Thursday, April 19, 2012

A bad product to skim off the high net worth person

A person in the last 20s, who is in the high net worth category, was offered a single premium life insurance policy. He has to invest $250,000 in the policy to cover $1,500,000. At the end of 30 years, the cash value of the policy would have been $500,000 (and it was not guaranteed). He asked my view about this policy. Here is my reply.

If you invest the same $250,000 in the Straits Times Index ETF and it earns an average yield of 5%, your investment would grow to $1 million at the end of 30 years. The chance of premature death during this period is 5%. The chance of surviving 30 years is 95%.

It does not make sense to give away half a million dollars in this single premium policy when the chance of a higher payout is only 5%. It is better to invest the money in the ETF. If you really need insurance, you can buy term insurance for $1,500,000 by paying an annual premium of $1,800. Over 30 years, your total cost would have been $54,000. Why give away $500,000?

The insurance agent was able to hoodwink the consumer by telling him that this investment product is specially designed for high net worth people, like him. It does not matter whether you are high net worth or not. Just look at the yield on the investment and compare it with what you can earn by investing in the ETF. The result is probably the same - the insurance policy will take away 40% (or more) of what should be yours.

The distribution cost for the policy was $36,000. This is the amount that the insurance agent and his agency manager would have earned by selling a bad product to you. And it comes from you, upfront. You are paying more 15% of your savings upfront for this bad product. Why should you give so much to an agent who sells a bad product to you?

I strongly encourage consumers to attend the educational talks organised by FISCA. If you do not spend the time, you are likely to lose a lot of money by investing in the bad products. And you deserve to be ripped off!


Tan Kin Lian said...

There are so many ways for the sales person to give untruths to get consumers to buy their bad, overpriced and unsuitable product.

This is just one example. I have come across other examples, i.e. the life insurance policy guarantees that there is no investment risk, etc.

The guarantee is untrue. If the policyholder terminates the policy, and it happens to tens of thousand every year, they are losing half of their savings. What type of guarantee is this?

Here is another untruth. The investment linked plan can give a return of 9%. The 9% is an unrealistic projection, and is the gross yield before deduction. After deduction of 4%, the net yield is only 5%. If the actual yield is 6%, the net yield is 2%.

Why take 2% when the investor can earn 5% on an ETF?

So, the move by MAS to set up a review committee, to see if commission can be capped or removed, is necessary, although somewhat late.

Tan Kin Lian said...

I asked this high net worth individual to make a donation to Financial Services Consumer Association - for my educating him and helping him to save $500,000, and he agreed. Let me see what is the amount of the donation.

He could have given away $36,000 (in distribution cost) to an agent who could make him lose $500,000!

zhummmeng said...

Mr. Tan , did you read the message by LIA president? He was pulling the wool over our eyes. he is trying to get the sympathy of MAS and the public. The LIA and the industry did NOTHING for Singaporeans except to rob them and Singaporeans didn't know until MAS dropped the bomb. Many people were shocked at the amount of money they 'stole' from them. If the customers didn't know how much they were supposed to pay but anyway taken from isn't it stealing? Now LIA is trying to justify the huge commission that the agents deserve it for the services that will be provided by over the life of the policies. Do you think so?
If the agents and the industry have done a great job why are Singaporeans still under insured? Why Singaporeans still cannot retire with enough fund? eg.the life policy you high lighted. The return so lower by $500,000, right? It is the same with all the products out there.
The public must know that if the agents are keen to sell it is a product that they make a lot of money. If they make a lot of money you will lose a lot of money, simple maths.
MAS must not bow to LIA's plea. If MAS does the whole episode is like a wayang.LIA has no good reasons except their members' business affected. MAS must always ask themselves...'can I let them make the money by robbing the public?'
"Can I let let insurance agents get rich by stealing from the poor ignorant people?"

Vincent Sear said...

For such cases, assuming conservative risk profile of little understanding or appetite for stockmarket fluctuation. I'd recommmend using Fundsupermart or DollarDex, select a few conservative balanced trusts. Commission would average around 2%.

If selection or allocation of funds is a problem too, hire an independent adviser who has nothing to do with the fund portals or the fund mangers. The fee should be S$50 for a simple job or at most no more than 0.5% of a big lump sum involved.

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