Tan Kin Lian's Blog: A poor deal for consumers on single premium policies

Tuesday, October 20, 2009

A poor deal for consumers on single premium policies

Published in Straits Times Online on 20 October 2009

Recently, I was shown the benefit illustrations for two single premium policies sold by two different insurance companies.

I was surprised to find in both cases that the surrender value on the first year is less than 75% of the single premium and that it would take 8 years or longer for the surrender value to reach the breakeven point, i.e. exceed the amount that has been invested.

Although these policies pay a death benefit that is higher than single premium in the event of death, the cost of this protection should be relatively small and should not require such a large amount to be deducted.

There could be extreme situation where a high surrender penalty is justified, such as a sharp increase in interest rate, but in normal circumstances, this type of penalty and high charges are unfair to consumers.

In both cases, the policyholders were not aware about the implication of locking up a large sum of money for long periods on an investment that gives a rather poor yield. They did not get the proper explanation from the insurance adviser and sought my assistance.

The Monetary Authority of Singapore has asked the board and senior management of financial institutions to be responsible for achieving “fair dealing outcomes” for their customers.

I hope that the MAS would ask the insurance companies that issue this type of product to explain how the product could be considered as being fair to their customers.

Tan Kin Lian

3 comments:

Anonymous said...: The senior management thought the fair dealing outcome is for them and the insurance agents and is a fair donation from the consumers to upkeep their lifestyle.Isn't it waht the insurance companies and agents are thinking?; October 20, 2009 7:48 PM
Anonymous said...: Rex comments as follows,

I came across a worse product than the one mentioned above. A relative of mine bought a 30-year plan (crazy!) in 1997 with a maturity date of 2027 (whew! i wonder why she did that!!). She recently got a letter from A.. Co., telling her times are bad blah blah blah, and gave her projected figures on maturity. Using that surrender value (f.v.), I used a spreadsheet to calculate the effective p.a. yield based on the annual premiums and the 30 payment points. Guess what, equivalent & yield p.a. over 30 years is 1.13% only!!!!
That means each year she is paying out to feed the birds in the insurance company, retro spectively, from 1997 up to 2027 year.

She asked me whether to terminate or not the policy (it is annual premiums to 30 years).
It is a hard decision. To terminate means to kill those birds, whilst you yourself are hurt quite badly. But to keep the policy, the birds fly away with almost all the profits generated by the principal till 2027 year. Just to spite the birds, whom we have no feelings for anyway, and make sure they don't get free lunch, i am tempted to tell her to quit the policy and take back whatever balance left even if at a loss.

At least have some satisfaction of the feeling "all die together", not "i die you laugh". Perverted logic?

REX; October 21, 2009 4:43 PM
Anonymous said...: REX,
did you know why they call wholelife and endowment products permanent insurance?
1.It is permanent becuase the company recieves premium income permanently.
2.It is permanent because the policyholders pay permanently.
3.It is permanent becuase you are held to ransom permanently
4.It is permanent because
policyholders are permanent hostages of the company.
5.You have lost control and freedom to the company.
Meantime, they do anything they like to your policy.If they cut waht can you say and do like the recent bonus restructuring saga.
If you want to terminate they tell you to consider the insurance you need. It is a threat and not an advice becuase it means you cut off their premium income.
And when you work so hard to save for retirement you wake one morning with a shock to realise that all these years of saving can buy lesser than what you could buy 20 years ago and nothing more.
Friends , beware of the birds.Birds have big appetite. They eat 24 hours and eat more than its won body weight.
I think terminate is the most sane option unless you have lost your sanity.; October 21, 2009 7:24 PM