Thank you for your good advice; I have learnt much from your blog and your Practical Guide on Financial Planning. It is really useful! Now I have a small but decent portfolio of ETFs and individual company stocks.
When I graduated, I was not savvy enough and bought 2 policies. Based on your book, I have analysed them as follows:
Policy 1 shows effect of deduction contributing very high, about 27.8% in year 25 of policy, but drops drastically to only 3.4% during maturity in year 28 of policy. Sounds too good to be true? What is the loophole?.
Policy 2 (ILP) shows a ridiculous low projected return. I would be better off just buying term insurance.
However, I remember you mentioned that distribution costs are mostly incurred in first 2 years. Since we have paid them, should as well continue. Is this still the best way to go?
REPLY
For Policy 1, a large part of the projected value at maturity on year 28 is non-guaranteed. It is difficult for the policyholder to be sure that this non-guaranteed portion will be paid, especially if it shows a big jump compared to the non-guaranteed value in the earlier years. If the company give some reason at that time to be unable to pay the non-guaranteed value, or to pay less, what can you do?
For Policy 2, the effect of deduction is more than 50% of the accumulated premium. Although you have already paid the upfront distribution cost, it seems that you will continue to suffer a large loss each year due to the "effect of deduction".
I suggest that you take the following approach:
a) Ask your insurance adviser to explain the above two points to you, and address your concern.
For Policy 2, the effect of deduction is more than 50% of the accumulated premium. Although you have already paid the upfront distribution cost, it seems that you will continue to suffer a large loss each year due to the "effect of deduction".
I suggest that you take the following approach:
a) Ask your insurance adviser to explain the above two points to you, and address your concern.
b) If you do not get a satisfactory explanation, write to the insurance company
c) You may to lodge a complaint to MAS about the type of policy that you have been misled into buying (i.e. you would not have bought these policies if you knew what they really were).
d) Write to the newspaper.
Do not allow people to sell you a bad product, and you have to suffer the uncertainty and poor return for a lifetime.
Do not allow people to sell you a bad product, and you have to suffer the uncertainty and poor return for a lifetime.
7 comments:
If you tally up the losses from life insurance it can come to billions of dollar yet the regulator is numb on this. Why?
Like this young man canceling his 2 policies will incur at least $1000.
If he holds them longer he will lose more.
Many wholelife polcies lapsed , terminated, surrendered and hardly 1% survived after age 60. What does it tell you? Wholelife product is a scam, it wasted a lot of consumers' money which could have gone into an investment to fund their retirement or their children' education instead of being cheated by insurance agents and provide cheap money for the senior management of insurance companies to keep up their lifestyle.
I have mentioned this earlier post. Effect of deduction is confusing. One main reason because it use projected values to compare against another projected values. How useful is this information?
The correct way is to use total distribution costs where you are using absolute values.
Anon 9:42AM,
I suggest you buy Mr Tan's book and analyse the chapters on insurance, to understand better.
While distribution costs is an absolute figure, it is mainly incurred in just the first 2 years.
But life insurance is long term right? At least 20 to 30 years. And what kills the policy for you is not the first 2 yrs of commissions to agent and agency manager. Instead it is the sickening high built-in costs eating away at your cash values, year-in year-out over the 20-30 years.
You can argue that the figures used to calculate Effects of Deduction is only projected. But the main focus is not on the isolated numbers, but on their interaction to provide good estimate of the built-in costs. Costs include profits to the company and salaries and bonuses to the staff and management; and these will only increase over the years.
Don't believe this concept? Instead of using the 5.25% figures, you can use the 3.75% to compute. You will still get a lousy result.
This is similar to sales charge versus expense ratio for unit trusts and ETFs.
Still don't understand? Go and study Mr Tan's book!
Sorry fellows, i'm really bad with figures/numbers. This is my first baby step buying insurance policy. So do I use 'Effect of Deduction To Date ($)' divide by 'Value of Premium Paid To Date ($) times 100% to calculate percentage of 'Effect of Deduction'? But why does the percentage differ so much at 'End Policy Year - 20' and 'End Policy Year - 25'? The difference in 'Effect of Deduction' between 20 and 25 could go as high as $20,000++.
ANON, March 18, 2010 4:53 PM,
no need to know..Don't buy this kind of products. They are wholelife or endowment or limited payment or any product that comes with a saving element. Just don't touch them and you will be safe. All these products are scam.
Ask your agent to tell you about term plan to cover death or critical illness in an amount that is enough to take of your needs should that event occur.
For saving ask for regular single premium plan aka RSP but NOT those rip off regular ILPs which are as bad as those wholelife and endwoment.
Avoid those rip off products and you don't have to worry about "effect of deduction".
Also to look for an honest and COMPETENT adviser but not a salesman or worse a woman.They are conmen and women in disguise.
Mr Tan,
I have a few policies bought from NTUC Income over the years. One of which is a 21-yr endowment policy which has just matured. The sum I received on maturity was approx $4k less than those projected when I took up the policy. If I wish to re-look at all my other policies with Income to objectively assess if it is beneficial for me to carry on paying premium (as finances is tight for me), who can I turn to for help? Can you help? Where can I get unbiased & free financial advice?
My policies:-
sum assured/cash value/entry date/premium
Living $50k/$15,591/Aug99/$116.5pm
Living $50k/$22,710/Mar95/$99pm
Protection $75k/$13,610/Mar01/$1673pa
Education $12k/$10,013/Dec96-Nov17/$636.9pa
Thanks.
From Mother-Of-Two
Effect of deduction is effect after deduction which is a amount that does not tell you anything much. Like buy fish but the balance after taking away cost of getting the fish in the first place. LPPL lah!
whatever numbers is to compute is not correct 3.75% or 5.25% because these are projected numbers - the larger the number the better it looks, the small the number, the worse it looks. Dun believe? Use 1.5% and try. LPPL again!
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