Tan Kin Lian's Blog: Fair charges on life insurance policy

Tuesday, December 16, 2008

Fair charges on life insurance policy

If a policyholder save $500 a month for 20 years and earn 5% per annum, the gross gain for the period will be $76,000. However, the total deduction to cover the various charges is likely to take away about 45% of this gain. This will leave a net gain of about $41,000 only. This reduces the yield to 2.8%. The reduction in yield is 2.2% (which is rather high).

A fair deduction should be about 25% of the gross gain. This will give a better return to the policyholder, about 4.1%. The reduction in yield is 0.9% (which is quite fair). This reduction is to cover the cost of life insurance, expenses and profit margin.

During the time that I headed a life insurance company, I was able to give a better return to the policyholder by keeping the expenses low and giving a larger share of the profit to the policyholders. They were able to get a better return. The reduction of yield for an endowment policy is about 1%.

Here is a rule of thumb, if you are buying a life insurance policy:

> look at the assumed yield
> look at the net yield, after deducing the charges
> calculate the reduction in yield
> if the reduction is 1% for an endowment policy or 1.5% for a whole life policy, the yield is fair.
> if the reduction in yield exceed these benchmarks, the charges are probably too high.

You can ask the insurance agents to point out these figures that should be shown in the benefit illustration for the policy.

16 comments:

Falcon said...: Mr Tan,
This is the reason why I bought all my policies from NTUC Income when you were the CEO. It was really unfortunate for policyholders who are now left holding less than ideal policies. We miss those regular anniversary bonuses that you were able to declare because of your prudent and thrifty running of NTUC Income.
Yesterday I went to pay up my monthly premiums and cringe when I see the vision statements of NTUC Income being flashed across the big screen. It looked so ridiculously false as everything that is being flashed seem so untrue now. What "peace of Mind", the opposite is true with the new management. What "fairness in dealing with you" my experience the last 18 months were horrendous let alone fair.
But what to do, but to gradually exit quietly from my policies when they mature or surrender them come April 09.; December 16, 2008 12:12 PM
siewkhim said...: Kin Lian,

Your illustration may be true for policies covering death/TPD and for investment-linked without strings of attaching riders.

Policies covering dread disease are not likely to achieve such return because at age over 40, the cost of insurannce would escalate and a huge chunk of the premiums would be eaten up by the insurance cost.; December 16, 2008 1:02 PM
Anonymous said...: Slowly insurance companies will adopt the ponzi model to survive if they keep on selling whole life products and endowment. Why? Cost is going up. The ceos and senior managers want high salaries. The insurance only will sell whole life and endowment or products that give high commission. Where to get these monies? From Consumers, lah, stupid.
But consumers want high protection and high return,. How ?
Reduce annual and bluff consumers that money pushed to specail bonus will give "higher" return. Is this a promise? gauranteed ? No, of course .The insurance companies are gambling with the consumers' money in the hope they can make good return. If they they make good return they keep to the projection or benefit illustration . And if not, they will tell "i didn't guarantee you , right?" That is why recently one cooperative resorted to this so called "'best industry practice."
Why it is resorting? It is easier to manipulate and to cover up the increasing cost. Don't believe , see next year.
Ponzi school of business awaits these ceos.; December 16, 2008 4:00 PM
Anonymous said...: Hi Mr Tan,

I reckon buying term insurance and keep the rest of the money for my own investment is a better deal. I can use the extra money to clear the mortgage or invest them. This is better than having someone managing your funds in the insurance funds. More flexibility and more control. Pple should learn to invest and so away with these financial institute if possible. Education is the best investment for yourself.; December 16, 2008 4:17 PM
Concerned said...: Do you know the reason why banks and insurance companies want to expand organically or by acquication, so that they become so big? One reason is too big to fail. The other more important reason is that they can have a monopoly or obligatory position and can roughshod over the customers' rights. Unhappy customers have no choice, but still have to shop with them. The latest case of the structured products is a case in point, where customers have very little limited choice even though they are fed up with those FIs.; December 16, 2008 5:18 PM
Anonymous said...: Pay higher next time when policy matures? NTUC Income do not bullshit. My recently matured education policy still did not meet the meagre 5.5% projection that was done twenty years ago in spite of the fact that NTUC Income made 10.8% profit last year and 10.7% before that.
If NTUC Income cannot meet its projection of 5.5% made twenty years ago how can it meet its projection now that all the financial markets are ablaze and double digit profits are not going to happen anytime soon?; December 16, 2008 6:42 PM
Anonymous said...: NTUC Income has become like the other companies,. Its claim of social enterprise is like Pru claiming having cooperative features.
They can claim anything. The fact their products are not and rip off.it is stealing from the customers and that makes them a cheat.It is like cheat claiming to be honest.
5.5% return if MR. Tan is still at the helm. Their products like whole life or endowment will return less than 3%. Not only that it is going to take 30 years or more and the greedy agents have no shame pushing these products knowing they are useless to their clients.Beware of the revosave promotion now. Don't fall into the trap. Once in and you are goner for life.
Their best kept secret was Mr. TanKL's credit but used by new management shamelessly as if it is theirs'.It is like using Mr. TanKL's backside skin as their facial skin. Not surprising that they will do that.They unabashedly make a lot of claims. Like their recent advertisement about local company being better than foreign. They even have recruitment advertisement near their competitors' office to poach the agents .it is like climbing over your enemy's dead bodies.
There is no more rules or business protocol anymore..; December 17, 2008 12:58 AM
Unknown said...: It's always best to get as much information as you can about a life insurance policy before deciding on one.; December 17, 2008 1:20 AM
Anonymous said...: NEVER NEVER EVER BUY whole life, endowment, anticipated endowment and regular ILPs. You buy at your risk.
And also never never trust insurance agents especially the product pushers.; December 17, 2008 9:39 AM
Anonymous said...: What to do? When you have a pseudo CEO from Malaysia who has worked in Prudential before, what else do you expect? It is not that there are no more rules but pseudo rules apply now. Thanks to our new generation ministars who favours foreigners over locals and who will pay the price for their short sightness in time to come.; December 17, 2008 10:29 AM
Anonymous said...: He is running ntuc like pru. just check their agents. they have same titles , almost same products. Eg. revosave is a copy of the Prucash. They now fight like mad dogs. Ntuc cannot lose to his former staff who is now a ceo. cannot lose face, lah.
Ntuc is all out, at all COST, no profit never mind but don't lose to pru.Ntuc greedy agents very happy, got this got that why not?
Both have one thing in common.
They both have only salesmen, product pushers adn greed.; December 17, 2008 8:25 PM
Anonymous said...: Put one mole in the company to spy out the malpractices in the company and expose the agents and the company.
Malaysia is considering legalise whistle blower and protecting the identity of the whistle blower.
We must do that too in insurance companies and the banks.
MAS is not reliable and very reluctant.; December 18, 2008 12:16 AM
Anonymous said...: What is happening implicates the insurance agents too. The agents will not escape the fallout. Similar actions should be taken against them and the companies. Malpractices are even more rampant in the life insurance.It is just that consumers are unaware of what is right or wrong product.
When Mr. Tan sets up the association it will a good place to help the consumers to let them know whether their agents have done a good job for them or how unethical their so called sincere agents have been doing to them all this time. Exposing the insurance agents unethical practices especailly those who touted the whole life and endowment products as 'one size fits all or cure all products'
Mr. Shane Tregillis of MAS had some time ago , in his address to LIA, proposed changes to the ways insurance products have been sold; also said commission has been a source of conflict of interest. He was concerned about the under insurance among the consumers.
This is exactly what we must expose the insurance agents. They had never cared for the consumers' needs and this explains why consumers are under insured.
I hope after the minibond saga the focus will be shifted to the insurance agents and the companies
to expose their dirts and the filth that have been accumulating in these companies.Also to let MAS know how self regulation has been abused by the insurance companies.
You will be surprised and shocked to know how the insurance agents and the companies have been colluding to fleece and cheat the consumers all these years without them knowing it. What Mr. Shane Tregillis's observation about the under insurance is just the tip of the iceberg;what about the CPF members' balances, how they were screwed up by agents and today members are still reeling from losses.
I hope MAS will act swiftly and curb the unethical activities of the insurance agents before consumers suffer more.

concerned observer; December 18, 2008 9:16 AM
Anonymous said...: he is practising yoga to destress himself after reading so much negative thing said about him. He is now bending over for charity.What does he mean? Is he raising fund by bending over? He needs to have a doctor on standby. He can die of too many bendings. Wow!!! this is called social enterprise. Cooperative no need , right?
What about his salespeople? They have been bending to get more sales especailly the woman agents.This is the only skill they have. The chief trainer is the cheif himself.; December 18, 2008 9:56 PM
Anonymous said...: tell him not to bend anyhow. it is bullshitting. It is a PR stunt to make himself look good; December 19, 2008 12:00 AM
Anonymous said...: Must vote him out at next AGM. He is ruining ntuc and before you lose your policies better remove him. He has wasted and lost so much of your money and splurge on himself, his cronies from pru days, the greedy agents with a lot of incentives, from dinner to incentive trips. Who pays for all these? Either your life fund or his own pocket.; December 19, 2008 5:56 PM