Latest: an edited version of this letter was published in the Straits Times Forum page on 4 January 2011. See
http://www.straitstimes.com/STForum/Story/STIStory_751527.html
http://www.straitstimes.com/STForum/Story/STIStory_751527.html
Editor
Forum Page
Straits Times
I wish to give a different angle to the points raised by Jimmy Koh ("Don't give in to pressure against new insurance test", ST 27 Dec).
Mr. Koh argued that the new test is necessary "to equip insurance gents ... to advice their clients properly and fairly on ... investment linked policies". I am afraid that, like the proverbial dog, the advocates of this approach are "barking up the wrong tree".
Most investment-linked policies have high charges that take away more than 40% of the accumulated savings from the consumers. Although this is disclosed in the benefit illustration, how many consumers know about it? How many insurance agents point this out to the consumer? Even if the consumer asks about the high charges, also known as "the effect of deduction", some dishonest agents might explain that this is the cost of the life insurance protection - when the true cost is only a small fraction of the total deduction.
The truth is that a large part of the deduction goes to pay for the commission to the agent, the over-riding commission to the agency managers, high marketing expenses including the sales contests and incentive trips and the profit margin of the insurance company.
It it difficult for the insurance agent to give proper advice when they face this kind of conflict of interest. Do they look after the interest of the client and forego the attractive commission? I am afraid that this type of ethical issues cannot be answered through a written test.
After trying to deal with a similar issue for a few decades, the regulatory authorities in the UK and Australia have concluded that the only way to avoid the abuse caused by the conflict of interest is to ban the payment of commission for the sale of life insurance type of investment products. I hope that the Monetary Authority of Singapore will implement a similar approach, to safeguard the financial future of consumers.
Tan Kin Lian
15 comments:
Wow, I did not know UK and Australia banned agent commissions for investment-linked policies. I agree 101% with you about the conflict of interest faced by all insurance agents in Singapore.
I certainly hope MAS will address this issue of conflicting interests. I believe insurance agents will sell the policies that give them the highest commission, and not the most suitable financial products that their clients need.
I feel sad for some of my friends who were talked into buying $3000/year policies from their friends who are insurance agents, even though they are still students and do not earn an income yet.
Insurance companies are some of the biggest and most important customers of SPH. SPH also cannot afford to offend its best customers. When it comes to $$$$, there are conflicts of interests all over the place.
rex comments as follows,
if i am not wrong, the "effect of deduction" and the 40% mentioned by mr tan would have been disastrous to the purchaser if he cashed out and give up the policy before it matures.
on the other hand, if the purchaser carry through the polciy for 10 years (example), the effect of deduction don;t matter, because he still get back 100% of his capital. He is able to get back the capital becaue the insurance co. made many more millions over the 10 years, and enough to cover for the deductions 40% "stolen" from the purchaser. OF course the insurance co. will pay him just a miserable 1% pa although it made 10% (example), but at least the capital is still 100% paid back ON MATURITY. So even if the purchaser is givern this miserable 1% or 2% pa at the end of 10 years, his capital would be preserved and strictly speaking it is a very very bad bargain, but i can't see that is is a question of ethics or cheating.
I do very strongly agree that such poor value products should be regulated or banned because they are so poor value and the consumer has to tie up the funds for so long in return for very low insurance coverage as well as very low returns.
rex
Zi Rong,
you can tell your friends to report to MAS because there might be no reasonable basis for the recommendation of such a high premium policy to students. There is high possibility that it will lapse and your friends will suffer loss or hardship if they choose to keep them.
Rex,
If you save money for 30 years and just get back your capital, your money would have depreciated by 30% to 50% due to inflation over 30 years. You need to get at least the money back with a net yield of 3% p.a. to be protected against inflation. If you allow the insurance company to take away 40%, the net amount will NOT cover the effect of inflation. If the insurance company take away 20%, you might just get your money back, with inflation added back.
rex comments as follows,
"does not cover inflation" ironically, is the catch phrase used by con-men to lure people to buy leman minibonds, etc..
in my opinion, when one stacks money away, it is not reasonable for one to expect to be covered for inflation. Because one does zero productive work but instead, rests on (hopefully) productive work done by others. In other words speculating. So when you speculate you remain at the mercy of the person holding your money. He could give you $1 or $10 or $100 if he made $1,000,000. You may call him all sorts of names, but you dont have the rights to demand for more in my opinion, because you are not the one who actually did any productive work in the scheme of things.
So how to cover for inflation? No choice, work work work. Be a policeman, teacher, lawyer, etc., do a service do some productive work, this is the only honest way to "cover for inflation", the rest all just wishful thinking, not a "rights"
rex
Rex,
I overlook the last part of your earlier comments. I agree with your view that financial products that tie the consumer down for a long time and give a miserable yield of 1% or 2% should be banned.
@ Rex. There are good investments to give you back more than inflation, and without the risk of the Lehman bonds or other bad structured products. I have explained them in my website and also in my talks on financial planning. I recommend investing in an indexed fund (of blue chip shares). If you invest for the long term, you will ride the ups and down of the market and get a good yield (maybe 6% or more). It will cover inflation.
Mr. Tan,
ntuc made sale of ILPs a condition to qualify for incentive overseas trip and ......viola....the fairy mother waved the magic wand on the salesmen and......suddenly...boom boom ..they became experts in ILPs. They sold regular ILPs with 110% charges like hot cakes.
Wonder what with the CKA implemented now? will the magic wand work this time? Sure work.lah..they have more powerful magic wand this year to turn their salesmen into investment experts.
The new CMFAS exam is a breeze, lah. No need the exam also can become ILP experts, lah. Just need the powerful magic wand...a better incentive overseas trip...perhaps with pocket money for shopping included and it will work like magic and be very powerful than the CKA.
The suckers are still dazed?
@ zhummmeng: Thanks for your concern and recommendation! I've tried to give advise to my friends about the high costs of such policies, and that may even pose as a financial burden in the future. But I guess that his insurance agent friend had already fully convinced them about the policy they purchased.
I feel that this conflict of interest is difficult to overcome without intervention from the authorities. People usually buy policies from agents who are their friends, and the friendship makes the person trust the insurance agent will recommend the most suitable policy.
I agree that MAS should ban commission from all life and investment products. The commission is the evil behind conflict of interest, unethical selling and misrepresentation etc etc.with all insurance salesmen and women.The top agents who qualify for mdrt cot or TOT are the ones MAS must investigate
I gaurantee that MAS will be shocked at the immoral and unethical things these agents did. They are robbing and cheating their clients wihtout their knowledge.These agents are despicable and without conscience.
They are agents usually with title like Executive Financial Consultant. They are the worse kind and the fact they shamelessly used the title to cheat their customers when they are only salesmen or women or even conmen.
MAS should stop the agents from using titles which they are not qualified to use.
The letter was published in the Straits Times on 4 january 2011. See
http://www.straitstimes.com/STForum/Story/STIStory_751527.html
Hi Mr Tan,
I totally agree with you. However insurance is a revenue generating sources that they wouldnt want to offend. Thus till date they aim at other products to give them an event more unfair advantage (CKA/CKR to be more specific).
nevertheless do keep up the good work :)
thank you
Jovan
Blog readers here should give thanks to TKL for giving us advice and updates regarding Insurance matters, a subject still close to this veteran's heart. Give thanks also to other commentors who give their side of insuring experience just as readily.
God bless, and may TKL's small business grow in 2012, and in the years to come.
NTUC agents's ILP production has to b checked by MAS..It is load of rubbish...pushing the AIMs ILPs for the sake of qualifying for incentive
overseas trips. I am amuzed when I saw what the so called executive financial consultants were doing.Whoever their clients should get their policy checked by a third party for incompetence and missselling.These salesmen are at best sales champions but never financial consultants.
inside colleague
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