Tan Kin Lian's Blog: High yields on matured policies

Tuesday, May 04, 2010

High yields on matured policies

A life insurance company advertised the high return (over 5% p.a.) on its policies that has matured in recent years. There is a risk that the agents may mis-use this information to sell their current policies. The possible mis-use are:

a) The high yield was obtained during the past three decades under an environment of high interest rate and economic growth. The future economic environment is quite different.
b) The expenses in the past on the old products were much lower than the new products that are being marketed today.

If the agent or consultant tells you about the high yield, but did not tell you the two key factors (shown above), you should distrust the agent for not being transparent and honest.

When you get a benefit illustration from any insurance company, including one that advertised a high return on matured policies, look for the following:

a) Distribution cost as percentage of premium. If it is more than 50%, it is too high.
b) Look for the "effect of deduction" after 20 years or longer. If it is more than 20%, it is too high.
c) See the proportion of the maturity benefit that is "not guaranteed". Avoid policies that "bump up" the "non-guaranteed" bonus at the maturity date to show a high payout. You may not get this bonus, but it will be too late at that time.

You can get more information from my book, Practical Guide on Financial Planning. There is a table that shows the benchmark for the effect of deduction for various years to maturity.

16 comments:

Anonymous said...: This is misleading and misrepresenting the future return of their products. In fact their products projected return isn't half of that of the past and the future return will NEVER attain even the projected.
Mr. Tan, it is not unusual of this shameless FT to use your backside skin for his face. Even acheiving the #1 in 2009 was due to last minute dumping of the product capital plus without which it would have lost to GE by a street. Think about it. The sale of this product was NOT accounted for in the agents' production but it was accounted in the company's. Why? The reason is obvious, right? So? is it great? No.....anyway it doesn't matter with this FT so long the result jsutifies the means.Well, self serving agenda is always top of the policy.; May 04, 2010 9:35 AM
Anonymous said...: A lot of bumps out there who are attracted by the bump up fake special bonus. These consumers although with MBA cannot think and let the insurance agents con them. Worse this company has no qualms using past yields to hoodwink the public.I wonder what MAS has to say about this. It is misleading , right?; May 04, 2010 9:44 AM
Anonymous said...: another grafting of backside skin on his face. It is cosmetic.No indifference from the people in Goldman Sach.; May 04, 2010 10:48 AM
Anonymous said...: REX comments as follows,

I think a good way to counteract this unfair advertising is to follow the bandwagon.

For example, another insurance company could also very easily dig up its ancient 20 year or 30 year policies and start a big advertisement as well saying how great they had been doing in the past.

As pointed out above, these are ancient historical yields and the relative performance of a company TODAY cannot be said to be better than another company, by using out of context and unfair examples. ...

It was a very poor advertisement, as always, by this company, in my opinion. (There was also another case when the same company advertised its returns in bold letters and then in small print "not guaranteed")

But anyway, the media loves it, probably earned 20,000 for this page. who cares.

rex; May 04, 2010 10:53 AM
Anonymous said...: It is unethical amd MAS shouldn't allow this company to advertise ancient history.
But does this company care? and will stoop to anything to be #1.They call it transparent but it is cheating the unwary that it is of the future.
Is this honesty? One can lie through his teeth that "honesty is the best policy" when he is not honest and clear.; May 04, 2010 11:48 AM
Anonymous said...: Mr Tan, I have been in the life insurance industry for the past 21 years, and commissions have dropped from the point I started till now. MAS 306 was one of the reasons for the cut in OVERALL payout of any policy sold.

Perhaps you might want to elaborate on your statement, " b) The expenses in the past on the old products were much lower than the new products that are being marketed today. "; May 04, 2010 12:39 PM
Anonymous said...: Insurance agents are rascals, I was once sold a three year policy where a certain portion of the returns are projected only, and the agent did not tell me this.
I would never buy from Great Eastern again, in fact i would never buy any insurance product ever.
I even cancelled my Annuity with NTUC, and return the proceeds to CPF. Likw what TKL said, just rely on our savings to fund our health costs, luckily I have been frugal in my life, and invested in shares and property.; May 04, 2010 12:41 PM
Anonymous said...: Looks like the foreign trash on the 6th floor is using someone else's backside skin for his face again.

The self-praise advert failed to mention that those yields were obtained when policeman wear shorts and ntuc was a real co-op, when policyholders were the real stakeholders and not the management or the agents, unlike today.

Furthermore, the advert also failed to mention that ntuc has permanently reduced (restructured) its bonuses since 2008 and now pays only 0.7% to 1.3% per year. At most every 5 yrs, ntuc will give some extra goodies to keep the peasants happy. Sounds just like elections (familiar?). The damage and reduction to yields will only show up 10 years later -- by then ntuc may not bother to continue blabbing about its yields anymore.

Just take a look at any of ntuc's wholelife or endowment Benefit Illustration. Read the fine print at the back of the 10-15 page BI. You will see that ntuc is now also engaging in the Bumping game of projecting Bumped-up maturity bonus. After another 20-30 years, I bet the only thing getting bumped will be your financial welfare -- being bumped into the toilet.

Over the next 10-30 years, ntuc's yields will most probably be similar to great eastern at best, and most likely be like prudential. Coz the FT started off and learnt the tricks of the trade in prudential and he has been using the same tactics to twist & turn policyholders hard-earned money.; May 04, 2010 3:14 PM
Anonymous said...: REX comments on anonymous@3.14

you have facts wrong. Policemen didn wear shorts 20 or 30 years ago. Policemen wore shorts 40 years or 50 years ago.
If you want to make rebuttal it must be 100% accurate, otherwise it might be perceived as unfair crticisim.
I dont hv problem with the rest of your post, though.; May 04, 2010 5:35 PM
Anonymous said...: Did you know how ntuc got to be #1 in 2009? Is it the effort of the greedy agents? What contributed to the winning margin? The agents contributed only 49% and the rest by the banks and the FA companies and of course the dubious capital plus in the dying minute of the year that pipped GE by a nose.
What is capital plus? It was a financially useless product that conned and exploited the kiasi and kiasu and kiabo customers. For this ntuc agents are super dupers.They are very good at duping their customers by misleading them with bank comparison.This is against MAS guidelines. MAS recently banned insurance agents from this comparison. However ntuc agents are still using it to sell their growth, revosave and vivolife. MAS must send mystery shoppers to catch them at the roadshows and fine them or suspend them.; May 04, 2010 6:22 PM
Anonymous said...: This foreign trash will stoop to anything to make himself look good. He doesn't mind using another person's backside skin for his face as long the results justify.
He claims to be transparent while other insurers are not. During Mr.TanKL's time all quotations came with the yearly yields but now the quotations don't. Why? so that their crap agents can bullshit their customers? so that their unqualified agents or so financial consultants can say any return they like? Why no year by year yield in the quotation? Let the people be the judge. Transparent...you dare to say anything?; May 04, 2010 9:57 PM
Anonymous said...: Why no yield table in ntuc quotations now?
It is obvious..the return is so indecent that it dare not show. The company has its own definition of transparency ,just like the definition of 'liquidity' for revosave.
I can also say 1.5% after 25 years is very high return BUT compared to a bank saving account,right? You see, ntuc agents have been trained to compare their product return to the worse bank rate to look good. Of course the motive is to con the gullible and unwary stupid customers. Now MAS has banned comparison with bank becuase of them.Although banned ntuc agents are still using it at roadshows.MAS must investigate.; May 05, 2010 9:24 AM
Anonymous said...: selective transparency...selective honesty.... selective everything; May 05, 2010 11:05 AM
Anonymous said...: This foreign trash is using the greedy agents for his personal agenda.Some of them know but play along . He is out of touch with the industry since booted out from the P company.He is the chief salesman.; May 05, 2010 3:00 PM
Anonymous said...: Yeh, why use someone's backside skin for his face to cover up his cunning grin? Why no yearly yield on every quotation now? Why? shy? or to let your agents con customers?
Why Mr. Tan KL dare to allow yearly yield on quotation. Who is transparent?
The public can see and cannot be fooled, hor. Wahlow, dare to say anything and also loud. #1 means only more sales, that is all and NOT your agents more professional. My foot , your agents a bunch of product pushers if not conmen and women.Maybe prodfessional consmen.; May 06, 2010 1:49 PM
Anonymous said...: he hopes to shout louder so that the loudness can drown the rotten stuff and turn it into truth.That is the kind of thing foreign trash do. Likewise the agents will do anything to get the commission. both no difference...they still say their products better than the bank return at the roadshow. You see, they dare still even MAS banned it.; May 07, 2010 9:48 AM