Wednesday, November 10, 2010

Two key factors insurance buyers don't know

Published in the Straits Times Forum Page
I REFER to the reply by Mr Jeffrey Tan,
president of the Insurance and Financial Practitioners Association of Singapore
('Choice of insurance plan hinges on affordability, buyer's needs'; last Friday).

In buying a product, the consumer should be aware of its price.
This is especially important for a life insurance policy,
which requires a large sum of money to be paid over many years.
For most people, this could be the next biggest financial commitment
after the mortgage on their home.

Consumers should learn to read the benefit illustration of the life insurance policy
and look for two key items: distribution cost and accumulated savings.

The distribution cost is
the amount that is subtracted from the consumer's savings
to pay for the advice given by the agent.

Typically, the distribution cost takes away one to two years of the premium.
So, if the premium is $500 a month, the distribution cost could amount to $12,000.
Is the insurance agent's advice worth that much to the consumer?

The deduction results in a portion of the accumulated savings
being taken away from the consumer.
This portion could be more than 50 per cent after 30 years.

If the accumulated savings is $300,000,
the consumer could be giving away more than $150,000.
The net yield earned on the savings is usually insufficient to cover inflation.

So, how can the agent claim to be giving good advice to a consumer
by selling this policy?

In his reply, Mr Tan stated that not all term insurance policies
pay a lower commission than traditional whole-life and investment-linked policies.
I disagree.

If a consumer buys a term insurance to cover $300,000,
the premium should be less than $400 a year.
The agent may be able to earn $400 in commission over a few years.
If the agent sells a whole-life or investment-linked policy,
the agent may be able to earn more than several thousand dollars in commission.
Unsurprisingly, most agents prefer to sell the policy
that pays a fatter commission.
They tell consumers to avoid a term insurance policy because it does not give any return.

However, consumers are not aware of how much they will be losing
in a whole-life or investment-linked policy.

Tan Kin Lian


Spur said...

Those agents and FAs must be jumping by now, maybe even senior management of insurance companies too. Kudos to Mr Tan for trying to educate the public and shed more light on the numerous half-truths of the life insurance industry. You can see quite a few angry and negative comments in the ST Online page, most probably by agents or FAs.

Even LIA has kept quiet in their latest Nov quarterly statement on the average claim amount and the average sum assured amount. LIA used to report these numbers every previous quarterly statement. After kena the lecture by GCT for inadequate insurance coverage, LIA seems to be laying low and act blur. Always a good tactic to use when unable to come out with solutions, and I confess to using it myself sometimes. :-)

Lye Khuen Way said...

Yes, as "Spur" commented, it was great of Mr Tan to stir and trigger some respomse from the Insurance community. Must also give credit to SM Goh for doing something, no matter how late.

If Mr Tan can use ST Forum to tickle many to question/ probe deeper, there is still hope that MAS will eventually act.

d said...

Dear Mr Tan,

From what you have written about Whole-Life Insurance Policy, does it mean that it is better for the consumer to buy Term Policy and to use the savings to invest on their own in other investment instruments?

I would really appreciate an advise from you.

Thank you & Best Regards,


zhummmeng said...

you need not invest on your own if you don't know about investing. You can engage an adviser or a coach to help you invest to your best interest.

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