An airline steward, who is in his early 30s, told me that he invested his regular savings in an investment-linked policy for the past seven years. The "investment" is still showing a loss of about 20%, i.e. the value of his investments is lower than the premiums that he has paid.
I told him that his loss is probably due to the following factors:
a) The high distribution cost, i.e. up to two years of his savings is taken away to pay commission and other marketing expenses
b) The spread, i.e. up to 5 percent of the invested sum is taken away up front
c) The expense ratio, which would probably be close to two percent of the accumulated savings each year
He did not realize that the ILP policy has been designed to look after the interest of the agent, agency manager and insurance company, before looking after the interest of the policyholder! Many consumers did not realize this, and when they do, it is too late.
This is why the life insurance companies are making hefty profit now, while their customers have to wait for ages to see a small appreciation in their investment - which hardly keeps up with inflation.
.
I told him that his loss is probably due to the following factors:
a) The high distribution cost, i.e. up to two years of his savings is taken away to pay commission and other marketing expenses
b) The spread, i.e. up to 5 percent of the invested sum is taken away up front
c) The expense ratio, which would probably be close to two percent of the accumulated savings each year
He did not realize that the ILP policy has been designed to look after the interest of the agent, agency manager and insurance company, before looking after the interest of the policyholder! Many consumers did not realize this, and when they do, it is too late.
This is why the life insurance companies are making hefty profit now, while their customers have to wait for ages to see a small appreciation in their investment - which hardly keeps up with inflation.
.
2 comments:
Yes, Mr. Tan is right. The regular ILPs are designed to NOT only benefit the insurance agents but also the company.Why the company? So that the companies can report yearly production or APIs to LIA to compete for #1 for the regular premium category.
This air steward person is lucky that he lost only 20% after 7 years. For most the regular ILPs won't break even even after 20 years. Imagine the chosen fund or funds , if it is rotten, have to overcome the humongous commission paid to the agents and the hefty sales charge and the high expense ratio and management fee.
This is the reason the regular ILPs are favourites with foreign insurance companies's agents and lately the 2 local companies. Can make tons of commission and it is easy to con the young people. Just ask for $100 monthly and get huge coverage , higher than wholelife plans and leave the customers to deal when the premium is not enough when the time comes. They can make $14,400 in commission monthly.
Mr.Tan , no current regular ILPs beat your ID7 and ID2 and truly they were saving plans. Alas, your plans were replaced with a so called saving plan .that is limited to $500 monthly(wonder why cannot save more than $500 when it is called a saving plan). Like all other ILPs the customers will TKK before the breakeven, some old folks sold this plan may have to wait in their grave.
Buy insurance from SAF to cover your risks and if you are very kiasu save the rest in your bank account. Al least you see cash.
"Most people do not like working for abusive & cheap people or abusive & cheap companies. Yet when it comes to the money they invest, many people turn their money over to people & companies that seem to care more about their self-interest than the investor's interests."- Robert Kiyosaki
We have to self-educate ourselves in personal finance. The air steward can still start his self-educate journey. It will reap dividends for rest of life.
No doubt there will be setbacks but he will realise that security lies within himself & not relying on others (boss, fund manager).
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