Friday, November 16, 2012

It is more risky to be safe!

A policyholder invested $42,000 in 3 annual premiums in a life insurance policy 15 years ago. He was given a benefit illustration that showed an illustrated maturity benefit of $82,000. The illustrated yield was 5% p.a.

According to the benefit illustration, the surrender value up to 14 years showed a yield of less than 1.5% p.a. He kept the policy to the maturity date and was shocked to receive a lower payout of $72,000, as the original $82,000 was "not guaranteed".

The reduced payout reflected a yield of 4% p.a., which is quite acceptable, in my view. However, if he had to terminate the policy earlier, he would get a poor cash value - allowing the insurer pocketing the difference. By keeping to the maturity date, he should get back closer to what he was promised, rather than take a cut of more than 10% on the promised amount. This is the case of - tail you lose, but head, you do not win.

If he had invested the same money in the STI ETF for the past 15 years, the average yield was 9% p.a. The accumulated amount would have been $123,000. Even if the stock market had dropped one third from the current level, say STI index of 2,000, the policyholder would still get more than what was paid by the life insurance policy.

This is another example of why consumers should not trust the "non-guaranteed" values shown in life insurance projections. The insurer has been making promising projections and cutting back on the promises too often. Do not trust these projections!

Note: these figures are based on an actual case that was presented to me.


3 comments:

Soodo said...

The words 'risk" and "safety" is so misunderstood, it makes me want to cry.

Risk includes the chance of losing all your money as well as the chance of becoming rich. If you are a middle class Sinkie, you are unlikely to become rich unless you learn to "risk" intelligently.

Safety means keep your money safe as well as keeping you safe from ever becoming rich.

It's highly unlikely that financial advisors and politicians are more interested in keeping your money "safe" than you are. Or that these folks are interested in making you rich. Think about it. Getting rich is your own responsibility. So is keeping your money safe.

zhummmeng said...

Wholelife or endowment and all par products have risks...from interest rate risks to portfolio risks.
In 2011 only 2 insurance companies's life fund performed positively.
AXA performed 4.1% and HSBC 3.75% the other companies lost money or performed badly.
All policyholders' premium are invested in the one size fits all portfolio...a rojak portfolio that doesn't distinguish policyholders' needs, risk appetite and time horizon.Your premium money is put into the same port with ah beng , ah tu, ah lian old uncles and aunites and your few months' old baby 's premium.
Low interest rate makes it difficult for insurers to guarantee annual bonus and soon insurers may further cut the annual bonus and push everything to terminal bonus where the insurers can manipulate as they like.
So consumers do you think your whole life , endwoments have no risk? The truth is it is more risky than investing regularly on your own.
Wake up and know the truth and don't let insurance salesmen con you putting your hard earned money into these rubbish products.
You will never be insured adequately and retire if you continue to use salesmen as adviser. They are no advisers but conmen in financial consultants' clothing.

zhummmeng said...

I am sure by now many of you consumers have been conned into buying or investing into those scam anticipated endowments aka as cash back, or dividend or coupon which there is an option to reinvest to earn " 3.5%" interest rate. Can the insurers honour it? Although not guaranteed can the insurers give anyhting near 3.5%
In the very low interest environment I don't think it is possible for them to honor this option.. One insurance company has already rejected one case for reinvestment although not the same plan but a proceed from an endowment, as reported in the ST forum.The company to honor the option although it is stipulated in the contract. The insurer cited the low interest rate as the reason for not honoring.
So what about those cashback anticipated endowments?
I urge those got conned into buying this scam product to check with thier insurer to see if they cheat on you about the reinvestment in 3.5%.

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