Tan Kin Lian's Blog: Existing life insurance policies

Saturday, April 17, 2010

Existing life insurance policies

Many people asked me about their existing life insurance policies - should they keep it or terminate the policy? In many cases, the policies were bought for them by their parents and are now transferred to them to pay the premiums. My usual advice is, "Keep your existing policy. You have already incurred the high upfront cost. Going forward, it should provide you with a modest return. "

However, if they have difficulty in paying the premium or they have better options to invest their savings, they can consider terminating the existing policies. Before they do so, they should calculate the return on the existing policy for the next five years. Read this FAQ.

They should think carefully before they put in more savings in a new life insurance policy. They should NEVER terminate any existing policy to buy a new policy - as it means incurring the high upfront cost all over again. They should avoid the insurance agent who makes this recommendation as the agent usually wants to make commisison at the expense of the client.

Some of these tips are given in my book, Practical Guide on Financial Planning.

Tan Kin Lian

17 comments:

Anonymous said...: If you ask me, I would recommend that you terminate your policies regardless of when you bought them.
1. You might have paid up all the charges unigue to YOUR policies but the common charges of all other policies CANNOT be overcome and they are ongoing. Every cost is charged to this common pool and they eat into every policy return. Your policies will LANGUISH in the poor return. Knowing full well that you will NEVER get a decent return.
What is a decent return?
Is it equal to inflation? If it is equal to inflation there is no REAL GROWTH. It is preserving your hard earned money. Is preservation your objective?
What is the inflation over the long term?
It is forecast that it will be around 3.5% average, in Singapore.
Reported yesterday India has hit a double digit inflation and China will soon breach it too.
In the past, other than ntuc, did other wholelife and endowment products return more than 3%? None!! Most returned only about 2% and they were held hostage for at least 25 years.
Going forward it will be worse, including ntuc, these par products will hover around 2% or 2+ over 25 years. Is this return good, decent?
My advice is get out of these products before you lose more.Don't wake up one morning when you are about to retire and be shocked by this discovery. SORRY, you cannot turn back the clock. Time decided the return.
Cancel your policies, immediately. Use your head and not your heart which your parents' heart were manipulated; April 17, 2010 4:59 PM
Anonymous said...: There is probably a better place to post this.

MSNBC video broadcast (the Dylan Ratigan Show) ... "SEC files civil lawsuit against Goldman Sachs"

Great example of hard hitting investigative journalism in USA in easy to understand language.

Hyperlink below.

http://vodpod.com/watch/3439602-video-sec-files-civil-lawsuit-against-goldman-sachs

Hopefully, this lawsuit will allow more sunshine into all these toxic bonds that have been sold to investors all around the world.

If true, the level of murky practices is astonishing. The way honest, hardworking citizens have been exploited is beyond belief.; April 17, 2010 5:22 PM
Anonymous said...: The correct advice is avoid all those dubious products with cash value.They are scams.They are wrong products. They are inefficient and ineffective products to address your goals..They are sold only by con artists, people without conscience and salesmen and women who never have your interest at heart.
It serves you well to heed this warning.
Many young people and worse, middle age people got into the quicksand. The moment you bought these products you are in the quick sand and you will be struggling to stay afloat. Many failed and swallowed up by the quick sand pool. MAS has this record of how long policyholders stay afloat. Only a handful survived beyond 60. What happened to the rest? Died and made a claim?
Some were claim cases but majority were lapses and termination. What is the consequence? LOSS, lah.
So, are they saving plans? Are they protection plans? they are crap plans to enrich the insurance agents and their company. The sooner you wake up to this fact you will be richer.
Did you see the well dressed men and women in the ST press? Let me tell you. It is your stupidity and your money that they appeared in the ST paper.; April 17, 2010 5:32 PM
Anonymous said...: I think you should cancel your existing policies even though they have acquired cash value if you think they don't give much value for the long term. Don't let the cash value operate against you and hamper you from doing the right thing becuase it is a dubious feature that works against you.
Yes, when you bought the insurance you were willing to commit for long term but you didn't because the long term is in favour of the insurer, ie provide a long term revenue to the insurer and in return you get 2 balls.Sure, there is loss when you cancel but it is better to cut losses now than in the future when losses might be even worse. Also your time will be lost and you don't have time left to accumulate.
It is a difficult decision but nevertheless you have to.
The problem is insurance is bought on trust and on emotion and both are exploited by unscrupulous insurance agents up to the hilt.Trust and emotion betray the buyers into the traps of insurance agents.
This betrayal is well documented in the LIA(Life Insurance Association) release each year of low sum assured sold and claimed. Despite this the perpetrators are themselves. Truthfulness is dead. This business is about greed and dishonesty. The insurers and insurance agents work hand in glove to con the CONNEDsumers.; April 17, 2010 6:41 PM
Anonymous said...: Slightly off-topic.

Did anybody see the headlines on page C40 of Straits Times, April 17. "SGX chief wants to raise trade velocity"

Quote:
Trading velocity is the ratio between ....... and point to how often a stock changes hands. UNQUOTE

It seems this new Foreign Talent, SGX Chief Mr Magnus Bocker said
QUOTE:
Most European exchanges are trading at between 130 percent and 160 percent velocity. For the US exchanges, NASDAQ is over 200 percent. (But) we are at 58 (percent) UNQUOTE

In other words, Singaporeans, please abandon "buy and hold". Don't be investors. Be share traders. Otherwise, SGX will be unable to achieve higher trade velocity.

Somebody please tell me that I have misunderstood this new Foreign Talent.

I have no either how this new SGX initiative will help Singaporeans achieve financial security in their old age.; April 17, 2010 9:05 PM
Anonymous said...: I would like to highlight that there have been extremely well performing participating policies in the past years. There have been bonuses declared of 4% and higher in some cases.

It is the customer's duty to find out past history of bonuses if he is interested in cash value. All you need to do is open your mouth and ask the agent. If he refuses to provide, find someone who will. Cash value is not a scam, it is simply a way to earn interest with insurance coverage at the same time.

I know people keep saying "you can get all the money lost due to effects of deductions if you just buy term and invest the rest!". Question : How likely is it that someone will invest the rest? Or will it more likely languish in the bank or go into the newest Ipod product? Or maybe even lost on the stock market because the customer thinks the market will move his way? You go ask the average singaporean, "How to buy shares?" and he will just stare at you blankly.

"they should NEVER terminate any existing policy to buy a new policy"

This is incorrect. When doing a policy review an agent may recommend terminating existing policies that are unsuitable, for example if your parents have been conned into buying a lot of random policies with riders that make no sense for you, they may correctly recommend terminating the surplus policies and then recommend some other policy or riders to fill in the gaps.

An example would be a clueless customer being sold multiple H&S policies by an agent who did not bother to check if he already has an existing H&S policy.; April 17, 2010 10:06 PM
Wayne said...: One of the issues as far as income tax is concerned, is the tax relief that can be deducted on life insurance premiums paid- NONE or almost NONE.
See http://www.waynekoh.com/2010/04/life-insurance-tax-relief.html for illustrated examples.

Do your sums, if it makes sense, then it may be ok to "switch" to term insurance by giving up whole life insurance. In short, BTITR + SRS.
p.s: But do the "switch" only after the term insurance policy is incepted.; April 17, 2010 11:07 PM
Anonymous said...: I am not surprised that you will be approached by insurance agents to cancel your existing wholelife and buy a limited payment wholelife living plan. They will pitch you that this limited WL is better because you pay only 10 years and you are covered for life.
Ah, this is dangerous. Instead of collecting the premium from you year after year for next 30 years they want to collect all the premium within 10 years. This is to ensure revenue for them for life and you are insured for life.Looks win -win , right? Ah, here, all your freedom gone!!!You are stuck.They call the tune; you are their prisoner; they decide the bonus; they decide the return; they decide everything; you have given them a blank check..
Be careful and suspect every agent.They lurk everywhere. They could be a friend, your brother or sister,or friends' friend.They are the same, unqualified and the only thing in their mind is how to make a big commission out of you.How to convince you your existing policy is not as good as the one he or she is peddling to you.
This is true. I have related a case of friend's friend who was asked to surrender all his living policies to buy one limited payment living wholelife. Why have 5 when you can one good one? You might not even claim from all the 5 policies if you are struck with a critical illness, said the agent.(you see more lies, now).Even his wife thought 5 policies were too many. The agent now manipulated the wife's ignorance.Fortunately, his bad procrastinating habit saved him and he consulted a second opinion.
The deal fell though and the man was saved from having to go another journey of misery.
This is scene of the industry where lies and truth are blurred.; April 18, 2010 12:22 AM
Anonymous said...: To be fair it is often cheaper to pay for only 10-15 years as opposed to 40+ years. But one should do the comparison.; April 18, 2010 10:00 AM
Anonymous said...: Anon, April 18, 2010 10:00 AM,

let me educate you on time value of money. A dollar today is worth more than the dollar tomorrow.
A limited payment is about the present value of ALL the future value of premiums discounted.The insurer is not stupid but you are stupid and you got conned if you beleive that. So , it is not cheaper.
Secondly , the same premium could get more than double the sum assured if the term is slightly doubled.In this case it might be the correct sum assured you need.This gives you peace of mind.
Limited payment term does NOT give you peace of term unless you have enough to cover your RISK..
You understand insurance planning, now? I suggest you buy the book from Mr. Tan and get a clearer picture of what is insurance.; April 18, 2010 2:52 PM
Anonymous said...: I had a friend who lost his job in 2008 & is still unable to find another one till now. I told him if he has financial difficulty, he should terminate his insurance policies so he has cash to tide him through until he finds a job again. I hope I gave him the correct advice.; April 19, 2010 10:14 AM
Anonymous said...: I agreed with the 1st comment. The longer you hold on to your insurance policies, the more losses you will incurr in the long run. If you are still young and your policies are only maturing 20-30 yrs from now, who can predict there won't be another economic downturn again. If it happens, the value of all your policies, irregardless whether they are investment linked or not will go down.; April 19, 2010 10:17 AM
Anonymous said...: It is best to terminate all your current policies and cut off all ties with your insurance agents.; April 19, 2010 10:19 AM
Anonymous said...: I had a friend who bought 3 policies from AIA before the financial crisis. When people start queuing up to surrender their policies, I did not have the heart to ask her to surrender all her policies as I was working for AIG at that time. Now I am feeling guilty.; April 19, 2010 10:26 AM
Anonymous said...: "You understand insurance planning, now? I suggest you buy the book from Mr. Tan and get a clearer picture of what is insurance."

I suggest you knock it down twenty.

At any rate for a age 20 male to get whole life insurance all the way up to age 60+ will cost him 60k+...but with limited payment for 15 years he will only pay around 40k+ in total.

Time value of money assumes you can make the money grow. Most singaporeans will spend it on the latest gadget or leave it in the bank; April 19, 2010 9:09 PM
Anonymous said...: MAS should not have intervened.Many were misled.
I think your friend is regretting that she didn't terminate.
She can still terminate and cut losses. Don't languish further .Continuing is like a slow death.
If she is healthy she should take term plan to insure the risk she is concerned about and immediately embark on a regular saving and investing plan. She will catch up the losses very fast.; April 19, 2010 9:35 PM
Anonymous said...: Anon,April 19, 2010 9:09 PM,
Is buying insurance about paying off faster and getting covered for life?
You have misplaced the purpose of insurance.Taking up insurance is to hedge ALL your personal risks and NOT 1/10 or 1/2 of it. Singaporeans have only 1/10 of what is required. Why? ask the insurance agents why?
For a 20 year old he must have ENOUGH coverage at CHEAPEST cost becuase he is not earning much.
Do you know much can the insurer do with your $40K if it is given to them earlier? Are you sure you need not pay after the 15th year? Don't be naive. You are still paying but out of your cash value. The insurer is not stupid and they are not transparent.
What is the point of having an insurance agent if he or she can't help you to grow your money at a decent rate of 6%? Why pay so much commission? for filling up the forms and submitting your application and deliver the documents to you and get paid so much? get a courier service is cheaper.; April 20, 2010 9:49 AM

Saturday, April 17, 2010

Existing life insurance policies

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