Saturday, October 31, 2009

Benefit illustration - samples

Here are samples of the benefit illustrations, with an explanation on how to read them. In all cases, the effect of deduction are too high and do not give good value to the consumer.


Anonymous said...

good work Mr. Tan. Your samples exactly matched with my two policies with NTUC Income i have took without understood that time...

One question:
Any chance for Singapore authorities take action to NTUC to revise these policies and help us?

thefisherman said...

thank you very much for this simple and easy-to-understand illustration, i gained much more understanding from reading this article, than the 2 session i had had with my life planner.

Khiat Han Hwee Adrian said...

I believe the objective of these illustrations are to tell consumers not to buy any Whole Life policy, ILP or Endowment policies.

Using the illustration for the Life Policy.
From my experience, I doubt the specific requirements set out under your "Good Policy" standard may actually exist. One or two conditions may possibly match, but nearly impossible for all to match.

1) Which life policy allows you to breakeven in 5 to 8 years?
2) Which life policy allows more than 75%-80% of cash value to be guaranteed?
3) Which life policy have a maximum EOD of 15.6% at year 20 and 19.4% at year 25?

The example you gave yields a 3.7% and 2.5% annualised returns basis 5.25% and 3.75% IRR after 25yrs. Under today's standard is actually quite good.

I'm not encouraging people to get life policies but I hope you can be fair in setting the benchmark.

A comparison should be done on what is available today and not on things that are not in existent. I hope you are not using decades old Benefit illustrations to set these benchmark. Or perhaps you can do a check on what is available outside Singapore which you think is fairer.

Tan Kin Lian said...

There is a better alternative, which is to invest in an exchange traded fund with an reduction in yield of 0.3%. The cost of term insurance will reduce the yield by another 0.5% (in most cases).

The total reduction in yield is less than 1%. The effect of deduction should be not more than 15% to 20% over a 25 year term. Actually 20% is a quite generous margin to the insurance company.

I have seen reduction in yields that are 40% to 50%. It is unfair to the consumers. Some people will use the strong words of "ripping off" the consumers.

How can an insurance adviser, acting honestly, offset such type of products to the customers who trust their advice?

I hope that people like Adrian Khiat, who wants to give honest advice, will speak out on this matter, rather than defend the status quo.

SGDividends said...

Hi Mr Tan,

I read your reply ( May 07 2008) regarding "effect of deductions" to an email from a reader.

For the samples you provided for reguular premium case 1, how come the "effect of deduction" is more than the total premium paid for the first and second year?

Does it mean that if we terminate the policy within the first 2 years, we have to fork out additional money to the insurance company?

Keep up the good work!


Tan Kin Lian said...

To SGDividend
If you terminate a life insurance policy, you get back the surrender value, which can be NIL during the first two years. You do not have to pay additional money to the insurance company..

The effect of deduction can be higher than the premiums paid due to the interest earned on the premium, which is also taken away from the policyholder's account.

Anonymous said...

From my ("layman") consumer's point of view, the returns are not attractive. However, the insurers have their own story to tell. Not to mention, they want to grease their own pockets.

Here comes the BIG question of sum assured which will be used as a carrot to antice customers. The payout on death benefits (4 to 5x the premium paid) are not actually freebies; which I suspect there will be a built-in cost.

If we leave death to chance and fate, would it be better to divorce "serious" insurance from investment; ie buying insurance policies to insure against death/total disablement alone.

Policies meant for long term investments should not have more that 1.5 times sum assured. In this way, maybe we can expect better returns.

Can Mr Tan care to correct me. thank you.

SGDividends said...

Thanks Mr Tan Kin Lian for answering my question :)

Anonymous said...

Adrain Khiat,
today the wholelife and endowment cannot be compared to decades ago, why are they are still sold? isn't it to con people, the unwary consumers using the greedy agents who will do anyhting to con these consumers. You cannot sell obsolete things today, something that don't work and cannot work as efficiently to help people.
mr. Tan's use of the old policy is a good and fair benchmark. Today's product are supposed to be better than the past, right? But they are not . Then why the insurers are still producing them? There is only ones reason. TO CON THE CONSUMERS by using the agents.

Vincent Sear said...

Today, savings and fixed deposits can't be compared to decades ago, why are they still sold?

Anonymous said...

Saving and FDs are very simple products and they don't need a human being to promote it.It is plain vanilla.Anyone knowingly puts money in them for safety and without having to keep them at home or under their mattresses. This is the purpose and they are NOT for purpose of investing .
For WL or endowment they are PROMOTED as protection and saving devices and if their benefits are disclosed fully and nothing is hidden from consumers I have nothing to say if they are bought. In other words people buy them KNOWINGLY but this is NOT true.These people don't know waht are these products for and how they work for them. That is not disclosed to buyers.
Your question why FDs and saving products are still available becuase there are no other alternatives of same risk return profile.If there is it is logical and rational people will NOT put in FDs and saving account.
Eg. the minibonds or the structured products they were promoted as of same risk as FDs but with higher return. RATIONAL people will put into the minibond.

Khiat Han Hwee Adrian said...

I will not say Life Insurance is a very good form of savings or protection. It fails to give protection at time most needed or to save at a rate good enough to hedge even inflation.

For those who are not in the industry may not understand that there is no such thing as one plan or method fits all. Some people can argue that investing in equity is a foolish idea. Some people simply are looking for lower risk instruments after putting most in high risk instruments.

Actually it may not be wrong to put some funds into an Endowment policy if it yields around 3.5% to 4%p.a over 8-10 years.

There are different values in what people are looking for and I think its not fair to put a blanket statement that agents are selling just for the commissions and ripping the customers.

The insurance companies play a crucial role in creating many of such products and agents should not solely be blamed just because they are "easy targets". Advisers will not or be capable to sue anyone for degrading and abusing them compared to the big boys. Thats why nobody needs to be kind to them.

My next point is if we want to create a benchmark to say what is good or bad, we probably should look into one that is in existent today. If unreasonable benchmark is set, the sole objective implied with be telling people not to get wholelife or endowments.

Anonymous said...

Is the bank rate a good benchmark?
I find many insurance companies especially the agents are using it to compare their product return.This is misleading and misrepresenting what is a good return.This is despicable too.
I define a good rate of return as one that can give an excess return of at least 3% with low risk.
Eg. If one is investing for 10 years the return must beat the 10 year SGS bond by 3% then there is REAL growth or 3% above inflation. This rate is generally for most people.
For the rich who don't want to grow but preserve their wealth then 4% or anything at inflationary rate is ok.
Eg. NTUC Growth Plan is suitable for the rich over the 10 years to preserve.And it is NOT suitable for man in the street.
Unfortunately it is sold to many ordinary folks.
Many of these products are sold to the wrong people. WL and endwoment are NOT suitable for poor people if they want to meet their goals. If they can't make their money work hard they themselves MUST work hard and harder by advancing in their career, otherwise they are doomed to poverty.

Vincent Sear said...

To: Anonymous 10:46AM

Exactly, I agree. It's about fair and full disclosure, not about the products. To have fair and full disclosure, it's about the agents, again not about the products.

Even T.K.L. likes to remark, if people knows the distribution cost and effect of deduction, they won't buy. I always differ. Many do buy, after knowing everything.

Anonymous said...

Often the disclosures are untruths and people buy becuase of the untruth.
Eg. Growth Policy of ntuc return of 4.1% was often pitched as guaranteed or it is liken to a FD. This is untruth.
So do you think there or that is the full disclosure? it is lies.
Why do you think the csutomers buy?
The customers buy becuase he trusts the adviser and believes in the disclosure or he is completely clueless and leaves it the advsier.
If he gets a charlatan the customer is finished. If he gets an incompetent adviser the customer is finished too.
The right thing is the advsier doing a due diligence on the product and match the customers' financial circumstances and needs with the product HONESTLY and OBJECTIVELY.The adviser knows everything and the customers depend on the advsier for everything which is not possible.
The adviser advises the csutomers on the decision and the csutomers must agree otherwise no implementation.If the customer declines the recommendation the deal is OVER.The adviser MUST discharge himself and must not try to circumvent and find reason. Tell it to the judge. "my customers want it, want" He loves it , waht"
Like what DBS is doing, if there is no product and customers suitability, the money will be returned to the customers. No trying to find ways to justify the product 'recommended' by writing lengthy report and making claims that it is the customers who want it or love it. How do the customers know? How do the patient know? If 'sabutex is sold the doctor cannot claim IT IS the pateint who wants it or it is in the opinion of the pateint that sabutex is the correct and appropriate medicine. Tell it to the medical council.
Likewise the customers have no idea the product is suitable or not
It is the adviser's recommendation and he is laible for the recommendation based on FAA section 27.

The Watchman

Anonymous said...

Vincent Sear,
maybe the below is a reminder to you.

If it is not the right thing don't do it.
If it is not true don't say it.

Khiat Han Hwee Adrian said...

I believe Mr Tan is trying to reform the industry and for his case without affecting his livelihood as he had achieved his financial independence after learning all the trades and loopholes in the industry for over 30 years. He can go full steam ahead without worries for himself.

Many of us cannot go full steam ahead to tell people what is happening because we are still in the industry. We are watched by the insurers, our company, our clients and maybe even MAS. We cannot be too eager to tarnish the image of the advisers and industry.

Vincent believes that its the disclosure, I believe its the products that the insurance companies had designed that complicate the financial planning process and confuse the consumers.

In my opinion, we should put more pressure on the insurance companies and not always focusing on the agents that they are greedy, unethical, trying to scare clients, etc. It makes everyone feel that all agents are like this when there are really good advisers around who worked very hard for their clients, earning a modest income. Financial Advisers still have an important role in the society, it is not fair to make all such accusations against them.

Anonymous said...

I agree with Adrain that there are good advisers but unfortunately they are only a handful. I put it at 5% of the population who is honest, competent and who put their clients' interest first and compliant.
The rest of the 95%, they are either dishonest and incompetent or honest but incompetent or competent but dishonest.
Of these 3 groups the worse is the honest and incompetent. They are the most damaging and cause the most disastrous outcomes becuase their clients trust them. They scew up their clients financial life without the clients knowing it. It is difficult to discover becuase of too much trust the cleints have in them.This is representative of the clients to day. The profile is they are under insured and unable to retire.
The other 2 groups their ruse will be discovered soon and becuase they are easily exposed the damage is less serious.
So, Adrain, you are to crusade against these 3 groups who tarnish and bring disrepute to the profession.I believe that is waht Mr. Tan Kin Lian is doing, to expose them and to educate the public what is right or wrong.
And products never got better or cheaper unlike technical products like TVs, cars and electrical appliances but not insurance products.You can't ask the CEOs of these companies to eat shit or take less pay. They all want high pay and bonuses and they add cost to the products.

Anonymous said...

Adrain, view the below link and tell us whether they ADD COST to the whole life products and endwoment and revosave.
Who is paying for it? Why cut bonus?

You mean suddenly these greedy agents must be motivated in order to make them work? What about Mr. TanKL's time?
How would that benefit their clients?
The truth is Mr. TanKL was concerned about the customers and tried to bring about a win-win and not agents win and the customers lose.
Now the customers are suckers and losers.

Anonymous said...

You can see for yourself that these agents need a lot of incentives to work. No wonder the cost of their traditional plans are expensive and they give low return. The trips to Veitnam and Gold Coast have added so much that it will take years to earn them back... Alternatively fleece their clients.

Vincent Sear said...

I can testify that during T.K.L.'s time at NTUC Income, regular premium policies were designed with commission about 20 to 25% below those from other companies. For single premium policies, commission could even be 50% lower, e.g. 1.5% for NTUC Income equivalent of another company's policy paying 3% commission.

Yes, the agents were still commission driven. However, to be realistic in the commercial world, there're reasons why those agents joined NTUC Income under T.K.L. Being in the profession, should have known well that other companies pay higher commission.

They may sincerely believe in selling products with better value for customers, and don't mind a lower commission as long as they make a decent honest living.

High commission high cost insurance companies aren't so naive as to send agents out to the marketplace promising high commission. More expensive products are more complex and difficult to sell. Many agents dislike or can't bear the boiler room pressure cooker training environment and quota requirement. They feel more comfortable with NTUC Income under T.K.L. But that's not to say there weren't commission and quota under T.K.L. They were less lucrative but also pressurising as well.

Anonymous said...

Look, par products are irrelevant today. They don't serve any purpose any more because of escalating cost which erodes the return and protection for which they were originally created.
Yesterday, 20 years ago the CEO only paid $10K , today the CEO is paid $1 million a year. Have return and protection increased in tandem?
Yesterday , a senior manager was paid $4K a month , today he is paid $15K a month. Have the par products' return and protection increased proportionately?

So who is paying for the cost? and getting the rotten deal from the products?
MAS should step in and stop the sale of par products, like wholelife, endwoment and the scam cash back products.They don't benefit the customers but only the agents.

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