Tan Kin Lian's Blog: A poor return on savings in life insurance

Tuesday, July 07, 2009

A poor return on savings in life insurance

When you pay premium for a whole life or endowment policy, a portion (say $X) goes to provide the insurance cover and another portion (say $y) goes towards savings to pay your the maturity benefit or cash value in the future.

The insurance company aims to earn a return of say 5% per annum on the savings portion. However, they take away more than half of the gain to pay commission to the agent, overhead expenses and profit for shareholders, giving a net return of less than 2.5% to the policyholder.

This net return is not guaranteed, as it takes the form of a bonus that can be adjusted by the insurance company.

When the investment return is bad (as has happened every few years), the insurance company cuts the bonus and gives you a lower return. If the investment return is good, the insurance company may not increase the bonus, as it prefers to keep the excess gain as "orphan money" in the insurance fund. The policyholder is likely to lose out in the long run and get a return lower than projected.

After deducting the cost of insurance (i.e. $X) the net return may be less than 1% per annum. This is a poor return for a long term savings plan.

This very low return is possible only if the policy is maintained for more than 15 years. If it is terminated earlier, the cash value is likely to be less than the total premiums paid, giving a negative return to the policyholder. Many policyholders lose more than half of their savings on early termination.

To give a fair return to the policyholder, an insurance company should follow this approach:
a) reduce its expenses, especially commission to agents
b) distribute most of its investment gain to policyholders

Unfortunately, to my knowledge, none of the life insurance company in Singapore follow this approach.

Hence, it is best to avoid all types of life insurance policies that have high expenses. Buy term insurance for the life insurance. Invest your savings in government bonds or an exchange traded fund.

Tan Kin Lian

5 comments:

James said...: Mr Tan,

Some time ago, you mentioned that you would be setting up an insurance company or acting as a consultant for an insurance company. Is this still in your plans? I am sure many people would like to buy policies from you as we trust you.; July 07, 2009 9:01 AM
Anonymous said...: Policyholders, wake up to this fact from an actuary that the whole life and other traditional insurance products are NO longer value for money.
The reasons are as below.
1. operating cost which includes the the commission for agents, admin, CEO's and senior management salaries, mortality cost and profit etc ; all these cost have gone UP and UP. As long human being are used forget about lowering the cost' this is a labour intensive business, they can't use robots, no technological innovations.
2.The low interest rate..
3. The low investment return
Item #1 has been going up and will go up. Your policy return is driven by item #2$3.
As a result for every premium dollar you pay , nothing goes into investment for first 2 years and after that only 30% invested.
The insurance companies know that and die die want to sell this type of products because is is lucrative and the insurance agents will only sell them because of huge commission. To make them look attractive and by projecting higher return(they hope to meet the projection) some companies restructure their bonus by cutting the annual bonus and transfer the money to the special bonus for higher risk investment. If they make you win a little bit, if they lose you get nothing. So cross your fingers that they make. But unfortunately if they make they give a little to you because of their high operating cost and smoothing.
If the insurance companies are taking more risk why not do it yourself and make all the return. For same risk as the companies take you get higher return.
Another solution is to cut the CEOs and senior managers' salaries by half, reduce the agents' commission to 10% and only pay them for 3 years instead of 6 years,remove all the frills, cut off all those crap ads, have one or two senior VPs(GMs) instead of 10(eat finish rice type)' lower mortality cost, take lower profit and you get a trim and lean company.
But meantime, avoid these products. Remember not to be fooled by names. The insurers are getting exotic and romantic but dishonest. Recently many products were rolled out with fancifool names.Why dress up if the content is real value for money? There must be a reason and that is to hide the rotten core.Another thing to remember is your agents will be calling you on the pretext of courtesy call, review or other craps.Their idea of 'review' is selling you more wholelife. The truth is they have something to dump on you.Don't make the same mistake like the Great Singapore sale (GSS) when you bought a lot of rubbish and you only realise when you do year end spring cleaning that they are rubbish.
Remember the standard reply if they should call you, "no need", "not interested", "I got alleady" , "my grand mother is also agent", "i got 10 alleady", "I ask my husband or wife".. etc..
All the best.

The Watchman; July 07, 2009 11:09 AM
Anonymous said...: The Watchman,
Whole life and ilp are lousy due to poor return to the policyholders. What about single premium plans?
Thanks.; July 07, 2009 12:05 PM
Anonymous said...: It depends on the objective of your investing, your time horizon, appetite for risk, your financial circumstances.
Example: if you are rich or accumulated enough for your goals and you don't need to grow any further and you need only to protect your hard earned saving or wealth then a low risk or risk free product is recommended.
A risk free product like the 10 year bond which gives about 3%.
A low to medium risk product like Growth of NTUC gives 3 to 4% for 10 years.
If you are accumulating for a medium to long term goal the above products are not suitable because they will NOT accumulate.
The best way is to use a broadly diversified portfolio of unit trust
or ILPs to accumulate. There is no other way if you are poor. Using insurance wholelife or endowment single or regular sure die and guaranteed loss or you are gauranteed to stay poor. The rich get richer the poor get poorer because the poor can't afford real qualified advisers but the insurance agents who don't know one end of investment to the next end but only WL and endwoment.
It is the poor who need most help but unfortunately it is the poor who always got screwed up by insurance agents.
The single premium endowment Growth
from ntuc CANNOT accumulate for you, only to preserve your wealth at best.

The Watchman; July 07, 2009 10:05 PM
Anonymous said...: Those who have been mis-sold by insurance agents the good news is these agents cannot get away now. The law is hot on their heels and the law will catch up with them once the minibond saga has blown over.
Policyholders must get ready to speak up and expose the agents. Check your policies with a third party for mis-selling and inappropriateness. Those who bought wholelife,endowment , anticipated endowment called cashbacks and regular ILPs have been taken for a ride. You have been short changed. These products are not suitable for you and will not meet your goals.Consult a qualified adviser to help you.Consult FISCA for help.You have been cheated by your insurance agents.Demand the return of your money from the insurance company or else lodge with MAS or sue the agents. You must know your rights. Your agents have breached section 27 of the FAA by pushing and dumping products on you. The products you were conned into buying fail the reasonable basis test. This is cheating .; July 09, 2009 12:25 AM