Saturday, December 25, 2010

Term insurance to age 99

I wrote this letter to the Straits Times to comment about the comparison between whole life and term insurance to age 99. I said that this comparison is misleading to consumers. The Straits Times did not publish my letter.

The insurance agents used this type of comparison to mislead the public to buy whole life or investment linked insurance. It is disappointing that the Sunday Times used the same approach.

Tan Kin Lian


Spur said...

Everyone knows there is a conflict of interest for the MSM when it comes to big companies and financial-related industry. The MSM need the big advertising revenues.

This type of comparing with 99-yr term surely comes from the insurance companies when the MSM staff interviewed the insurers. And the MSM staff dutifully regurgitates it in the news stories. If a 3rd-party was to proof it wrong, they just act blur and keep quiet. As long they themselves know can already.

Many higher-level executives working in banking & insurance industry actually buy term life for 25-30 yrs, and regularly put the difference into low-cost UTs, ETFs or blue chip stocks. In one major local insurance company, I checked out some of the SVPs and VPs --- most of them buy term to cover themselves for $600K to $1M. These shameless senior mgmt in the insurance industry actually don't buy much wholelife or endowment. Yet they can put on a straight face and tell the salesmen/women to push wholelife and endowment at all costs.

zhummmeng said...

It is on the assumption that policyholders hold them till 99 years old.
99% of policyholders don't even hold beyond 65 years old...only the crazy ones do or policyholders in coma do.. If it is the wholelife all the cash value will be gone then, eaten up the insurer.If the rate of increase in mortality charge is compounded on average 4% the cash value will be gone against the insurer paying 2.5% for the policy.
Yes, it is unfair comparing the premium based on unrealistic situation.The writer was trying to pander to the insurers who are the newspaper's advertisers/clients. Any negative comment may incense them and thus impacts the revenue. Conflict of interest, hor.

Vincent Sear said...

Zhummmeng, Merry Christmas.

I have no idea where you get this idea from that WL kept till advanced age would be eating into returns with higher and higher mortality rates. WL mortality charges have always been level, computed from inception age to 85 or 99 depending on insurers, surviving beyond which is premium free, just waiting for claim, i.e. the inevititability of death.

Some companies use age 99. This enabled them to bring down the level premiums a bit as it's stretched longer and there's practically no actuarial cost of free premium. Most companies use age 85 for last premium payable.

The policy is still whole life as long as it's in force. Regardless of how expensive the distribution cost is and how low the bonuses are, bonuses declared cannot be deducted away and form part of the policy. The policy that will eat into accumulated returns on to of premiums is RP-ILP which is YRT-based in which mortality charges increase every year and all returns are not only non-guaranteed but also not locked in until unit redemption for cash.

In any case, buying term to age 99 is of course a ridiculously senseless thing to do and such a projection shouldn't be used as basis of comparison to WL whether traditional or RP-ILP.

For retirement planning purposes, nobody really keeps WL or term or whatever policy for whole life (i.e. till death). For dependant protection purpose, there's no more purpose after all dependants come of age and become independent.

Some insurance agents try to sell the idea of leaving a "legacy." That's another ridiculous senseless idea to spend so much on distribution cost for so low a ratio of returns. Leaving a legacy is nice. Invest elsewhere with proper sense of purpose, proportion of cost and expectation.

zhummmeng said...

Merry Christmas to you, Vincent.
It is no use debating with you on this. I have said that the premium is level through out but not the mortality charge which increases with age. There will come a time when mortality cost exceeds the premium and you may be wondering where the insurer deducts the extra cost from.Of course from your cash value. This is where transparency is called into question. It is not shown explicitly but you can calculate, can't you? The RATE of increase of the mortality cost is average 4-5% compounding and the age bands get narrower with increase in age.
Why insurance companies love selling this product is because of this guaranteed revenue from the policyholders. Did the insurer tell you or the agents tell you? NO!! the insurer is NOT truthful. The insurance agents are dumb and refuse to know the truth or know the truth but they lie.
WL is also YRT...ask your actuary, please and once and for all resolve this issue with yourself.
Term insurance IS also YRT and is structured like WL except the small extra premium is invested to pay future increased mortality cost and NOT for cash value unlike WL.
I can't convince you anymore if you are still in comatose state.

Spur said...

Mortality charges do increase for wholelife too, but only for older ages after 60 yrs old. The insurer cannot increase the premium or deduct from accumulated cash value and past declared bonuses. What the insurers do is to take away more from ongoing and future bonuses and/or asset share. Worse case is when they start declaring 0% bonus. Actually that's 2nd worse case. The worst case is of course the insurer goes bankrupt.

Wholelife is totally not transparent. But you can deduce from the BI by calculating the yield during younger years e.g. 40 -- 50, as compared to older ages such as 70 -- 80. You will find that the yield (or rate of increase) of the cash value drops in the older ages, even though all other parameters remain the same. Even for limited-premium wholelife where the customer completes paying by 40 yrs old.

zhummmeng said...

In younger policyholder the increase in the mortality cost(YRT) in WL is not obvious and noticeable but the jump comes after 60 years old.It is usually lesser than the bonus given so there is a net gain or increase in cash value. When one gets older the rate of increase in the cash value decreases due to higher mortality cost.
Yes bonus declared is vested and the insurer doesn't take away from from but you PAY the mortality cost with the bonus/cash value. It is like giving you money to pay them.LPPL, right? You get it?
If you plot on a graph the cash value return is shaped like a mountain, ie it goes up on one side and goes down slope on the other side.

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