In your earlier blog, you mention that a life insurance company have a deduction of 50% of the accumulated premium. Which company is this? What is the significance of this 50%? What is a fair amount of deduction?
REPLY
The insurance company is a foreign company and the policy is investment-linked. When you buy a life insurance policy, you are entitled to receive a benefit illustration that discloses certain information about the product. You should look for the following information:
- value of accumulated premiums - this is the amount that your premiums will accumulate to the maturity date, based on the assumed interest rate (3.75% or 5.25% or 9%)
- effect of deduction - amount that is deducted from your accumulated premium to pay the cash value to you
In my book, Practical Guide to Financial Planning, I have given the benchmark on the amount that should be deducted from you and the balance that should be paid to you. For a 25 year policy, the maximum deduction should be 20% to cover the expenses of providing the life insurance protection (less than 10%) and the cost of investing the funds.
Most life insurance policy take away 35%, which I consider to be too high. For the specific policy mentioned above, the deduction is 50%, which I consider to be "blatant cheating". Imagine - if you work hard and save prudently for 25 years and the accumulated savings should be $500,000, do you like to see $250,000 taken away from you? Many people are not aware about this excessive deduction and would not have been willing to pay so much, if they knew.
I will try my best to educate consumers in my blog and in my website, www.tankinlian.com. It is important for consumers to be educated on financial matters through my book and by attending the educational talks conducted monthly by FISCA, www.fisca.sg.
If an insurance agent approaches you to buy a life insurance policy, you should be careful. Read my FAQ on "marketed financial products" here, www.tankinlian.com/ask.aspx. The same tip applies to any financial product that is being marketed to you, such as land banking, structured products and properties.
Tan Kin Lian
2 comments:
Nowadays the insurance industry is more similar to the clothing industry, than to the finance industry. If you're talking about pricing and profit structure.
Concept of fair dealing and reasonable basis are all thrown out the window. In its place is the concept of sales turnover, units sold per week and per month, pricing at whatever the market can bear or can be sold, emotional selling & marketing, hidden cost structures, hidden charges to middleman & salesman etc etc.
E.g. A shirt that costs $2 to manufacture in places like Indonesia, Myanmar or Vietnam is easily sold for $40 in places like G2000, Metro, Tangs, U2, Giordano etc etc.
Sure you can say people in the distribution chain and capital owners need to be rewarded --- but what is their share of the profits? Is their cut too excessive? Frankly nobody knows or cares. And that's OK to shirt buyers because at most it's just a one-time cost of $40. Even if the sleeve drops off after just 3 months of wearing, it's doubtful anybody will go to CASE or court to seek recompense.
However, an illiquid insurance policy is something else. You're locked into something that you will need to pay hundreds of dollars every month for 20 years or longer. 99% of consumers don't know whether it is a fair deal to them or not, until 20-25 years later. By then too late. Why do you read so many letters in even ST's forum page complaining about the lousy outcomes? And this is just the tip of the iceberg.
So the only way not to be a victim is to not be lazy -- start taking an interest & start educating yourself. But I think only 10% of the population will do this.
No, don't play into the hands of MAS.MAS is talking about creating a mass market of savvy consumers through public education and MoneySense seminars.The agenda here is to help promote product pushing and customers to buy on their own with eyes open so that enforcement is minimal.Option 3 is the way and caveat emptor is the basis so that MAS will not be embarrassed when a debacle happens. It is also good for the industry. Sales will soar and more insurance agents can qualify for MDRT, COT and TOT. 20 years from now is long time away and hoping time bar applies so any legal prosecution for mis-selling is not valid by then. But has crime any time bar?
MAS is dragging its feet. It has the minibond investigation case still outstanding.The fair dealing guidelines is meant for the insurers and not for customers. It should be renamed as fair dealing outcome for the insurance companies and their agents.
So , buyers beware.You are on your own without the protection because you choose, select, you want, you think that product is suitable and that has nothing to do with the insurance agents. You have made an informed decision.But wait a minute... did you choose option 3 on your own because you knew what you were doing and not the agents advised you to choose option 3?..If this is so , you may have to prove it. At least it gives a glimpse of hope if you want to sue your agent.
My advice to you before buying an insurance product , get a 'cert in life insurance(CMFAS 9)? to know about insurance. or a cert in ILP if you are buying an investment otherwise you will be disadvantaged becuase not only the law is not on your side but the product is stacked against you.
While the insurance companies get nearer to its target sale with your purchase and the agents laugh all the way to the bank and on the way to an overseas trip, I bet you don't know what hits you until 25 years later when you are about to retire. Too bad ..too late..The insurance agents and their companies robbed you of the time and money. The Law? too bad..you bought with your eyes open.. you made an informed decision.. you chose option 3..the agent is dead.the company changed its CEO.
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