Tan Kin Lian's Blog: Use "funny language" to confuse the policyholder

Wednesday, September 23, 2009

Use "funny language" to confuse the policyholder

In April, a policyholder was advised by the agent to "lock in" his investment linked policy and wait for a higher price to "lock out" his policy. He was assured that he would not be adversely affected by this transaction. He trusted the agent and took the advice to "lock in" his policy, although he was not clear about this concept.

Later, he discovered that "lock in" meant that he sold his investments to prevent further loss, if the market falls further. Instead of protecting against further losses, he missed the rally in the market and lost a lot of money due to this bad advice.

Why did the agent use "funny language" to confuse the policyholder? Why not advise the policyholder in direct language, i.e. sell the investments to avoid further losses from a falling market?

If the policyholder sells the investments and buy them back later, will the agent earn commission on the new purchase? I do not know the practice of this company and the terms on which the units are sold and bought back. Is this another form of twisting?

I wonder if the agent was giving bad advice, or have an ulterior motive in getting the client to churn the investment? I am very sad that some agents take advantage of policyholders to earn more commission.

12 comments:

Anonymous said...: This is obviously churning in disguise.The aim is to confuse the investor so that the investor will obey blindly and would not feel that he is paying the sales charge when he 'lock out".
Some agents from a social enterprise call their single premium endowment a fixed deposit.This is misrepresenting the endowment because FDs are supposed to be guaranteed and implicitly to mean the endowment is guaranteed too.I wonder why MAS is keeping quiet about this. This endowment is not even to be called a protected product as the word ' protected' is now outlawed.
MAS should warn agents against the use of words to mislead and misrepresent the prodcuts by insurance agents.; September 24, 2009 12:06 AM
sgcynic said...: At least, the agent did not ask him to "take profits". In general, I approach agents/consultants/relationship managers like I would snakes. Stay away. Well, as a Chinese proverb states, shang4 liang2 bu2 zheng4, xia4 liang2 wai1 (something like the lower support would be bent if the upper beam is crooked).
Still look up to our "leaders" after the minibomb fiasco?; September 24, 2009 12:40 AM
Anonymous said...: to 12.06 am

I don't think the agents are cheating you when they liken "Single Premium Policies" to "FD"s. Because, SPPs are capital guaranteed on maturity just like FDs. SPPs pay slightly higher interest. SPPs provide very small insurance coverage during the term (FD is worst, you get nothing). SPPs tenure start from 5 years usually, whereas FDs tenure could be as short as 1 month.

Of course SPP's lose out compared to stock market. But if you want safe secure place to put spare cash and a certainty to cash out with a fairly clear interest, on a certain date, SPP's are ok. If you buy shares, you cannot tell whether at the end of 5 years exactly, how much the shares worth due to cyclical changes in the market. SPP's (like fDs) has its own advantages in that sense despite the low returns compared to stock market.

SPPs and Term insurance are the only trustworthy products that insurance companies sell. Almost all other products tie your money down and pay you back in dribs and drabs and make you think they are very generous when they use part of your own money to pay you back, whilst at the same time pocketing quite a big chunk of it behind your back over the years. But SPP's, i won't worry about it, you can trust the insurance agents for once, when they sell SPP's.

REX; September 24, 2009 8:18 AM
Anonymous said...: Hello here is REX again,

I think i may have to retract my mail above.

I just picked up a brochure with big words Single Premium Policy, from a certain company in AMKH. I was shocked.
This company has taken advantage of, I think, generally positive sentiment about simple single insurance products. The "crime" it committed was to emphasise in its brochure, an unguaranteed payout of "4.1%pa" - but if you read the fine print, you "may" get the 4.1% only if you put the money for a total of - guess what - 30 years.

Here are the details.
The brochure cites and example, if you put 65,700 when you are 35 years old (duh.. which 35 year old has so much spare cash), then after 10 years you get a guaranteed return of $76,900" I made a calculation, it works out to equivalent of a miserable 1.5% p.a. (the company didnt do this calculation for you. They prefer to cheat and emphasise heavily the other non guaranteed figure of 4.1%). I think 1.5% guarantee, is a bit below market rate for a 10 year simple SPP.

The 2nd half of the story ...the brochure further explained that "up to 4.1% return" can be obtained !! But to get the 4.1%, the first 10 year end non guaranteed bonus must firstly be realised (which may not happen), AND secondly, you must let the policy roll on another 20 years, and you get the money back in drips and draps per annum over 20 years, equivalet to 4% pa) ... do note.. a lump sum payback is prohibited. That means you have to put most of the Single premium in that company for 30 years to get 4.1% pa. I think no one in his right mind would put most part of his $65,700 for 30 years in any company.

I think that companies should not use non-guaranteed figures as a carrot to hook the customers. This is not fair to the consumer!!! When drawing up illustration examples, they should use realistic figures. They used a huge figure, then say that in the last 20 years you get high $8000 per year return, but mostly, it is your own money coming back to you!!

I have bought many times SPPs before, the issuers don't normally advertise the % returns. It is "buyer beware", we know how SPPs work, there is a guaranteed portion and a non guaranteed portion of terminal bonuses etc.

I think only simple 5 year SPP's are acceptable, not these complicated stuffs which give a bad name to the industry.

REX; September 24, 2009 2:46 PM
Vincent Sear said...: Traditional SPP is not the same as FD. There's still the guaranteed and non-guaranteed columns to look at on the projection. However, in practice, no company ever cut bonus even from the non-guaranteed column. This is because it's usually only about 5 years to maturity at the time of projection. Any actuarial worth their salt should be able to reserve enough for that time frame.

In case of a really drastic interest rate fall in the market, the company would and could still honour the issued SPPs. But they'd withdraw the existing "series" from new sales and introduce a new "series" with lower interest rate on the projection.

Another difference between SPP and FD is when there's a need for emergency withdrawal before maturity. FD pays back the full principal sum with interest forfeited or pro-rated at the lower base savings rate. SPP usually pays back less than the principal unless approaching the year of maturity, and sometimes it can be very very much less in the earlier years.; September 24, 2009 4:12 PM
Anonymous said...: Hi REX comments as follows,
Yes Vincent Sear, your post presented correct facts. From my experience, at the end of 5 years, I get the higher projected maturity interest instead of the lower guaranteed interest. (Of course it has to be assumed that one should not default and withdraw before tenure over).

I have heard that recently terminal bonuses are cut etc so i think in future maybe this good luck won't hold...

Nevertheless, because all information is clearly presented upfront, a 5 year SPP is a very simple product, and fair,if one doesn't like to dabble with stock exchange stuffs.
I think there should be some regulation over how the SPP should be presented, the one i mentioned in my post is wrong i think. They should not allow the use of figures which are not guaranteed, to attract attention.

REX; September 24, 2009 5:41 PM
Anonymous said...: This was because Mr. Tan KL was at the helm that you got the higher of projection. With the new FT in charge wait long long . You will be lucky that you get 3.0% after 10 years.SP is a low to medium risk product and return NOT a guaranteed.
If you were misrepresented and mis-sold you should take the agent to task.Threaten to report him or her to MAS. It is the fault of the comapny and the agents. If the agent was qualified and honest he or she should present and disclose all info about the product before selling to you.The salesman was supposed to be a financial expert and that is REQUIRED of him or her,.; September 24, 2009 7:18 PM
Anonymous said...: REX,
what you find on the brochure may not be as pitched by the insurance agents.Half of the information is missing and only what the consumers like to hear is told by the agents. if there are figures they might be manipulated and interpreted to suit the sales pitch.
Are you aware that from now nobody is allowed to use the words 'capital protected" for financial products? I can bet with you, outlawed or not agents will continue to use the phrase interchangeably with capital guaranteed.Moreover, many consumers are not aware and may not understand the difference. This is where the agents will exploit and con the them.; September 24, 2009 9:45 PM
Anonymous said...: REX,
you are a great fan of single premium endowment from NTUC. How come all those things were not told
to you. I am sure you have bought many of these growth products.You should be the most familiar customer insofar the product but what slipped your understanding. Was it the agent took you for granted as savvy customer and therefore didn't want to disclose the downsides? or you were too smug that you refused.
I mentioned many times this product is meant for the rich who don't have to save and grow anymore. They just need to preserve what they already have. For the many out there, the man in the street, they need to invest in equities to get up and overcome the inflation and grow.They need to make their saving work harder.
The single premium endowment product cannot get ahead of inflation to grow.This SPP is wrongly sold to many people and I am sad that it is sold to the poor who need a lot of help to get them out of the rut but instead their trusted insurance agents locked them up in this unsuitable product.
If only FISCA existed then. These people would have gotten proper advice.; September 25, 2009 12:19 AM
Vincent Sear said...: We must bear in mind, look at the returns relatively, not nominally. A 5% return could be considered low in 1996 but a 3% return should be considered high in 2006.

There're valid and beneficial uses for SPP in personal financial planning. For example, for one with $50k, an agent should not try to sell the entire $50k. Say, $30k in 5-year SPP, $10k in FD and $10k in FD is prudent.

I've shared one experience under T.K.L. in the early 2000s. That was when NTUC Income SPP Capital Plus old series was paying 5-6%. The management knew, unsustainable and announced withdrawal of the series with a dateline.

The agents knew and the clients knew too: that type of rate nowhere else to find. That's when we found almost comical scenes of clients arguing with agents and agents arguing with supervisors, to buy into the old series.

There were stories from clients like, fixed deposit $XX,XXX maturing next week after dateline, please extend dateline. When you have something in the market that pays well above market rate, investors knock on your door for you to take their money.; September 25, 2009 12:20 AM
Anonymous said...: Hello REX wishes to clarify,

I still believe in SPP products as a safe place to park spare money of for example several $10,000, because it's capital guaranteed and you know when you are getting the money back, despite the fact that the interest rate will hover between a lower and upper limit (usually they pay upper).

What i dislike about the product mentioned is that the upper limit of 4.1%pa (10 year SPP) is i believe quite above market rate for SPPs, just for the sake of enticing customers - yet this number is not guaranteed, and it comes with many other conditions. Tomorrow, if i am another insurance company, i will make a product and say I pay 5.1% then put in the fine print "not guaranteed". It is extremely unethical to lure customers on the basis of unguaranteed numbers, this is the problem i have with that particular SPP. All the sPP i bought in the past - the agents do not make a big fuss about the payouts because they are aware that it is optimistic projection only and should never be used as a carrot in any way.

REX; September 25, 2009 8:06 AM
Anonymous said...: The agent failed to disclose and he didn't fuss because if he did you probably would not have bought. But I guess you trusted Mr. Tan KL because he was known as one who delivered the goods. But this new FT, can you trust him? It is not surprising that you will get another bonus cut and the breakeven point is the same as the maturity.
How about leaving some money with me. I guarantee you that you will get back all your money plus 5% compounded after 15 years but if you should surrender in the interim you lose all,no surrender in other words like hedge fund.; September 25, 2009 10:08 AM