Tan Kin Lian's Blog: What's wrong with Investment Linked Policies?

Thursday, October 08, 2009

What's wrong with Investment Linked Policies?

Most investment linked policies marketed in Singapore have the following features:

a) designed to hide the high upfront charges
b) high charges for insurance cover
c) not tranparent

The upfront charge can be as high as two years of premium. If the savings is $300 a month, an amount of $7,200 can be taken away to pay commission and upfront charges. The consumer is not told directly about these charges. Here are the ways adopted to hide these charges, as adopted by different insurance companies:

a) The consumer is told that x% of the premium is allocated for investment. This means that (100-x)% is taken away. But the non-savvy consumer may not be aware about its significance.

b) The consumer is told that 100% is allocated for investment, but is not aware about the annual charge that is taken away to pay the distribution cost and the surrender penalty that is imposed if the policy is terminated within a certain period, say 10 years. Even if the consumer is told, the consumer is usually not aware about its significance

c) The consumer is told that the total amount allocated for investment is more than the premiums paid after a certain period, say 20 years or longer, but is not told that there is an additional charge (usually 5%) deducted from each premium that is invested. The actual amount invested will be less than the premiums, due to the upfront charges.

The charges for the insurance cover is usually much higher than the same cover provided by a separate term insurance or critical illness policy that can be bought in the market. The consumer is not aware that there is a choice to buy the cover separately or about the lower cost that is available in the market (but not from the insurer that markets the investment-linked product).

The consumer is not told and is not aware that the same premium can be invested in a unit trust that offers the same potential return, but does not incur the high upfront charge that is used to pay commission to the agent.

The terms of the investment-linked products are confusing to the consumer. In this environment, an agent can mislead the consumer into buying a product that pays a high commission to the agent, gives a high profit margin to the insurer, but provides a low return (relative to the risk) to the consumer.

Most informed consumers will never accept these high charges. This is why many insurers have devised ways to hide these charges from the consumer.

I will write a separate blog to describes the features of a good investment-linked product and to encourage insurance companies to adopt these features.

Tan Kin Lian

18 comments:

gerimegaly said...: Mr Tan, I think it's important you clarify that the ILP you are referring to, is the Regular Premium ILP kind, and NOT the Single Premium ILP type.; October 08, 2009 9:10 AM
Anonymous said...: Mr. Tan your good and industry best ID2 and ID7 regular ILP saving plans have been replaced by the 'best industry practice' regular ILP called by vivo crap name with all the high charges and expenses to kill or rob the customers to pay ??????.Of course this product is designed with the insurance agents in mind to gratify their greed with high commission.
This kind of product should be avoided.; October 08, 2009 9:59 AM
Anonymous said...: The insurance agents have a way to sell this product or any products for that matter. How? CONcealment of facts...try to avoid telling the charges.. telling the customers about the beautiful things....then go for the kill... Is this financial planning?? No, it is product peddling or dumping or robbing, cheating.; October 08, 2009 10:52 AM
zhummmeng said...: I am NOT for regular ILPs and I find them disgusting but what I am going to do is to say a few things about regular ILPs and traditional wholelife or limited payment WL.They are both rip off.
Regular ILPs are actually known as variable wholelife (VWL) It has the 'best' features of WL and don't have all the downsides of traditional WL.
1.You know what you are paying but you don't know what the hell is going on in the WL.The insurers do whatever they like, like the bonus restructuring by one so called social enterprise company did.In Hokkien , the expression is 'or um' , black dark.
2.With traditional WL once you get in you are trapped and held to ransom , held hostage by the insurer. To get out you have to pay heftily, losses.
3.With WL You can't stop paying premium and if you do they force you to take loan(APL). What the hell is loan? Don't you have money, cash value which is supposed to be yours.The agent I bought from said WL is a saving plan and why am I borrowing my own money and pay a hefty interest to the insurer? Something is really wrong , isn't it? The interest rate I am paying is 5.5% maybe 8% and they pay me NOTHING and only 2.3% if I hold it for donkey 30 years.Even I borrow at the 30th years my return is NEGATIVE after paying the insurer interest on MY OWN money. It is crazy!!!!
4. What is return on regular ILPs? Well, it can be much better, maybe 4%? or 5.5% if held longer.
5.The insurance agents say there is a BOMB in ILPs at the latter years....but WLs have it too except it is NOT revealed by the insurer or your trusted agents.
6.Can you mimic or replicate a limited payment WL with regular ILPs? Of course, anytime and YOU decide the time and the limit.
7.The agents will tell you in a downturn or crash( a word favourite with them) your cash value in ILPs will crash too. Yes and so is WL when the insurer starts cutting back on bonus BUT , but with regular ILPs the amount of cash value accumulated forms a buffer and can withstand the 'crash' and yet it is still better and there is good chance of recovery like the begining of March when equities surged by 50% while WL still lagging and languishing.

NB. The upsides of regular ILPs AS COMPARED to traditional WL are plenty and the above is not exhaustive. There are hundreds of reasons why you MUST not buy or get conned to buy a traditional WL by insurance agents.
Caveat: Having said that don't buy a regular ILP too.
The above is comparing 2 evils to see which is evilest.
The verdict is likely traditional WL wins hands down as the most evil of the
2.; October 08, 2009 11:39 AM
Vincent Sear said...: An regular premium ILP modeled on what in the US is called "universal variable" has a load of complexities in features.

The sum assured can be variable, the type and scope coverage can be variable, the premiums can be variable, the funds invested in can be variable through a whole maze of mechanisms and options. It can even hold single premium top-up fund units separate from the regular premium fund units.

Be aware of perpetual double charging even after the 1st few years when commission ceased to be payable to the agent. This is done through the bid-offer (e.g. 5%) spread. After allocating premiums to units at offer prices, units are deduted at bid prices to pay for mortality charges. Premium dollars should be deducted for mortality charges before allocation to fund units.; October 08, 2009 12:22 PM
siewkhim said...: Kin Lian,

You have not informed two additional stupid feature of ILP products:

(a) When the unit fund is insufficient to cover the next due protection cost, the policy will lapse even though you have been paying your premium regular

(b) Under an ILP, the investment risk is totally passed to the policyholders while the insurer has a good time gambling your money away.

Avoid all par products and ILP!!!!!

Just go for sinmple term assurances.

There is no such thing as a good ILP or par products.; October 08, 2009 4:15 PM
Anonymous said...: Although regular ILPs are better than the traditional wholelife and endowment products they are still rip off. Worse, if they are wrongly designed they can be disastrous.; October 08, 2009 7:33 PM
Vincent Sear said...: Siewkhim, some regular premium ILP have a sum assured guarantee, i.e. policy won't lapse even if unit values can't cover mortality charges (e.g. in a stockmarket crash) as long as the premiums are paid regularly without miss.; October 08, 2009 9:39 PM
Norman said...: I would like to contribute my simplistic view. The purpose of insurance is to transfer risk to the insurer. I see that in a regular premium ILP, the insurer is transferring back to me the risk.; October 09, 2009 10:53 PM
zhummmeng said...: Yes , you bear the investment risk for higher return but your personal risk is borne by the insurer.
In WL you also bear the larger part of the investment risk but the return is low.
Which is better?
Any prudent man will choose the ILPs.

Caveat:I am against both.; October 09, 2009 11:50 PM
wjsim said...: I disagree with ILP being better. Mortality Charges rises to dizzy heights once the person reaches 50-60 years old. Your mortality charges might be more than your monthly premiums! This is especially so if you've been convinced right at the start that ILP offer high coverage at low cost, which is true for young people. If your good agent does not review your ILP, there is a chance that the policy lapses during a market downturn when your cash value drops. I've seen ILP BIs with surrender value $0 after year 30 onwards and the client/prospect does not understand what it means.

I believe insurance is something that gives you a peace of mind and not extra worry or burden. I would recommend WL or limited pay WL over ILP any day. If anyone wants ILP, go fundsupermart and start a Regular Savings Plan or something similar to SmartInvest from GE and then buy Term insurance. Term insurance is just as flexible, can cancel anytime or buy more anytime, subject to medical underwriting. Of course buy more at older age means higher cost but you're already doing that in an ILP and if you want to increase sum assured in an ILP, you have to be subjected to medical underwriting anyway.; October 10, 2009 12:10 PM
zhummmeng said...: wjsim,
i wonder you are an agent or a consumer. If you are an agent you are certainly NOT competent or not knowledgeable or pretend to be not knowledgeable. Why I say that.? because you do not know your product well or have NOT CONducted DUE DILIGENCE ON THE WL PRODUCT.
Both regular ILP and WL use YRT for mortality charge(COI) and mortality charge increases with age. Do you know why policyholders pay more than the cost of insurance(COI)?
Let me tell, the premium is for paying current COI and future COI and whatever left is invested to meet future COI and same time as saving.
The structure is similar for term.
Let me give you another peice of truth and many insurance agents distort and lie about this truth.
At whatever age you take up your insurance the COI is the same for everyone attaining the age. Eg. If a baby takes up an insurance at age 1 and when he reaches age 50 years old his COI is the same as a 50 year old man who has just taken up.
You many argue the grown up baby is still paying the same premium, how come? Yes , same premium but not COI.The COI may be more than the premium. Go back to class if you don't know or ask your actuary for the truth.
This is the big crap insurance agents will tell client that it is cheaper to buy at early age.. Yes, correct but only half truth.
The other half truth is if you are a consumer your agent WON"T tell you and worse they lie and neither will your insurer. That is why they say WL is NOT transparent. Both agent and company collude to cheat the consumers.
The problem is insurance agents and the insurers sell insurance products on half truth with lies and that is why this misconception is still being used to frighten and con consumers..; October 10, 2009 5:39 PM
Vincent Sear said...: Zhummmeng, you're very "zhun". You understand how the whole thing works. Yes, it's all YRT, so might as well buy YRT without the heavy "participating" distribution costs. Another thing is, backdate inception of policy to previous birthday for a cheaper premium. Basically, that's paying for risks that have passed unmaterialised. Why do agents advise that if it means a lower premium? It's because they saricifice a few dollars in the long term, but in return get a few hundreds (or even thousands) of dollars of commission collectible paid upfront on backdated policies.; October 10, 2009 8:36 PM
wjsim said...: Ouch. My point wasn't on whether the person pays higher for COI on the WL or ILP, but the fact that misinformed consumer will leave their high SA there and risk lapsing the policy. If you're not looking for the 'buy and forget' insurance, now you're comparing ILP with Fundsupermart+Term, which the latter wins hands down. When you buy insurance, please think of it as insurance. It is crap to use it to save.

The protection from lapsing is only valid for the first few years provided premiums are paid without miss. After those few years, whoever planned this ILP product think you have sufficient cash value to weather through storms. But there will be people with $100 monthly premiums and $100k SA with $100k CI and no servicing agent. What will they say when they receive a lapse notice when they were expecting a claim (choi)? That financial advisers not regulated enough? Agents not conducted due diligence?

Pluck out any Unit Trust and see how often you see one that performs 5% since inception. The recent hit is a good example. I flip through the booklet about 1/3 negative returns since inception, with a few double digit negative. Imagine your Unit Trusts suddenly lose half their value and COI comes in. There is a chance you might hit the tipping point where you will lose cash value month-on-month unless you increase premiums or lower coverage.

The 5-9% in the BI is too misleading. Unit Trusts rarely maintain positive, let alone 5% annualised year to year since inception.

Buy WL and sleep better. Or get Fundsupermart+Term. ILP is the worst of both worlds.

If you can't afford the same coverage an ILP offers with a WL, then don't buy either of them. Getting an ILP just so that you can "afford" the high coverage now is misleading. At least WL tells you, hey, this is so much you have to pay now cos you're paying for future COI as well. If he wants risk, go Fundsupermart. ILP gives you risk and sucks you dry. WL, well... just sucks you dry. :P; October 14, 2009 2:03 AM
Anonymous said...: With regular ILPs the sum assured usually over stretched.But in the early years the COI should not be a problem. The problem comes when the insured is 50 and above when the COI is substantial and this is the time to pare down the sum assured.
ILPs work exactly like WL except that it is more flexible. if you design exactly like the whole with same premium, sum assured there should no problem at all even when the insured is old.There is more cash value than WL to pay for COI.; October 14, 2009 9:01 AM
wjsim said...: But why would you want to do that when there's Fundsupermart+Term? I find no reason to buy ILP, I have one myself, now I'm still trying to find the reason why I have one and get 15% allocation for first year...; October 14, 2009 6:50 PM
Vincent Sear said...: Not everyone is like you or me. Yours and mine logic don't necessarily work for everyone.

If one doesn't know what one should be investing or insuring for, one'd probably be better off talking to the bank, an insurance agent or better still, an independent financial adviser.

If one knows what it's all about, and how to go about doing it, yes, just buy sufficient term insurance and invest the rest in unit trusts or even stocks. Frankly, I think it's also highly risky advice to give to someone who don't understands. UTs and stocks don't mean sure make profits or sure make more profits than insurance; there can be hefty losses too.

But one thing is clear, such losses if incurred, are mostly market losses, not distribution cost reduction of yields.; October 16, 2009 5:26 PM
Anonymous said...: The comments so far had been lop-sided. To be fair, we must all understand firstly that ILPs and WL policies are NOT pure investment vehicles. Stocks, options and funds are. WL is actually insurance and meant for protection, more than investment. Buying $1,000 worth of Microsoft stocks is just gonna give u a certain number of units. Buying $1,000 worth of WL could potentially reimburse you $50,000 in case of death immediately.
ILPs are a little more complicated, as these are a mix of investment and protection. All-in-all, it is not a rip off or a waste of money, but a tradeoff between protection and actual market gains.
As for agent's commission, it is a trailing amount that diminishes rapidly to a mere 5% in 3 yrs... and subsequently 0% after 5 yrs. I presume you guys think agents should serve you free? Maybe you should say the same to my broker.; November 02, 2009 11:36 AM

Thursday, October 08, 2009

What's wrong with Investment Linked Policies?

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