Tuesday, February 23, 2010

Effect of Deduction

An agent who recommends a life insurance policy to you is required to provide a benefit illustration, which can take 10 pages or more.

You should ask the agent to show you the "effect of deduction" and calculate it as a percentage of the "value of premiums paid". The "effect of deduction" should not exceed the following percentage of the "value of premiums paid" in the case of a regular premium policy:

20 year policy - 15%
25 year policy - 18%
30 year policy - 22%
35 year policy - 25%

The above benchmark is my estimate of the fair amount to be deducted from your "value of premium paid" to cover the insurance protection and investment services provided by the insurance company. If the actual percentage is higher, the amount taken away is excessive.

The "value of premium paid" is the accumulated amount assuming that your premium has been invested to earn the assumed rate of return. The "effect of deduction" is the amount that is taken away from your accumulated amount to cover the charges by the insurance company.

Most insurance policies have an "effect of deduction" that takes away an additional 15% from the accumulated premiums (compared to the reasonable levels shown above). These insurance plans do not provide good value to consumers.

For an investment-linked policy, the "value of premiums paid" is not shown. You have to add the "projected net amount" plus "effect of deduction" to get the "value of premiums paid".

Tan Kin Lian


Anonymous said...

Real life example from NTUC Income:-
Vivolife (wholelife policy) -- limited premium term of 20 yrs, for healthy male customer 30-yr-old.

20 yrs - 31%
25 yrs - 33%
30 yrs - 38%
35 yrs - 44%

Vivolink (regular ILP) -- for healthy 30-yr-old male customer.

20 yrs - 27%
25 yrs - 29%
30 yrs - 31.5%
35 yrs - 34%

If a so-called social enterprise can give such bad figures for effect of deductions, what more other insurance companies in Singapore?

With current state of insurance industry, better to get term insurance and invest for longer term by RSPing into low-cost ETFs and funds.

Anonymous said...

Social enterprise is actually social networking of former colleagues to live off the socail company. With top heavy taking 80% of the total and giving 20% service in return.

Anonymous said...

What do they care. So long the company under the guise of social enterprise and the insurance salesmen disguised as financial consultant can reap big money it doesn't matter who is the victim.
It is not shocking that their clients and policyholders are poor man in the street ,old folks , aunties, relatives and friends. They are easy victims. They got conned either they trust the agents or too ignorant and dumb to know anything. Do the agents bat an eyelid? Money and commission had blinded them.Are they to be blamed? No, they will tell you they are not qualified and that is why they sell and push products.Anyway their friends want to buy what, you cannot blame the agents, right?
What does the company do? Trying hard to look compliant so MAS cannot catch them. Give the salesmen fancifool names and titles to fool both MAS and customers.Donate a bit here and there to look good as social and corporate citizen. Once in a while carry the balls of prominent and invite them for free dinner and dance party.Pretend to be caring by distributing angpows to passersby and security guards.
So you see besides the effect of deduction have you included all these monies.The monies didn't come from their own pockets, they are treated as pooled funds.
They only have salesmen who sell to make commission and you pay the commission for having your forms filled up .

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