A policyholder was sold the Yield 15 which provided a payout of 3% per annum. During a volatile period a few months ago, the insurance company offered a 100% payback of the investment, less all the interest coupons that were paid. The policyholder, on the advice of her children, decided to accept the payback offer and to lose the interest. At that time, the market price of the investment was around 90. She was afraid that the investment could drop further and in the worst case, be worth nothing.
In the subsequent months, she found that the price of the investment had improved and there is a good chance that it would safely reach the maturity period with a 100% payback. She regretted her decision to accept the payback offer and losing the 15% interest (i.e. 3% for 5 years).
I told her that she made the right decision at that time. Some investors of certain series of Pinnacle Notes had lost the entire investment due to the failure of a certain number of entities. This could have happened to her Yield 15. It is better to be safe than sorry.
She should not think about the 15% that she had lost. Her actual loss is only 5% (i.e the fixed deposit rate of interest for 5 years). She should not count the higher rate of 3% which is for a more risky product.
My same comment will apply to policyholders who accepted the payback offer from Great Easter Life on the GreatLink Choice (which is a similar product).
Tan Kin Lian
What is MAS doing? It is not protecting consumers against the unethical practices of insurance agents.
ReplyDeleteDoesn't MAS realise that it is a loss to customers to cancel when they discover the products are rotten or don't meet their needs.
Long term commitment means long term source of revenue to the insurers.Short term means huge profit to insurers if policyholders terminate.
Either way the consumers lose. Are consumers suckers?
An important info is missing, ie., what is the remaining period to final maturity. If the offer was made recently, and especially if it is a short time, say 9-12 months, from fianal maturity, then it is very debatable whether that the policyholder did the best thing. A valuation of 90% in the midst of a clear recovery in the financial crisis reflects in risk-return terms a prevailing low risk in the investment. It is easy to guess why the issuer would offer to buy back at full face value only now and not in the midst of the crisis when valuation was lower/lowest. Valuation reflects the probability of loss and that's why investments that went bust like certain Pinnacle Notes and Lehman Minibonds had valuations near ZERO and finally ZERO. The issuer is not a charitable organisation and this looks like a very sweet deal for them like 15% or more annualised in returns at low risk. After having ridden through the worst and riskiest periods and then for the policyholder to hand all the interest earnings back to the issuer now doesn't seem the smartest thing to do. I view the issuer to be opportunistic and predatorial, taking advantage of the uninformed and the uninitiated by playing on their fears.
ReplyDeleteSounds like a "head issuer wins, tail issuer wins."
I was told by a GE Life advisor that for customers who accepted the payback offer, the advisors who sold them the product lose all their commission.
ReplyDeleteSo the company win most of the time: if the product fail, the company eat the customers; if the customer accept the payback offer, the company eat the advisors.
FYI, there used to be a GreatLink Choice tranche that matures in 2012. It looks like almost everybody of that tranche accepted the payback offer, because when I checked the fund report subsequently the fund size was listed as only slightly more than $1000. Now this tranche is no listed on the GE Life website.
well i guess it's a good thing that GE life took the commission back from the advisors. Commission comes from the customers' initial capital anyway so if they decided to return the money to the customers, the advisors should have to share in with this. At least GE Life opted to do this and not let us customers suffer huge losses. From what i heard, most of their customers re-invested the money with them anyway.
ReplyDeleteYield 15 has climbed to 105.8, 2 weeks before maturity.
ReplyDeleteDoes it mean it is better to cash out now then wait for maturity of 100+3?
Is there any liquidation fee?
We have redeemed our Yield 15 at 1.08 last Tuesday, the last week for early redemption. If we have waited until maturity on 10 Jun 2010, we would have only gotton 1.03. 1.08 is also its peak price during the 5 year period. Overall, we earned 20% over the 5 year tenure, or average of 4% a year.
ReplyDelete