Tan Kin Lian's Blog: Locked into a poor policy

Sunday, June 27, 2010

Locked into a poor policy

A consumer showed me the benefit illustration of a 21 year anticipated endowment policy taken 18 years ago for a large life insurance company. She paid $2,000 a year, comprising of $1,500 for the basic policy and $500 for the critial illness rider.

The projected maturity value in 3 years time is $25,000. The premiums paid for 21 years is $42,000, comprising of $31,500 for the basic policy and $10,500 for the rider.

I found the premium for the critcal illness rider (which does not provide any return) to be too expensive for the small amount of cover. The return on the main policy is negative, and is lower than the total premiums that was paid.

The consumer asked if she should stop the policy now, as the return is negative. The cash value for 18 years of premium is so poor, that she had no choice but to continue the policy.

This large insurance company must have sold more than 100,000 policies of this plan (just my guess). The policyholders had no choice but to accept the negative return for 20 years of savings.

It is very sad that the consumers in Singapore have to suffer this type of treatment. They were financially unsavvy and trusted the insurance agents. However, these agents sold them a bad product, which was made worse by the cut in bonus rates and the reduction in the interest that is credited on the installment payments.

Consumers should avoid most types of life insurance products that give a poor yield on their savings. They should buy term insurance and save in a low cost investment fund, such as the STI ETF available on the Singapore Exchange.

Read my book, Practical Guide on Financial Planning.

8 comments:

Anonymous said...: This is not good..More and more people are discovering that they were taken for ride by their trusted insurance agents. A lot of time is lost. Saving and investing is about time. Imagine $2K a year and compounded for 20 years at 6% you might have $80K or more.
What is MAS doing? Consumers are getting wrong advice and rotten products.Is there something can be done for these consumers?
The whole saga is insurance agents are unqualified, giving poor advice and selling wrong products and worse they are driven by GREED.
Whole life and endowment are NOT for risk management and saving. They are very poor protection insurance and rotten saving plans.; June 27, 2010 11:15 AM
gerimegaly said...: Mr Tan, I think it is imperative to do a fair assessment of this plan.

If the Critical Illness Rider is bought purely for protection purposes, then it should not be lumped into the calculating the returns of the main savings/endowment plan. This is because:

1) Product Pricing for such Critical Illness Riders in the early 1990s were very pricey and they were NEVER sold as stand-alone. In other words, they had to be bought together (meaning attached) with a Basic Plan.
I believe you are aware of this, as you were the CEO of NTUC Income back then.

2) Nowadays, pricing for Term Cover (Critial Illness Or Non-Critical Illness Type) has dropped tremendously, as compared to 15-20 years ago. A direct comparision with a product now, and a product bought back then, would not be fair at all...

On top of that, this article also gives the impression that the overall return is just $25,000...But what about the Anticipated Lump Sum payouts? Are they also added into the Projected Maturity Value of $25,000? And how about interest earn (past & future) on the Anticipated Lump Sum Payouts? Has it also been accounted for, in the Projected Maturity Return?

A product like this sold 18years ago, typically would have an initial OVERALL projection of around 5% to 6% back then. But with adjustments in bonus declarations over the years, the OVERALL interest earned would have dropped to 3% to 4%, and surely NOT negative!; June 27, 2010 1:31 PM
Tan Kin Lian said...: Reply to gerimegaly,

I have excluded the premium for critical illness from the comparison of the return. On its own, the premium is far too high, relative to the amount of cover.

The consumer told me that they have not taken out the anticipated payments. It was rolled up with the maturity payment. (But, she could be mistaken).

There was another case of a similar policy, where the poor return was poor, almost nil.; June 27, 2010 2:06 PM
Anonymous said...: Anticipated endowment NEVER can give 3% even if payouts are 'reinvested" after 21 years.
Check the new anticipated endowments in the market they give at BEST only 2.5% after 25 years.It is guaranteed loss.
It is real foolish and makes no sense if you were told that they would give you only this, right? Any rational person would have rejected if he or she was told the truth.
The problem is consumers were NOT TOLD the truth. That is why many of these scam products were able to sell.In fact they were sold on half truth and lies, eg. the payouts were misrepresented as interest earned; the return was compared to the banks(now it is banned by MAS but insurance agents still using this ruse to con passers-by at roadshow).
If there were full disclosure these products could not be sold. Any prudent man will not buy. And if the insurance agents were honest and competent these products would not be sold also.
These products were sold on falsehood and manipulation of the truth.; June 27, 2010 2:22 PM
gerimegaly said...: Hi Mr Tan,

I was formerly an agt (left in 2000) of one of the big insurance companies (am now an FA Rep) and have sold Anticipated Endowment Plans back then.

In fact, one of my old clients (still a client) just had a maturity cheque paid to him early this year(from a 15yr Anticipated Endowment Plan sold to him, by me) and I believe the overall interest earned for his plan was around 3.5% p.a.

Again, New plans in the market place NOW, are currently giving very low projected interest (with anticipated returns reinvested), around 2.5% to 3% only.

However, the older policies bought in the early 1990s are still giving decent returns, even after taking into account the many bonus cuts along the way.; June 27, 2010 2:45 PM
Tan Kin Lian said...: To gerimegaly

My blog contained some other examples of people who got close to zero return on this type of policy.

One of them was quite sure that he had his payments reinvested and he still got a poor return (could be less than 1% or negative). I am trying to locate his case.; June 27, 2010 2:49 PM
gerimegaly said...: Mr Tan,

to be honest, I can only speak for the previous company I worked for, and the plans I sold when I was there. Not fair for me to comment on the other companies...

As for some of the examples, could it be possible that there is some mistake in reading the Benefit Illustration?

I am most happy to offer my help, if needed. I have been in the Insurance industry for the last 21yrs.; June 27, 2010 3:01 PM
Anonymous said...: I have been a daily reader here and I also post comments frequently, but I always wonder why is it that companies are never named. Of course on the surface I know it is to avoid any lawsuits but what is the underlying reason? Is it illegal or defamatory to give details of a particular true case? Or is it just fear?

We went through the entire minibond saga and everybody knows which companies we are talking about, but when it comes to insurance we are left guessing.

Anyway I also just follow the same practice in my postings and avoid naming any company.; June 27, 2010 7:07 PM