Saturday, June 04, 2016

Policyholders faced a big risk in non-guaranteed values

Mrs Tan (not her real name) bought a life insurance policy 20 years ago and paid an annual premium of $5,400. At the end of 20 years, the projected surrender value was $260,000 made up of a guaranteed value of $90,000, a non guaranteed value of $170,000. The non-guaranteed value in the previous year was only $30,000. There was a big jump of $140,000 in the non-guaranteed value at the end of 20 years.

When Mrs. Tan asked to surrender the policy on the 20th year, she was quoted a surrender value of only 120,000. This seemed to suggest that the insurance company did not intend to honor the jump of $140,000 in the non-guaranteed value on the 20th anniversary.

Mrs Tan approach me for my advice.

I suspect that the insurance company could have quoted her the surrender value prior to the vesting of the additional non-guaranteed value of $140,000. Perhaps this additional sum would only vest exactly on the 20th anniversary and would be forfeited if the policy is surrendered one day earlier.

If this was the case, the insurance company is acting dishonestly by not advising her of this option. Are they trying to "cheat" her of this sum?

It may also be possible that the company had decided to withdraw the additional non-guaranteed value of $140,000. If this were the case, the company would be acting in violation of the policyholder's reasonable expectation, which is a regulation imposed by the Monetary Authority of Singapore.

While the company has the contractual right to reduce the non-guaranteed value if they performed badly, they are required to reduce the non-guaranteed value fairly across all policyholders. They do not have the right to take away a huge sum of $140,000 from a policyholder, representing more than 50% of the projected surrender value, unless a similar reduction is applied to all other policyholders.

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