Poor return from life insurance policy

4 May 2012 


Editor

Forum Page

Straits Times

I refer to the letter by Ms. Pearlyn Koh. It is quite improper for her to describe my views as being over-simplistic.

Ms. Koh mentioned that the cash value of a traditional life insurance policy may be "a life saver" when a policyholder needs cash for certain emergencies. 

She must have assumed that the policyholders are not able to invest the savings in other suitable forms of investment and that life insurance is the only available choice. This is a bad assumption. 

A typical life insurance policy reduces the yield by 2% to 3% compared to the yield that the policyholder could have earned when the savings are invested in a more suitable investment plan, such as a low cost, well diversified investment fund.

Over a period of 35 years, a reduction of 2.5% in the yield could mean that the life insurance policy pays 40% less than the alternative investment plan. Instead of getting a payout of (say) $500,000, the cash value from a life insurance policy could be 40% or $200,000 lower. This is a lot of money to give away. 

Too many policyholders are getting a poor return on their life insurance savings and are not having sufficient money for their retirement needs, in spite of being prudent in saving for their retirement.

While the life insurance policy does give a higher payout if death occurs in the earlier years of the policy, this risk of premature death could be covered under a term insurance or accident insurance policy at a much lower cost to the policyholder.

A large part of the reduced payout from a life insurance policy represents the high commission paid to the life insurance agent and the agency managers and the profits of the life insurance company. 

Due to the conflict of interest faced by life insurance agents selling high commission products, it is not possible for consumers to rely on the advice of the agents. I recognize that some life insurance agents do act professionally in the interest of their clients, but the risk of consumers being misled by unethical agents is real and should be addressed. 

This is the reason why the it is timely for the Monetary Authority of Singapore to set up the Financial Industry Industry Review (FAIR) panel.

Tan Kin Lian
President
Financial Services Consumer Assocation