At the CNA program on financial planning, a panel speaker said that consumers should look at the guaranteed and the non-guaranteed portion of the benefits under an endowment policy.
This is only partly true. The consumer should also look at the following figures (available from the benefit illustration):
a) The distribution cost
b) The effect of deduction.
The consumer will be shocked that the distribution cost is usually more than one year's premium. What is this figure? It is the amount taken from your savings to pay the insurance agent. Imagine that you work hard to save $6,000 a year. Do you want more than $6,000 of your savings to be taken away to pay the agent?
What does the agent do for the consumer to earn such a large sum of money? Frankly, the agent does not help the consumer to get a higher yield. The consumer can get a higher yield on his or her own by investing in other more appropriate investment products - as explained in my book on financial planning.
To understand what happens when you buy a life insurance policy or an investment linked policy, you can read my book on life insurance.
These books are available from www.tankinlian.com/ishop. You enjoy a discount when you buy from i-shop. More importantly, you can save a lot of money by avoiding the wrong financial products.
This is only partly true. The consumer should also look at the following figures (available from the benefit illustration):
a) The distribution cost
b) The effect of deduction.
The consumer will be shocked that the distribution cost is usually more than one year's premium. What is this figure? It is the amount taken from your savings to pay the insurance agent. Imagine that you work hard to save $6,000 a year. Do you want more than $6,000 of your savings to be taken away to pay the agent?
What does the agent do for the consumer to earn such a large sum of money? Frankly, the agent does not help the consumer to get a higher yield. The consumer can get a higher yield on his or her own by investing in other more appropriate investment products - as explained in my book on financial planning.
To understand what happens when you buy a life insurance policy or an investment linked policy, you can read my book on life insurance.
These books are available from www.tankinlian.com/ishop. You enjoy a discount when you buy from i-shop. More importantly, you can save a lot of money by avoiding the wrong financial products.
Endowment products are scam products. They don't give enough to the buyers and often they are bundled with insurance to con people into thinking they have saving and yet protected.This is RUBBISH plan.
ReplyDeleteSalesmen's argument is that they are low risk.Not true....they are very risky because the insurers NEED NOT PAY as projected and if they do the return is very low and you ONLY GET it at the end of the term. The return is at best equal inflation only and that depends on how is the term.
This is a rubbish saving plan, right?
You can do much better than that.
Since the coverage is limited to the term why not buy a term. If you don't need insurance why pay?
Best method for saving you can use RSP(Recurrent single premium)which is low cost, efficient and effective. Only pay upfront sales
charge of 0 to 3% and get IMMEDIATE cash value as high as what you pay, eg.$200 regularly you get minimum $200 cash value upon buying without all the craps of high commission and high set up cost to the insurance company. It is 100% allocation.It can breakeven immediately and NOT after 15 years or 20 years like some regular ILPs.Isn't this low risk, lower than endowment? Best is you can achieve your goals faster.
The Insider
That's right, Mr. Tan. The agent does not help the consumer to earn a higher yield. In fact, the agent helps the consumer to earn a lower yield, after deducting the savings that is taken away to pay the commission. The agent also helps to lock up the consumer for 10 years, just to earn enough to pay back what has been deducted. This is the value of the agent.
ReplyDeleteYou can imagine what those limited pay endwoment like reach and anticipated endowment like revosave can do for you, LOSS in purchasing power after 10 to 20 years. Worse is revosave, it is loss from the moment you buy. Why are all these products allowed to be sold to comatose consumers? Yes, they are sold because comatose customers don't know what are they; just trust the agent or the company? It is sad that companies and agents are in cahoot to rob the customers of their financial future. They are useless financial vehicles.
ReplyDeleteThe purpose of Endowment is to save, usually for a goal(child edu, retirement etc.) or regular savings.
ReplyDelete1. Yield - What is the returns of your funds?
2. Realistic - Is the projected maturity value realistic? The best guess will be based on the type of bonus allocation (annual R.Bonus, % of Terminal Bonus on RB) and what is the average yield of similiar policy maturing for last 3 yrs.
3. How much premium for the Sum Assured? For the same SA, some insurer cost lesser, some more. SA also means the guaranteed portion upon claim or maturity.
4. Cash Surrender Value - Many do not realise policy is an offical contract. If you sign up for 20 yrs, surrendering prematurely is a breach of contract - you get penalise. If so, how much is it at different stages. I've seen past Income policies surrender value higher than premium paid at 1/3 of policy term. I've also seen policies, unless until maturity, you get back lesser than what you paid (excluding interest).
Endowment are low risk - this is relative. Usually it refers to operation risk - you wont have the accountant running away with your money. Security risk, Insurer failure is backed by MAS and PPF. Volatility - Smoothing of the bonus, The maturity value may fluctuate 10-20%, it's lesser than 50-80% like the mini bond.
I feel that there's nothing we can do about distribution cost except not to participate. We have no control over the Insurer budget, advertisement, commissions, salary etc. What matters is the actual returns to us, eg. if we get 4% for 20 yrs, that's fine.
Effect of deduction is just a number.Of course there will be cost incurred and funds usually dont keep growing at a fix rate. DIY also has costs too, seminar costs, books, time to monitor, if things go bad - sleepless night, make relationship sour etc.
One good thing about endowment is monthly contribution. The upfront is the tough part for most. If have huge capital, anyone can easily downpayment for an apartment and rent out. Look at furniture company, the price and the installment amount double in five yrs. (Credit firm with furniture as collateral.) People still go for it as it enable them with monthly payment.
If talking about saving for a purpose like 50K child education. It's hard to come out with 50K lump sum but you can afford 2.5K a yr, for 15 yrs. And if in year 3 after paying 7.5K and something happen to you, the Insurer payout 50K plus bonus. This is financial protection, the child education fund is protected. Upon maturity, your annual contribution returns you 3.5%. 10% would be exciting but 3.5% is better than not saving at all, better than 1%, 0.1% or 0.05%.
Every products or methods has it pros and cons and it's dependent on the user. One can allocate 10% income to insurance and still plenty left for other investment and purpose.
While there are those who are investment savvy, there are others who are just getting their ends meet.
Endowment policies are fine as long as the user know what it's getting into. I know of Bank RM having Endowment, Fund Analyst having Endowment, Fund of Funds manager having endowment.
Apparently a lot of user doesnt really understand or know what they are signing up for. Education is the key. So what can we do about it?
(I am not a Financial Adviser,nor with any Insurer or FA Firm)
Micky Neo
Resale Endowment
Mickey Neo,
ReplyDeleteyou don't get 4% nor 3.4% even after 20 years. Protection is just a scam because if your clever agent has adequately insured you DON"T need a saving plan with insurance coverage .And if you are NOT adequately covered you shouldn't be investing and worse buying an endowment plan.By doing this you are putting the cart in front of your horse. The horse is YOU. Who is more important, you or the cart(your child)?
The smartest way to plan is buy term plans that adequately cover all your RISK needs at 1/10 of the cost of limited pay wholelife or 1/20 of endowment and save using a regular saving plan(RSP) that pays only 3% as charge or commission and earn 7% to 9% return with very low risk, lower than endwoment.Endowment has no cash value in first 3 years and breaks even at donkey years whereas a regular plan has cash value IMMEDIATELY and breaks even also almost immedaitely and if you stop saving there is NO PENALTY.So which is more risky, endwoment or the regular saving plan? When you need cash you don't need to borrow and pay 8% interest to the insurance company because it is YOUR MONEY but NOT the money in the endowment unless you TERMINATE it..
Often the problem is the salesmen. A good adviser/planner will look into your needs and put your interest first and NOT the product first.
The Insider
Hi Insider,
ReplyDeleteI feel products and methods are as they are, have their pros and cons and it's up to the user to choose and how to use them.
So what is your message?
You are unhappy with what the Insurance Companies are doing?
Your feel the insurance products are not good?
You feel tied agents are limited by their in house products?
You will like to promote buy terms and invest the rest in RSP?
What's the action plan to outreach?
Run a campaign?
You have a personal website?
(hope we can contribute some traffic)
Micky Neo
59 Club Street Singapore 069434
Mickey,
ReplyDelete"I feel products and methods are as they are, have their pros and cons and it's up to the user to choose and how to use them. "
This is the favorite line of argument insurance agents would use to justify pushing high commission products...let me tell you the users DON"T know and this is the reason why they kenna SOLD by insurance agents. If the users know they don't have to pay hefty commission for rubbish advice, right? They can buy direct or demand discount from the products.
About the pros and cons, the cons are stacked high against the users of these con endwoment products. The Insider has given you examples of RSP and how you get better , higher and superior return with LOWER risk.
I don't FEEL about the products. I SHOW you they are rotten. I do DUE DILIGENCE on every product to check for toxicity before recommending to my clients.
I am a FINANCIAL ADVISER AND NOT a koyok product peddling salesman.
Lets be real endowments are a scam: have been always will be.
ReplyDeleteMore developed markets don't simply sell these products.