Wednesday, May 07, 2008

Exotic Terminal Bonuses

During the past 20 years, many life insurance companies have introduced products with exotic terminal bonuses. These bonus rates do not follow any rational pattern. They are jacked up at certain durations, usually 20 years and later, to make the return look attractive. The insurance agents are trained to sell the attractive returns to the consumers by "explaining" these figures.

Many consumers ended up with poor returns. If they terminate the policies before the "magic" durations, they lose out on the terminal bonuses and get a poor cash value. Those who waited for the "magic" durations may also be disappointed. If the investment markets fell, the terminal bonus rates were also taken away. After all, they were not guaranteed.

In an environment where the terminal bonus rates could be changed so easily, and could be made different for different groups of policyholders, it is difficult for policyholders to "trust" the terminal bonus rates. It is better to avoid these types of policies.

It is better to invest your money in low cost investment funds, which are more transparent. You are likely to get a higher return. Read this FAQ:


Anonymous said...

Mr Tan,

Very good strong point made. In fact the best so far on terminal bonus. If people absorb this point, there is no way any agent, no matter how "talented in sales" can convince people otherwise.
Keep it up.
Only regret is your blog did not start much earlier. More people could have been educated to avoid bad segment insurance.

Anonymous said...

You are right that you can be played out. No one can foresee the future what NTUc will do. Have faith? that is what we are told . I think that receiving higher annual bonus is still the best. Don't be fooled by the trickery of the new management. No trouble for the last 30 years now they tell us there will be trouble if we don't agree to the cut. What is up their sleeves? The AGM is an opportunity to oust them and free us of this headache. Do you know that the new team is made up of people some of whom were not or never in this industry? No wonder they feeling the crunch.

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