Tan Kin Lian's Blog: Why are insurance agents wealthy?

Sunday, January 23, 2011

Why are insurance agents wealthy?

All around the world, insurance agents have thrived on the ignorance of consumers. They used the risk of premature death to get consumers to part with a large part of their savings to be invested to get a poor yield. The consumers are not aware that they can buy term insurance to cover the premature death for 7% of their savings and invest the 93% to get an attractive long term yield. Buy putting their savings with the insurance company, they stand to lose 40% of their savings.

The difference of 33% make the insurance agent a top income earner and give a lot of profit to the life insurance company - but make the ignorant consumer that much poorer.

The insurance agents are trained to tell all types of stories to get consumers to part with their savings in a low yield policy, such as insuring the child, protection against critical illness and health. The consumers are not aware that they are paying far too much for the insurance, and that they can buy the insurance at much lower cost, if they buy a pure term or critical illness rider (covering a short term). Most consumers need insurance fo 25 years only, as their accumulated savings will be more than sufficient to provide for their financial needs, without insurance.

By insuring for the whole of life, the consumer becomes poor for life. My remarks apply to whole life or investment linked policies that take away 40% of the accumulated savings over a 25 year period. It does not apply to a life insurance policy that takes away 20%, which is a fair rate to give away for the insurance cover and the investment service. If you can find an insurance policy that takes away 20% after 25 years, it is all right to buy that insurance policy.

My new book, "Get Value on your Life Insurance" shows how much is taken away from you - based on the popular life insurance policies sold in the market today. Most of them vary from 35% to 50%, which is far too high. If you have bought a life insurance policy, you will probably find it mentioned in a case study in this book. The book will be available on 15 Febuary 2011 (tentative).

Read my book on financial planning for guidance on how you can buy term insurance and invest the savings on your won - if you cannot find a life insurance policy that takes away less than 20% over 25 years.

Tan Kin Lian

9 comments:

Singapore Stock Picker said...: Mr Tan,

what are your views on the raised retirement age? This would mean that an adult who joined the workforce at 25, has 40 years working. Does it change any traditional assumption that you make when planning, considering the assumption has always been 25 years?; January 23, 2011 3:20 PM
zhummmeng said...: I heard in ntuc the female salesgirls are doing good business peddling expensive high commission products. Some of them are former retrenched clerks, secretaries , receptionists and factory workers.They are very creative. they give rebates, vouchers and give their customers loving tender care.
Many are now called Executive Financial Consultants. Although with fierce title they do anyhting except consulting. At best they peddle and traffic in high commission products and execute the order.Their chief lovingly call them sales champions.
You see , even the cheif knows they are not consulting but insulting the customers by pushing products.
In life insurance females are usually successfool. The $5 million dollar girl is another high flyer example with creative thank you policy.In private banking the high net worth are sold customised products.
No surprise selling only high commission products with little disclosure they are rich..They shall bring their wealth to 18 level hell to spend and celebrate and bride the hell gate keeper.They sure go there because their customers/victims are cursing them day and night.This is the reward/retribution they get for fleecing trusting clients with poor return and low protection products and those cashbacks which the pigs might be poisoned too.
The good news or bad news depending who kenna..when MAS thinks that enough is enough and follow UK FSA and Australia, India, HK and New Zealand and US to ban commission. Australia is banning it this July.; January 23, 2011 4:41 PM
Vincent Sear said...: Commission per se isn't evil. From short-term investment (e.g. stockbroking) at 0.5% through the mid-range 2 to 3% (e.g. common conservative or balanced unit trusts)to 5% (e.g. more "sophisticated" unit trusts) per transaction. General insurance products (e.g. motor, health, fire) at 10 to 15% per year.

The overpayment of commission comes with hybrid products where investment is mixed with insurance, and making matters worse, loaded upfront.

My examples above, reasonable commission for investment products should be between 0.5 to 5%, for insurance products should be between 10 to 15% p.a.

However, in hybrid products like Par-WL and RP-ILP, insurance-rated commission are charged to the investment portion as well. Then, in order to incentivise the sales force to go for more sales, decades of future commission is commuted upfront resulting in 50 or even 60% first year commission.

After a few years, the commission tailed off and the agents are forced to generate new business to sustain commission income.

This can only happen with insurance disguised as investment, investment being charged along with insurance-rated commission and commuting commuting upfront.

The insurance company won't advance the upfront commission to the agent. It charges to or withhold from the client's cash value. The client will end up overpaying for these excesses.

When I was with TKL at NTUC Income, there was a very good, comprehensive, flexible yet simple FIP (Family Insurance Plan). The insurance portion was distinctly separated from the investment-linked portion but administered under the same policy. It saves on annual fees and the hassle of monitoring separate policies.

I'm not sure if it's still available now. Anyway, even during those days, our agents weren't really keen on that, as understandly they were used to high upfront commission during days when par policy returns where high enough to sustain that.

Buy term and invest the difference. Pay a fair commission for insurance and pay a fair commission for investment.; January 23, 2011 8:06 PM
JasonX said...: Personally, I feel the commission based salary is the biggest culprit. How to trust an insurance agent to gives you proper advice when their income depends upon how much you commit to them? Yet these agents are called "Financial Planners" when they have not gone through proper financial training nor will they offer proper financial advice 95% of the time.

Another issue is that most agents who started out will take the 100% commission path. A lot of young agents have very little savings. This forces them to try to hard sell products as aggressively as possible to endure through the 1st few months.

MAS should be aware of these issues, yet they aren't taking any actions. They have a number of tools at their disposal. They can ban some poor insurance products, force disclosure of certain information, allow consumer a cooldown period to reverse their commitment to certain insurance products. Better yet, change the commission based structure to a based salary structure, with a much smaller commission from the clients spread out over the duration of their policies. This at least ensure that agents have a vested interest to continue servicing their clients. This also helps to reduce the culture of agents "tricking" consumers into switching their WL plan for another WL plan.; January 24, 2011 1:11 AM
James Yeow said...: I believe there are many consultants who will really do their job to recommend suitable products according to clients' needs. I can't deny there are some who go for the commission, but i just feel it is unfair to those consultants who are passionate about helping people with their financial plans. Majority of the people have limited knowledge of wealth management, what are the risk they are exposed to for being underinsured and also investment. If telling the client the facts of the risk that they are exposed is telling them stories to scare them, then why MOH has to go through all the trouble to give us statistic and newspaper having articles about inflation? All these are facts, by being ignorant to them only puts one in a more dangerous position. that's my view; January 27, 2011 12:11 PM
elderflowertea said...: So is the best way to buy a term policy and invest the rest? Where to invest the rest into?

I know of honest financial planners who genuinely want to help their clients but sometimes they may be "deceived" by their managers/companies. I know people who are financial planners and they bought their own products, thinking that it's as good as claimed.

Financial planning is a very tough concept. If the financial planners are new, chances are they will know exactly what to advise as they gain more experiences but.. the company/manager must be able to guide them properly.; October 23, 2011 12:34 AM
Unknown said...: I have seen the advantages of Insurance Agent and its benefits. It is very realistic on how you will deal with this kind of process and your blog is very useful. Thank you so much for providing plenty of useful content.; September 21, 2012 11:39 AM
Gary said...: It might be useful to self-analyse your existing policies, before talking to a financial advisor about expanding your portfolio. You might want to check out the Policy Vault (www.policy-vault.com) for a basic review of your existing policies, or do some basic spreadsheet projections beforehand.; February 04, 2014 12:03 AM
Nikhil said...: Thanks for sharing the blog, seems to be interesting and informative too. Can you suggest some of the websites to visit for bike insurance online; May 24, 2021 6:22 PM