Tuesday, February 23, 2010

Distribution cost

The benefit illustration for a life insurance policy has an item called "distribution cost". This is the amount taken away from your savings (i.e premiums) to pay the commission to the insurance agent and his agency manager. It is usually a large sum of money, representing more than 18 months of premium. If you save $500 a month, the amount that is taken away as distribution cost could be (say) $9,000.  A large part of this sum is taken away during the first year and the rest over the next four years.

You should ask, "Is it too much to give away (say) $9,000 to buy a life insurance policy? You have more attractive alternatives. You can buy term insurance to cover a larger sum (say $300,000) by paying less than $500 a year.  You can invest in a low cost fund, such as the Exchange Traded Fund in SGX, and pay only a small annual fee of 0.3% for the asset management service.

If more consumers are aware about the alternatives, there is no need for them to pay 18 months of their premium as "distribution cost". This will force insurance companies to reduce their distribution cost and find more efficient and low cost ways to market their products. Some countries plan to ban the payment of commission for the sale of insurance products, as the consumers had been given a bad deal for the past years.

After paying such a high distribution cost, you are not getting a superior product that gives superior return. Most life insurance policies give a yield of 2% to 3% over 30 years. This is too low. It should be higher, if the distribution cost and other charges are kept at a modest level.

However, if you find a life insurance policy that has a modest distribution cost, say $300 or less, it is all right to buy the product. Alternatively, you should be willing to pay a fee of $300 for advice, provided that the commission built into the life insurance policy is refunded to you.

Tan Kin Lian


Anonymous said...

In the second MAS response to feedback, it has been proposed to the insurers to think of another alternative model to commission that truly reflects the advisory work and to prevent conflict of interest and product pushing malpractice.
I propose that product pushing to be stopped by paying a nominal commission , let's say 5%, for form filling .It doesn't matter whether the product advice option is suggested by the insurance agents or by the clients the commission should be low as there is no financial advice , need analysis work , report provided by the agent. How can the agents earn a high commission by filling up forms only? It is not fair to the customers..
It makes a lot of sense that product pushing should not be allowed to earn the full commission. It is unfair to the customers and other practising advisers who provide and spend so much time in helping their clients to put in place a financial plan.
This anomaly must be removed by MAS.

Anonymous said...

There is none. In other words those par products shouldn't be sold to con people. They are no better than the toxic products as they poison the financial life of consumers.
I liken wholelife , endowment and anticipated endwoment disguised as cash backs products to old Cathode Ray Tube Television sets. They can never get better in term of technology without compromising its features and benefits.
If they get bigger they get heavier and clumsy in size, not energy economical, not cheaper. Like the cathode ray tube TVs wholelife and endowment products will too get worser as time passes. That is why insurers hide these disadvantages deep below some dubious features and wrapping
and promote them using greedy insurance agents to con their own policyholders and own friends and relatives as guinea pigs.This is working together to fleece the unwary consumers. I find the insurance agents despicable selling these products to their customers. It is like robbing them of their hard earned money. No wonder the poor get poorer and the rich get richer. The rich don't have unqaulified insurance agents as advisers. They are smart. Only the poor goondu ones get conned by the insurance agents. These agents' earning is actually ill-gotten gain , no difference from drug, gambling and prostitution money. Anyway , retribution will catch up with them.

Anonymous said...

I agree that consumers shouldn't pay commission if there is no advice required. On second thought pay a token fee to the insurance agents for helping to fill up the form and of course the submission of the forms.But how much would that service cost? Surely not the full commission of 2.5 years of my premium for wholelife or endowment product . Maybe a 5-10% of first year premium will compensate the agent enough for the service of form filling and also for filing a claim if I am dead on behalf of my family if I do keep it for so long.
Yes, MAS should fine tune the remuneration structure to reflect more realistically the services rendered by insurance agents. I have heard that 99% of insurance agents are product pushing agents and not adding any value of any significance to the consumers.Surely MAS has realsied that agents have been over paid all these years and decades and it it time to reveiw what these agents really do and whether they deserve the commission 'robbed' from clueless consumers.I use the word 'robbed' becuase if consumers' saving is not growing at proper return or as projected they are really robbed and the insurance agents really robbed them becuase the consumers didn't let them and didn't know.
MAS, the ball is in your court and as umpire or regulator you are to ensure fairness that the consumers get the best deal and advice like your counterpart in UK which says that consumers should get the best advice from the insurance agents and if it is not it is a breach of the FSA, an offence punishable by fine or jail or both. Let's see you hit back the ball.

Anonymous said...

The distribution cost of $9,000 of your hardearned money goes towards paying for those fullpage fullcolour advertisements so that the CEO enjoys goodwill with the newspapers. This will ensure that the newspapers editors will ot publish any letters that the policyholders sent to voice their displeasure.
Part of your money also goes towards the incentive trips that the agents and management enjoy annually when they congratulate themselves on a job welldone by congregating with their families in exotic paradise trips overseas. Another part goes towards paying posh hotels fees for their important meetings when they meet to see how they can squeeze more from you in the name of smoothing your returns.
Another major part of your hardearned money are well spent on extravagant expenses like expensive hotel like renovations and designer chairs that cost thousands per unit so that they can meet and sit comfortably while thinking up new ways to psycho you to have "peace of Mind" while they continue to suck you dry.

Anonymous said...

wonder the Beijing trip expenses are included in the distribution cost and passed on to the policyholders?
Maybe not becuase the ceo kenna toto.

JasonX said...

The public needs to be more aware of their distribution cost. I believe it is not in the interest of any agent to ever mention distribution cost to the consumer.

Recently, I heard from an agent that "Independant Financial Advisors" are gaining prominence here, due to their ability to cherry pick products from various insurance companies.

However, when I asked him about the distribution cost, he was unable to gives an answer, saying that he gets different rates from different companies based on how much he sold, hence he is unable to tell me how much commission is being paid to him.

It looks to me that the concept of IFA is a step forward, but the lack of disclosure and transparency is just another step backwards.

Unknown said...

There is no diff of $ sucking insurance agent, financial insultant, financial actwiser or independant my ass financial actwier or relationshit managers or personal bangers.

Part of the distribution cost and cost of reduction still nevertheless goes to the commission for the insurance agents/ financial insultant or goes to the independant financial actwiser's company + suck you another recommending fee for those fee-based actwiser.

The best is the independent financial actwiser, bashing its rival tier insurance agents on conning consumer who won awards and free Spain trip or US trip. But how much can these flight ticket cost compared to their so called fee-based charge + monthly salary + AWS and performance bonus. Just a matter where the commission is given, be it direct to salesman or to salesman's company, simply put.

No matter its from independant financial actwiser or $ sucking insurance agents, can distribution cost be any lesser? You be the judge.

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