Dear Mr. Tan,
There was a report in the Straits Times that several insurance companies are able to maintain their bonus rates last year, in spite of the financial turmoil. This is due to the practice of smoothing the bonus. How does it work?
REPLY
These insurance companies already cut their bonus by about 50% in recent years. The reduced rate of bonus gives a yield of about 1% to 2% per annum. Life insurance policies now give a poor yield, compared to other long term financial products.
Using the concept of smoothing the bonus rates, the insurance companies now declare a low rate of bonus. A large part of the surplus is kept in the life fund as "orphan money". This orphan money is contributed by the current generation of policyhholders, but are likely to be used to pay high commission rates to expand the sales of new policies (which do not benefit the current policyholders).
In some countries, the regulators disallow the use of orphan money in this way. To protect the interest of policyholders, they have mandated the use of asset shares in distributing the bonus. The regulators in Singapore has not mandated this practice yet.
Due to the low yield, it is best to avoid investing in life insurance products.
TMAsia life boasted that they never cut bonuses. Do you know why? Their annual bonus is only 1%, so low that it can be met even during bad times smoothing. So, don't be fooled.
ReplyDeleteNTUC did that too so that it can boast that it need not cut bonus .
During MR. TanKL's time bonus was high and when there was a cut it was replaced during good time.
For companies who use 'industry practice' as an excuse to reduce bonus are on a slippery slope to no bonus.
A company in mind was Equitable Life which adopted the no bonus and declared high return and eventually resorted to PONZI scheme that put paid the company.
Is low bonus fair to the policyholders? If policyholders bought with that understanding and it was the basis of contract there should be no quarrels about it but policyholders bought because of the high bonus and later reduced the policyholders have the right to sue the company for restoration.
Higher return is NOT guaranteed and companies may end up like Equitable Life.
The Watchman
There are policies which have break even point at maturity.
ReplyDeleteWhat do you think of the reasons for this.
My take is
1. the insurers can manipulate
2. to make high projection
3.to lock you up for the term of the policy.
4.to cheat you if things fail
5.for their insurance agents to con you
6.to 'reward' their agents with high commission
7.company will benefit from early termination
Between Whole life products and regular ILPs, although both are rip off, regular ILPs are better because you don't worry about bonus cut or the value of the special bonus that you will get.
ReplyDelete1.Regular ILPs are transparent;
2.you know the cost of your insurance;
3.you decide the protection value at any point of time; reduce or increase
4. you decide the portfolio depending on your risk appetite, time horizon and the return, unlike the WL which invests in one size fits all portfolio like a cesspool.
5.you can take premium holiday without going into APL(automatic premium loan) and pay interest
6.you need not borrow your own money whereas with WL you borrow your OWN money and still pay very high interest rate, higher than they pay you.(this is really rubbish)
7.You have full control whereas with WL you are at the mercy of the insurer.
8.Regular ILPs are also known as variable whole life policy
HAVING SAID THAT, REGULAR ILPs & WLs ARE TO BE AVOIDED BECAUSE OF THE HIGH COST. HIGH COST AFFECTS RETURN.