Monday, November 15, 2010

Why only term insurance plans make sense now

Published in the Straits Times Forum page
MR GIDEON Lee ('Buyers, not agents, decide the products they want'; last Friday) asked why I am advocating term insurance when the insurance cooperative that I headed had been selling whole-life and investment-linked policies for 30 years.

During my time, the whole-life and endowment policies were sold with distribution costs that were much lower than comparable products in the market. The effect of deduction was about 20 per cent over 25 years, compared to the 40 per cent for most policies today.

In the past, the cooperative also distributed high rates of bonuses out of the surplus, giving a high yield to policyholders on these old policies.

The letter writer quotes the example of a term insurance premium that charges $200 a month. This is an exaggeration. A young person can buy $300,000 in sum assured under the Singapore Armed Forces (SAF) group insurance scheme and pay only $38.40 a month. This is available to SAF soldiers and operationally ready national servicemen, and their spouses.  To buy this amount of protection under a whole-life or unit-linked policy, the consumer usually has to pay a premium that is 10 to 20 times higher.

Some dishonest agents deliberately quote a higher cost for term insurance to persuade the consumer to buy the alternative policy that charges a higher premium and pays a fatter commission.

Mr Lee said correctly that the distribution cost is not paid entirely as commission to the agent. Part of it is paid to the agent's manager and spent on lavish overseas trips and other sales incentives. Regardless of how the money is spent, the consumer does have to pay the total distribution cost.

The writer said the commission is given for selling the product and not for advice. If this is the case, why are these people called financial advisers, consultants or other impressive names and not life insurance salesmen?

The writer is wrong in saying that I am advocating a one-size-fits-all solution. My aim is to educate consumers

to invest their savings in a low-cost investment fund, rather than a life insurance policy, to earn a better long-term yield and achieve greater flexibility. 

Tan Kin Lian

My guidance on how to invest savings in a low cost investment fund, and why this is more flexible to meet the changing needs of consumers is explained in my book, Practical Guide on Financial Planning, available here


Spur said...

I can attest to the good yields of wholelife policy during Mr Tan's tenure at Ntuc.

Yesterday, out of curiosity, I compared my wife's old Ntuc wholelife policy with my GE wholelife. Hers "break even" after only about 8 years, and the cash value has been accumulating more than the premiums ever since. Mine break even only after 16 years!

Unfortunately for my wife, the pace of cash value increase has slowed down since the new mgmt took over, due to their bonus cuts. According to the new Ntuc spin of "balloon" terminal bonus, my wife has to maintain her wholelife until she reaches 65 before the *projected* cash value is similar to the old amount under Mr Tan. Luckily both our wholelife policies are small and incur small amounts to maintain.

The yield structure of current Ntuc policies are now basically the same as for other commercial insurance companies. i.e. a parabolic curve going up from left to right, but with a very shallow gradient in the first 25-30 yrs, and only having a steeper gradient after that --- corresponding to the non-guaranteed "balloon" terminal bonus.

Take a look at the current BIs of Ntuc policies. Under the optimistic 5.25% scenario, it now takes at least 13 yrs or more to break even. In actuality, I bet it will take about 15 years for the current policies to break even --- same as other insurance companies liao.

During Mr Tan's time, Ntuc's bonus structure was more of a simple straight line going up from left to right, with a reasonable gradient. i.e. Fair bonus payouts whenever the par fund makes a surplus.

Tan Kin Lian said...

Hi Spur
How about writing to the Straits Times to share your experience? Or get someone else to write and share their similar experience? There must be many policyholders in the same situation as you.

DareToAct said...

I agree that the best approach is "buy term and invest the rest".
However, the likely case is we will see many "buy term and spend the rest".
A fairly priced whole life is probably better for people who do not have the discipline.
Unfortunately, the incentive system in the insurance industry will see to it that whole life won't be priced fairly; and the ugly step-sisters (malls, fashion industry, advertising ...) will see to it that money supposed to be saved will be spent.

Blog Archive