## Thursday, October 01, 2009

### High upfront charge

A consumer asked my views about a product introduced by an insurance company.

He showed me a benefit illustration:
a) A large single premium is paid into the account.
b) The sum insured is about 7 times of the single premium
c) The cash value on the first year is 73% of the single premium. The upfront charge is 27% of the single premium.
d) At the end of 20 years, there is a guaranteed cash value based on the guaranteed crediting rate of 3% and maximum charges) amounting to 79% of the single premium.
e) There are two other illustrations, which are not guaranteed, that shows a cash value that is higher than the single premium invested.

MY ANALYSIS
a) The charges are TOO HIGH. If the single premium is \$100,000, a sum of \$27,000 is taken away from your investment to allow for commission and profit.
b) It is unlikely, in my view, for the payout to meet the non-guaranteed illustration, as they are based on optimistic assumptions on future earnings
c) The consumer can invest the single premium separately and pay the on a term insurance out of the interest earned.

Anonymous said...

Another scam product using the con artiste insurance agents to peddle them using relationship
selling. The commission has to be high to incentivise the agents to muster up all trickery and means to sell them. Commission can work wonder and falsehood and lies can become truth.
There bound to be some suckers.

Anonymous said...

Dear Mr. Tan
Earlier, you posted the name of this product, but you have now removed it. Is it the Platinum policy from Company A?

Jeremy said...

I just did some simple calculations. Correct me if I'm mistaken.

According to the policy's website, the 3% guaranteed crediting rate is based on the single premium, less charges. In other words, at the end of 20 years, the 79% guaranteed cash value you've mentioned is based on 73% of the single premium.

Put it another way, the guaranteed amount after 20 years is only 32% of the original single premium. This works out to an interest rate of about 1% per annum.

So if you put in \$x to this policy, your guaranteed cash return is effectively 1% per annum. Comparatively, if you ignore the insurance component or any potential upside in the policy, this does not look as good as the Fixed Deposit of 1.1% - 1.4% for a 2-year commitment currently offered by most banks even in this low interest rate environment.

Sim Wei Jian said...

Totally agree on the last point! Term insurance and invest the rest. Either take up a regular savings plan or simply spread it out over a few months to dollar cost average into STI ETF. Although it is probably a bad time to go into STI now...

Anonymous said...

No wonder they are rebranding too like ntuc. Rebranding with new clothing will not cover up the
layer of dirt below. The dirt is still there.
This product is meant for high networth so it is alright. Let them take the action .

Vincent Sear said...

To be fair, I think that the company has made very clear that the product is meant for high net worth individuals, and there's a simple 5-year renewal term version available.

Anonymous said...

They are sold to the wrong customers, the unwary and gullible man in the street who happen to have a substantial saving.