth and half lies the result is cheating.
And you have been cheated all these times. It is time to wake from those craps like they 'insure you for whole life , forced saving, cash value, retirement, old age and other craps'.
Has it ever occurred to you that you have to borrow and pay interest on your OWN money? The interest rate is between 5.5% to 8%, more than what the company pays you in bonus, right? It is good return on investment for the company at your expense. Once you borrow, that is the end of your policy. You will be dumb to keep and continue paying the premium. It is like walking up a moving down escalator; it is coming down faster than you can walk up. You remain stationary or stay at the bottom and this is what happens to your policy if you borrow or make an automatic premium loan.
Wake up and know these scam products

Anonymous said...

Speaking of insurances, last year I asked CASE a question.

If one declares a pre-existing medical condition, insurances may exclude these conditions in their insurance coverage. Sounds fair so far.

But if Insurances exclude these certain *pre-defined* conditions, that means a portion of the overall original risk is removed from the original insurer's undertaking.

But with these risks removed, why are there no deductions on the nett premium payable?

I mean if no fish ball, at least compensate with more mee or reduce price or something. But not for insurance.

CASE forwarded my query to some insurance association and to date, no reply and no followup from CASE.

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