Tan Kin Lian's Blog: Make traditional policies good for consumers

Sunday, September 20, 2009

Make traditional policies good for consumers

I wish to address the questions: What is wrong with traditional policies, such as whole life, endowment or critical illness, which have been sold for decades? Can the shortcomings be corrected?

The shortcomings are:
a) High upfront charges - as much as 160% of the annual premium
b) Lack of transparency
c) Fair distribution of bonus

These shortcomings can be overcome by:
a) Reduce upfront charges
b) Adopt the asset share method - improve transparency and ensure fair distribution of bonus.

Using the asset share approach, the insurance company has to give an annual statement to the policyholder showing the premiums paid, the charges taken out of the premium (for mortality risk and expenses) and the interest credited (based on the investment yield earned by the fund) and the asset share. The asset share has to be paid to the policyholder on the termination of the policy.

This transparency will help to reduce the upfront charge (as consumers will never agree to have 160% of their annual premium taken away). The transparency and competition will make the upfront charge to disappear one day (similar to opening a savings account in a bank!)

Some countries (e.g. Malaysia) have already adopted the asset share method and also placed a modest cap on the upfront charge. If a similar approach is adopted in Singapore, I will be happy to recommend the whole life, endowment and critical illness plans as being good for consumers.

tan Kin Lian

7 comments:

Anonymous said...: Whole life product MUST be able to give at least 4% after 20 years and endowment after 15 years. From this base point discount to present value and see waht have to be cut ,from commission, expenses, salaries starting from CEO, senior managers down to middle managers.; September 20, 2009 9:02 AM
Anonymous said...: Remove the commission from all products and let the buyer and seller bargain for a fee.
Lower the cost of the products by selling on line or from a product vendor(the pharmacy). Buyer can buy(implement) with a prescription from a registered adviser.
Buyers can access to a list of products with prices.; September 20, 2009 9:44 AM
Anonymous said...: Consumers in US, Australia and UK have stopped buying par products like wholelife and its variations , and endowment.
This is the only way to help MAS to tell the insurers that their par products are rip off and robbing the consumers.
FISCA can play a role to educate consumers that par products are useless as protection and saving devises.Only consumers have the power to stop the sale of these products.
Telling the insurers is futile. Par products are their life lines and source of cheap capital. When it is cut off they will have to be more transparent and cannot do anyhow.; September 20, 2009 12:23 PM
Vincent Sear said...: Let's say a participating whole life policy, with an age 30 client paying premiums of $100 per month (or $1,200 per year) till age 85 for a sum assured of $100k. That's $66k worth of premiums throughout the policy, if he survives.

The selling agent is likely to get a hefty commission of about 2 years worth of premiums, usually heavily loaded in the 1st year, and gradually diminished from 2nd to 5th or 6th year. Then, nothing thereafter.

Let's put it at $600 (50% annual premium) at the 1st year and total of $2,400 collected in commission over the 1st 6 policy years.

2 years worth of premiums going to commission may sound a lot, but we have to look at it from the other side of the equation.

The agent sold a whole life policy worth $66k in premiums. His commission being $2,400 is just about 3.6%. The trouble and quarrel is, he collected mostly upfront instead of throughout the policy life, yes.

However, if you pay the agent 3.6% according to monthly regular premiums as received, he'd be paid $3.60 monthly for all the troubles and efforts to secure a deal worth $66k over 55 years. You want to work as an agent?

Second, the commissions are leveled throughout policy life, the agent also lose out on inflation. He'd be receiving the same dollar amount that keeps losing more and more value to inflation, while the client is compensated by paying premiums with devalued currency and also having policy cash value preserved or even enhanced through participating bonuses.

Not many people questioned this business model in the high interest rate environment of the 70s and 80s. What's the big deal about losing 2 years of premiums to commissions when the projected returns were based on 8% or even more 10% compounded over 20 years or more. However, with the interest rate environment, it shows up glaringly.

All parties, insurance companies, sales agencies and clients need to rethink their business and investment strategies.; September 20, 2009 5:59 PM
Anonymous said...: Vincent Sear,
trying to justify selling par products? Your argument is flawed.
As long you know that the commission eats into the return and affects it badly it is shameful to do it.But insurance agents don't care and knowingly con the CONNEDsumers into buying it.The CONNEDsumers don't even know they are conned until told by a third party.
I hope FISCA can fill this role to review and to detect the mis-selling and to help the aggrieved consumers lodge with the police if there is evidence of cheating, to demand a refund from the insurers and lodge with MAS.; September 20, 2009 11:21 PM
Anonymous said...: Hi 9.02am,

It is told that TM Asia Life's participating life insurance policies was able to achieve 5% per year for 10 yrs.
TM Asia also abnnounced in April that it will not cut bonus and it is able to maintain the same bonus rate as those given in 2008.

Anyone care to comment...; September 21, 2009 2:40 PM
Vincent Sear said...: Anonymous September 20 11:21PM

Perhaps you misundertood. I'm not trying to justify anything. I'm just relating the history and development of high upfront commission for participating policies. I don't mean it to be an argument and I don't think that it's flawed. I'm just telling it as it is.

But you're right on one point. The buyer should know it too before deciding for himself whether it's worth his while and money to buy into it or not. That's the agent's job.; September 21, 2009 4:11 PM