A reader asked my advice on a life insurance policy that was bought a few years ago. It provided a cash payment every 5 years and projected the accumulation of the installments on a non-guaranteed interest rate of 5% per annum.
The benefit illustration showed the following:
a) The distribution cost, which is the amount taken from the savings to pay commission to the agent and other marketing expenses, amounted to $3,467 for the first 6 years, representing about 2 years of the premium. This will continue to increase for each year but at a lower pace. With two years of the savings taken away, the return on the policy is likely to be poor.
b) At the end of 20 years, the projected amount as follows:
guaranteed $40,300
non-guaranteed: $14,881 (assuming the coupons accumulate at 5% p.a.)
total $55,181
c) It is better to be conservative and assume that the coupon will accumulate at 2.5% p.a. and take the non-guaranteed portion at half, i.e. $7,440. The projected amount at the end of 20 years will be $47,740, representing a yield of 1.8% p.a. on the savings. This is a reduction of 3.4% from the projected yield of 5.25%. This reduction is excessive - this policy gives a poor return.
d) If the annual premium of $1,967 is invested to earn 5.25% p.a. the total accumulated savings at the end of 20 years would be $70,292. The projected payout (based on a more conservative estimate) is $47,740, representing a reduction of 32% (which is excessive).
The life insurance policy gives a poor return. But, If it is terminated now, the policyholder will still suffer a large loss. It will be difficult for me to advice whether to continue or terminate the policy at this time, as it depends on the personal circumstances and priorities of the policyholder.
Tan Kin Lian
15 comments:
I have a policy matured last year. The non-guaranteed bonus was near $6000 but the insurer paid me less than $2000 for a 10-year policy plan.
So, please don't believe these non-guaranteed portion as they deem right to pay you as little as possible.
Look at the plans they propose to you. The guaranteed portion is exactly what the premiums you are paying and on maturity they happily return you this sum of money, plus reducing the non-guaranteed portion or none that once convinced you into buying.
Don't believe them.
If you want to take up a policy, ASK what is the return on the guaranteed bonus, otherwise, you will regret having bought it.
Mr. Tan,
I am a bit confused because most insurance policies in the market provide similar return as the example you are giving, no matter it is from Income or Great Eastern, or others.
So, do you mean that all these should be avoided? If so, there is no insurance to buy.
what to do?
REX comments as follows,
I think this kind of situation is only happening in the last two years or so.
In the past i have on many occasions purchased 5 year single premium policies, everytime on maturity I get the higher non guarnateed value payments and i had no complains.
I think insurance companies lost too much money in the wake of Lehman collapse, so the game plan has completely changed in the industry.
My next 5 year policy matures in 2013, i guess i cannot hope for too much.
By the way, the AVIVA DBS Principal Guaranteed Single Premium 5 year plan, offer of 2.25% pa guaranteed is an extremely good and rare bargain. IT was in the papers a few days ago. Anyone with spare cash and want safe place to park your money, i strongly recommend that.
rex
Reply to 9:00 am
Read my book on financial planning. Learn how to make the right decision. Do not depend on others to think for you.
NTUC used to be different from the rest and if Mr. TanKL had used the "Made different" slogan the public would certainly agree that it was different because ntuc WAS giving good return and protection for thier policies and better than the rest.
But , alas, the FT , for some reasons best known to himself found joining the rest made it easier for him to manipulate the return and he reduced the annual bonus and 'pushed' everything to special bonus and claimed best practice. The best practice is to scam the consumers and manipulate the life fund so that they can have overseas trips, wine and dine at posh joints, siloso beach party , 2K chairs , new facade, full page ads , bill boards etc etc.. all this money would have become the policyholders' bonus and not for the squandering on 'face uplift' and cosmetics.. Come on, deep down inside is still auntie and uncle and unqualified product pushing salesmen disguised as financial consultants whose mission is commission from these poor and scam products.
By now everyone should know that par products are rotten products that don't give value for money.Imagine waiting for 20, 30 years to discover this.
lionhill of March 23, 2010 9:00 AM,
don't touch any product from any company and from any insurance agent who peddles you these products.
1. wholelife limited or not, living or not
2.Endowment..single or regular ..anticipated or not.. cashback or coupons
3. Regular ILPs from any company
If you need insurance buy term..
If you want to save with good return invest regularly ...
If you want safety to ensure that YOUR PLANs fulfilled and NOT the agents' look for an adviser with tertiary professional qualification in financial planning, competent and honest. If any one of these traits missing don't engage him or her , it is dangerous.
With the above guidelines go forth on your financial journey. Remember it is fraught with dangers.
Dear Mr Tan,
Your comment is most Interesting, Quote: "DO not depend on others to think for you"
If you leave it to others to think for you, this is "your choice" and you have to bear the consequences and NOT pointing the fingers that you have been ill-advised or taken advantage off.
Just my 2 cents worth.
Cheers
Raymond Choy
Since the economy is now recovery. Will all the insurance return on both gaurantee and non-gaurantee increase as well? We have reduction in the past during bad time and I wonder will the insurance company sent us a revise increase return estimated payout copy?
I won't consider buying insurance anymore after reading so much negative news. Why go through the trouble if the industry is so unfair to consumers. In other word, not well regulated by MAS or whoever responsible. I don't expect the policies I bought will give me reasonable return when they mature or when I cash them.
I also have a feeling that the best time to cash the policy is when the economic is good since the return is in unit trust based. Hope I am correct. Fingers crossed.
Nobody knows if a double-dip recession will occurs. If it does, the value of all policies (especially those ILP) will be affected.
Ha! At least most insurers give you guaranteed amount equal to, or slightly more than, the total amount of premiums you paid.
Take a look at Revosave benefit illustration. The guaranteed amount is LESS THAN your total premiums paid. In fact only 66.7% of your premiums paid. E.g. If you paid total $50K premiums over 20 yrs, the guaranteed amount is only $33.3K.
Let me repeat: REVOSAVE GUARANTEED AMOUNT IS LESS THAN TOTAL PREMIUMS PAID.
The company uses most of your premiums to tikam tikam the markets. Strategy is hope for the best, hoping 20 to 30 years later the market can return enough to give more to the non-guaranteed portion. If cannot, then is You Die Your Business. You already signed all KYC/MFP forms, all disclaimers and all acknowledgements to indicate You Went In With Eyes Big Big.
And I can tell you, after 20-30 yrs, if Singapore still around, if the company not bankrupt, if no Great Depression, if not more than 1 minor recession every 10 yrs, regular-premium endowments will give you at most 2% to 2.5% returns.
Single-premium endowments at most will give you 3.5% returns.
WARNING;
There is absolutely NO way to accumulate funds through insurance products except through investing in equities. So, don't be foolish. It will be too late to discover the truth after 20 years. Many baby boomers learned it the hard way. Many continue to work and delay their retirement till 70 or 75. Worse some cannot find work and their whatever funds may soon be depleted.
Don't be fooled by insurance agents. They only want to sell you a product so they can make a big commission. They are NOT planners. They are NOT qualified. They are salesmen at best if not conmen and women.
Please learn the lessons from the baby boomers and let them tell you their story. Don't make the same mistake as they did many years ago for trusting their insurance agents .Not that their insurance agents lied to them , they were NOT qualified to tell the truth and to do the right thing.
Please don't fall into the same trap and let history repeat itself.
Commission has been the evil that derailed many plans and devastated many lives.Remember an agent who pushes a product upfront is likely not interested in putting your interest first but his or hers.Runaway if possible from this agent.Get the industry association to help you.
He squandered your bonus on ads, overseas trips, dine and wine and unnecessary building facade uplift, new color etc..contest after contest to bait the greedy agents.
Do you guys agree that it'd be better if the minimum entry level for advisors to be a degree and in the relevant field of finance.
Would there be more quality advice?
"Do you guys agree that it'd be better if the minimum entry level for advisors to be a degree and in the relevant field of finance.
Would there be more quality advice?
March 28, 2010 11:08 PM"
Not necessary if the qualified adviser is a crook. He may be another salesman out to get rich quick too by pushing products.
But certainly a qualified adviser is better than a con salesman disguised as financial consultant, everything being equal.
The best safeguard to ensure the qualified but dishonest adviser is for MAS to lay down rules on the sales process which he or she must follow and to put the last nail to the coffin is to remove the commission. With these safeguards in place even the dishonest adviser would quit the industry, no need to say the unqualified.
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