Tan Kin Lian's Blog: Benefit Illustration - distribution cost and effect of deduction

Wednesday, March 10, 2010

Benefit Illustration - distribution cost and effect of deduction

A consumer ask my advice on a new product that is being sold to her. It is a life insurance policy with the benefit paid in installments over a period of years (similar to a life annuity). She sent a 15 page benefit illustration on this product to me. She was confused with the explanation by the financial consultant.

I find it difficult to understand the product based on the benefit illustration. There are a lot of information, including items that are not related to the product itself. The additional information gives opportunity to the financial consultant to mislead the consumer when she explains the product.

The distribution cost was $14,000 and there is a statement "please note that the distribution cost is not an additional cost to you, it has already been allowed for in calculating the premium". I find this statement to be misleading - it is a cost paid by the consumer and is a lot of money for financial advice that is confusing and detrimental for the consumer.

I found the "effect of deduction" after 30 years to be horrendous. Based on projected investment yield of 5.25%, the accumulated premium amounts to $840,000, effect of deduction is shown as $611,000 (73%) and the amount payable to the consumer is $231,000 (23%).

What kind of financial product takes away 73% of the accumulated savings from you and leave you with only 27%? I do not know if these figures have been calculated correctly, but they appear in the benefit illustration.

I have advised that the "effect of deduction" should not exceed 20% for most types of long term products. I complained when the ratio is 40%. Now I have seen a ratio of 73% for this product. It is tantamount to daylight robbery and cheating of unwary consumers.

Perhaps the Monetary Authority of Singapore should contact me so I can ask the consumer to send the benefit illustration for their study. This type of product should not be allowed to be sold to consumers, as they are clearly unfair. Perhaps the benefit illustration should be changed, so that it contains information that is clearly understood by the consumer, without giving opportunity for the financial consultant to mislead the consumer through verbal explanation.

Tan Kin Lian

17 comments:

Anonymous said...: Dear Mr. Tan,

I doubt MAS will contact you or even pay attention to your blog. You need to be pro-active. Send MAS a copy.; March 10, 2010 9:07 AM
Tan Kin Lian said...: MAS ignores letters sent to them, because they do not want to take the trouble. They will continue to ignore letters sent to them.

I know that they monitor my blog. So, it is up to them to show if they wish to take up this matter or continue their old practice, "this is not MAS business".; March 10, 2010 9:12 AM
Anonymous said...: I wonder why consumers buy even they are confused. What is the use of disclosure which consumers don't understand.CONSUMERS DON'T UNDERSTAND AND CANNOT UNDERSTAND EVEN AFTER 10 PRESENTATIONS. Insurance agents don't understand what they sell do you expect the consumers to understand?
PEOPLE BUY ON TRUST and NOT becuase they understand and NOT that they are able to make informed decision.
MAS seems to think otherwise. MAS has spent a lot time talking about disclosure. I wonder is this to help intermediaries avoid responsibilities? Disclosure should be in addition to other safeguards and not a way out for the sellers.
MAS, if you are reading this blog please put in place the following safeguards.
1. assume all consumers are clueless about financial proudcts
2. agents are to conduct due diligence on the products before recomending to the customers.
3.insurance agents are to be responsible for the product sold on the reasonable basis
4.fact find is a must
5.remove the commission
In this way insurance agents are accountable to the consumers.; March 10, 2010 9:36 AM
Anonymous said...: Mr. Tan,
I hope that when you submit your proposals to MAS consultation paper closing on the 12 March to include the following.
In particular the excluded product like LIFE INSURANCE in Table 1 that MAS must also require the FAs/intermediaries to conduct a CUSTOMER KNOWLEDGE ASSESSMENT before agreeing to selling the product to the buyer. Should the customer after being assessed as clueless still insists on buying the product the right option for the intermediary , besides the warning and other safeguards, is to discharge himself or herself lest he or she be incriminated later.
It has been proven time and again that consumers are ignorant and have no knowledge of the products even on seemingly simple products like life insurance. It is a myth that life insurance is simple and that all consumers have enough knowledge and information to make informed decision and it seems this assumption has been deliberately promoted by the insurance industry and the insurance agents to push products with impunity.This has been going for decades and it is no surprise that till today people are still under insured. Insurance industry and agents have attributed to inertia .No, it is due to mis-selling, greed and dishonesty to exploit the ignorance of consumers so that these despicable salesmen can dump useless and expensive unsuitable wholelfie products on them.
Agents must be made responsible for the outcome and not allowed to hide behind caveat emptor.
Hope this doesn't put extra demand on your time. Thanks.; March 10, 2010 10:51 AM
Anonymous said...: I am pulling back all of my investments from FIs and doing the monitoring and invesment decisions by myself. There are two reasons for me to do that.

1) Misleading info provided by my RM in CLN causes me to lost a big chunk of my saving. RM's knowledge on investment is poor

2) I never make a loss in stocks and bonds investments. I will concentrate on these two areas going forward.; March 10, 2010 11:12 AM
Anonymous said...: TKL,

If "this is not MAS business", than whose? We are paying these so called "TALENT" and you are telling me they are all sleeping on their job?; March 10, 2010 11:37 AM
Tan Kin Lian said...: Someone said that this looked like the Revosave from NTUC Income. It is NOT the Revosave. If you have a Revosave, you can send the benefit illustration for me to take a look.; March 10, 2010 12:00 PM
Anonymous said...: Revosave is an anticipated endowment disguised as cashbacks.
The one in question is a regular premium payment over a term maturity when regular annuity payouts over a period.It is a mix of regular endowment plan with annuity certain.; March 10, 2010 12:14 PM
Falcon said...: Dear Mr. Tan,
Once again, you have shown your ability and competence in financial matters. All these wanton financial misdeeds are happening at various levels. This led me to think that you are the most suitable person to be guarding Singapore's reserves. I call upon you to stand for the nextg presidential election. We Singaporeans certainly need you to be guarding our reserves given your abilities.
As an ordinary citizen, you have shown repeatedly that you care about the ordinary citizens and have the vision and expertise to surface financial misdeeds. I am therefore convinced that when you are President, you will be able to discharge the duties of guarding Singapore's reserves well.
Thank You; March 10, 2010 12:21 PM
Anonymous said...: Anticipated endowment is the worse of the endowment plans and they are scams. That is why insurance companies are disguising them as cash back, coupon and what not and one gave it a revolting name like revosave which should be more appropriately called RETROSAVE, isn't it.It is is retro saving plan becuase you are NOT saving at all when you are NOT accumulating. Imagine you receive your OWN money as cashbacks. This is ridiculous.
This product was born in the marketing department and being touted as contemporary,chic and stylo to own by the Y-Gen. It looks like the Y-GENs are idiots to have fallen for this kind of products which have a hollow core wrapped with fresh air and craps. No wonder these Y-GENs can't even afford HDB flats becuase dubious companies are rolling out dubious products that take away so much and returning paltry return much below inflation.; March 10, 2010 12:54 PM
Anonymous said...: I just don't buy any of these so whether MAS care or not is a non issue.

I only care that

1. I continue to have a decent pay job.

2. I am prudent in my spending.

3. MAS ensure our local banks are safe for savings and FDs. That's all and I don't expect more.

Otherwise no one will care and help you when you are in trouble.; March 10, 2010 1:10 PM
Ex-Con said...: Bottom line is never to buy any savings product from any insurer -- this applies also for wholelife and limited-pay wholelife.

I recently met an ntuc agent and I questioned him about the effects of deduction showing 37% after 30 yrs. He can tell me "Ya, but other companies even worse what." That is like a robber telling you that it is better to be his victim than to be victim to rapist or murderer. You still lose, but not as bad. What a joke!

If MAS really serious about protecting consumers, they should immediately do 2 things:
1) Ban all commissions.
2) Enlarge the low-cost Dependents Protection Scheme to have sum assured of minimum $100K and allow consumers to select options up to $500K. The current basic of miserable 46K is still stuck in 1980s. And bring back govt oversight for DPS premium charges, underwriting and claims process.; March 10, 2010 4:12 PM
Parka said...: Another scam packaged as an investment to steal money from investors?

Sounds pretty much like it.; March 10, 2010 7:22 PM
A Singaporean said...: I don't find the statement "please note that the distribution cost is not an additional cost to you, it has already been allowed for in calculating the premium" misleading. It means that you pay the premium, and not premium + distribution cost.

But then, this is anything but a good product. Thanks for highlighting.; March 10, 2010 7:25 PM
Anonymous said...: If we don't do other insurance agents will do.
If I don't rape you other will rape you too , isn't better I rape you first.
This is the mantra of insurance agents to justify robbing you.; March 10, 2010 8:21 PM
Anonymous said...: CPF Annuity:

Can anyone confirm that 10% of our hard earned monies in the RA will be deducted when we opt-in to any one of the four plan of CPF Annuity?Why they need a premium if they said they are taking care of us till we are dead?I'm puzzled.

office clerk; March 10, 2010 8:59 PM
Anonymous said...: Is MAS still insisting that disclosure will help consumers to make informed decision? If consumers can there is no need for intermediaries, right? In fact it is worse to have an intermediary who can manipulate you and turn white to black and vice versa.
If disclosure can help I suggest that these products be sold through a portal or in the super market where decision can be made without any undue influence.
Unfortunately consumers can't. Therefore there is a great need to control the advsiory process and remuneration.These are the 2 areas that are most abused by the insurance agents. So much proof and why are you still waiting, MAS?
We are losing faith in you.; March 10, 2010 9:25 PM