You can look for an explanation of the following:
1. Total distribution cost
2. Effect of reduction
3. Reduction in yield
All insurance companies are required to provide them in a common format.
One key figure that you should study is the reduction in yield. It shows how the total distribution cost and other charges impact on your yield.
Here is an example of two plans, for 25 years, offered by the same insurance company. The gross investment yield is projected tobe 5.25% (not guaranteed).
Reduced Reduction
yield in yield
Endowment policy 4.61% 0.64%
Endowment (new) 3.74% 1.51%
_
If you save $300 a month for 30 years, the difference is as follows:
_
Net yield Total on
maturity
4.61% p.a. $166,600
3.74% p.a. $147,500
Difference $ 19,100
The new product provides an annual payback of 5% of the sum assured from the second year. It has high distribution cost, which reduces the yield.
Lesson: Buy simple products that offer a better yield.
19 comments:
Mr Tan
Thank you for this simple explanation. When I bought insurance policies before, the agent did not point out these figures to me.
A NTUC agent was trying to sell the Resosave plan to me. She did not explain that I have the choice of buying the endowment plan.
Is she giving me the right advise? Can I complain to the authority?
I wonder what Mr Tan writes is to educate or to cause people to "complain"?
Generally, is it better than simply putting money in the bank to rot, or is it better to have such plan.
If there is no avenue that can make the money work better and such plans provide better yield, what is written is for information.
We need to be objective in reading what Mr Tan writes.
Then some will comment, there is a chinese saying, cross the bridge chop the rope. Is Mr Tan then seen as doing this? Surely he is not.
He writes the facts for information, not for complaining.
I see that every topic he post, people will ask, should I complain to MAS?
I think his writing is for comparison and not for complaining.
Product selling or pushing is selling what is advantageous to insurance salesperson in term of commission. Selling is an end itself and it is not a means to an end. This is bad.
That is why sales promotions inevitably lead to short changing the client because the salesman will be working on numbers and can't afford to waste time on need analysis.
This is happening in Income and I am sure it is trying to capture the sale of the new product Revosave to justify the huge amount of money that went into promoting this product.The insurance salesmen will be pressured to meet their targets.
Customers' needs will be sacrificed in the process.
For your case you can lodge with CASE if you have been aggrieved.
Did the Income agent tell you that there is a management charge of 1% (not management fee at fund level) if you invest into the regular ILP?
I am sure she would only tell you that your investment would enter at bid price and the sales charge is waived.
The additional 1% charge can make a lot of difference. It is the percentage of the customer's total value under management and unlike the sales charge which is 3% of the amount invested on each year.The additional charge will compound if the fund grows in value and over the years.
I bet there will be no disclosure at all. They will disclose what looks good to them like the waiver for example.
This is manipulated selling and selling is always manipulated and the extent depends how creative is the agent.
It may not be appropriate to make direct comparison between a Hybrid plan with a pure Endowment Plan.
The investment option shows a fixed 5% investment returns before deducting the 1% management charges. i.e, they are forced to use 4% as illustrated investment returns for the yearly cashback. Endowment Policies use 5.25% Investment returns from the company without deducting any management fees.
All these will affect the illustrated net yield.
If liquidity is your main attraction of taking this plan, then its advisable to choose the investment option as you are able to purchase at zero bid-offer spread. Of course, it will even be better if you choose to invest the whole monthly savings than an endowment plan.
Mr. Anonymous 8.57am, you are complaining that every body is complaining. You don't see the discussion as feedbacks.You don't see the feedbacks are both for and against. Readers can benefit from this discussion and argument.When they have to make a decision this information helps.
Directing them to MAS is the right recourse to take if the customers are aggrieved by insurance salespeople or advisers.Often customers are helpless,especially the less educated ones in the face
of mis-selling or misrepresentation. Usually they are easy victims of agents.
We must get rid of errant and rogue agents otherwise we may end up engaging one ourselves. We must be aware of what to do and ask when buying products like insurance. You may think insurance is simple but lately there have been many products that are complicated,like revosave from NTUC Income.And analysis has shown that it is not good product, whatever option you choose. It is better to buy a simple product that meets your need
optimally.That means you are very clear about your goals. That is no one plan that can address all and your needs. Like Revosave trying to but gets diluted in all the options. So Mr.,please don't see as complaining.
Sure , that is not correct but if you take them apart into components and test the what ifs you can see the revosave is inferior in term of coverage, returns and flexibility.
There is no liquidity here but renosave seems to tout it as its feature. How do you define liquidity?
How can you say it is liquid when you have to wait for 25 months and after that end of each year to get part of your premium back? What if you run into a financial problem
can you take premium holiday?
If you invest in money market regularly and whenever you need money you can access it without a loss to the principle. This is liquidity. You can earn about 3%.Revosave is illiquid.
If you invest in an endowment, Mr. Tan has shown the insurance coverage and rate of return are far superior than the revosave.
ILP? beware of the management charge based on 1% of the total value.
For Mr Anonymous 9:52.
"Did the Income agent tell you that there is a management charge of 1% (not management fee at fund level) if you invest into the regular ILP?"
Can you elaborate more on this about this 1%? Who took 1% away from the investor? Fund Managers or the Insurance Company? Thanks.
Adrain, the 1% goes to NTUC and is charged to the client based on fund value held by client. It is stated in the illustration.This charge compounds over the years.
Fund management fee is at fund level and never used for illustration.
The product should be renamed as SABOsave because it sabo customers' financial future if they buy this plan. It encourages and promotes spending and not frugality.
Mr Anonymous,
There are no extra management fee that goes to NTUC Income. The fund management fee charged is at fund level and is already factored in the bid price of the fund.
The 1% that they reflect in the BI are fund management fee at fund level.
Clearly Mr. Tan has shown that Income's new revosave gives less than putting into an endowment plan in terms of return and protection..
But someone somewhere talked about people buy because of liquidity of the plan.
I cannot see his reason. Money in your hand is more liquid, isn't it?
You can do what you want without losing 65% of your money to some non transparent expense, like insurance agents' commission and what not.You can have your money fully invested in regular ILP except for 3% sales charge but with revosave you only have about 35% invested. What a deal!! so what if there is no spread, at bid . Imagine I pay $1000 only $350 is invested. I want to know what happened to my other $650.
The answer is obvious; it goes to paying the insurance agents to 'promote and to sell' to those unwary customers. The commission is huge enough to motivate the agents to use and call up whatever 'skills' they can think. It is no holds barred selling.The means justify the ends.
Unfortunately there are gullible and naive and easy victims aplenty.
There is an urgent need for blogs like Mr. Tan's or some public awareness vehicles to educate them.
only time will reveal e success or failure of 'revosave'. Its for you to take e plunge :>
Firstly, the refunded amount is around 68%(Basis 25yrs tenor), not 35% which many comments seems to be misunderstood. This means 69% are invested at Zero cost. Whereas the 32% get a projected returns of around 4.2%.
The 32%, comparable to pure endowment or pure investment, surely lose out. However the 68% which is invested at zero charge surely gains.
I'm not helping NTUC Income or anything, but I'm puzzled that such plan have been around for years in almost all insurance companies, why the sudden interest and attack on revosave, which in fact gives better deal than similar plans in the market.
The success of a product, especially a financial product, is not measured by the sale. It is whether it delivers what it promises in the future time. Analysis has clearly shown its inferiority in every aspect
yet people are still wondering whether revosave is good or not.Well, there is always a group of people who have mental block and unable to grasp the math.
That is actually what happened to many policholders who bought endowment and wholelife 20 to 30 years ago.Many have found the return short changed by 50%. The baby boomers who relied on these kinds of insurance plan for retirement cannot retire.
Why? the reason is these types of plan were sold by insurance agents
and there were no financial planners to help in the analysis. This is also the reason why insurance agents are despised and cursed by customers in US.Insurance selling is the most despicable job in US.
Having said that, history is doomed to repeat.Habits diehards are plenty and thanks to these short memory,mental blockheads insurance agents can still make a living by
selling rubbish and useless products.
Adrian is puzzled why there is this sudden attack by people on the new renosave. Could it because NTUC Income is a co-operative, meaning to serve the poor and needy, as our labour Ministers have said. The idea of a co-operative is better served by policies that benefit the masses rather than prey on them through glitzy advertisements to squeeze more money out of the poor?
NTUC chief has said the cooperatives exist to help the less fortunate but Income is rolling out products that are not to the advantage of the poor. Examples like revosave, limited premium living plans, how do these plans help the poor? They are expensive,with long lock in period, with low return and low coverage.Only the rich can afford them.
This is contradiction.The situation is compounded by untrained insurance agents who never have the interest of the poor at heart.They load them with products that the poor will not be able to maintain
for long.Lapsation is always very high among the poor. Do the Income agents care? I don't think so,after all they have already collected the commission, lapsed is not the agents' concern.
I find them despicable and not sincere. They misuse and betray the trust of their good customers who hope they can be helped. Instead they have been fleeced without knowing it.The poor are always the victims and victims of those whom they trust most.
You should not just blame the agents. Many of them are just hardworking people who are trying to make ends meet. I think you should direct the questions to the managemnet, who should be the more intelligent part of the organisation. They are also the one getting more pay from the sales of all these policies you mentioned. It is their decisions that matter and result in what kind of products you get.
Yes , they are hard working but they mustn't abet the company in committing against the poor.They are willing middlemen and blatantly and ruthlessly load useless products on the poor.They have no principle and ethics.
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