Tan Kin Lian's Blog: Cash back insurance policy

Wednesday, October 28, 2009

Cash back insurance policy

I wish to explain why a cash back insurance policy gives a poor yield to the consumer.

A cash back policy combined a basic policy with an annual refund feature. Let us take a hypothetical case. The basic policy is a whole life policy with an annual premium of $5,000 and a yield at the end of 25 years of 2% per annum. The cash back feature adds an additional premium of $1,000 and pays $950 a year from the 2nd year (i.e. no payment for the first year). The cash back feature reduces the yield to 1.8% per annum.

The agent tells the customer that he is getting a cash back every year (after the first year) and makes it look like a more attractive policy. But the agent does not explain that the yield has reduced or the effect of deduction has increased with the cash back feature.

The agent earns commission on the increased premium of $6,000 (including the premium paid for the cash back feature). If the distribution cost is 200%, the customer will be paying $12,000 in distribution cost, including the cost attributable to the cash back feature.

It does not make sense for the customer to pay a higher premium for the cash back feature and get back less than the increased premium. But the consumer does not know about this structure of the policy. The agent tells the consumer that this is an "innovative policy".

Tan Kin Lian

22 comments:

Anonymous said...: Cashback is you take own cash back and NOT interest earned.But insurance agents misrepresent it and even posters at ntuc roadshows.
This is most rotten product and they are scams.
You want cashback , keep them in saving account. It is available anytime and don't need to wait and you won't lose. If you buy a cashback and if you don't hold to maturity term you will lose some of your capital.You are forced and the term is long. Many drop out and lose money. Only the insurance agents and their company make the money. The policyholders are the suckers.; October 28, 2009 10:34 AM
Vincent Sear said...: Remember the classic anticipated endowment policy issued by practically all insurance companies from the late 1960s to the early 2000s? Very popular with working ladies and housewives.

That was based on a simple endowment but with reversionary bonus encashed at 10% of sum assured at every 3-year interval for the cash payout. That cash payout was actually earned through participating with profits.

By the the late 1990s, this type of policy become increasingly unsustainable for most insurers.

Then Prudential introduced an alternate-year cash payout endowment policy, i.e. cash payout every 2 years instead of every 3 years, but at 5% of sum assured instead of 10%. Today, NTUC Income is offering every-year payout.

When one considers buying this type of policy, one has to be clear on the purpose. Is the insurance or endowment element important? If not, just to have regular savings and draw out a sum once every year or two, it's commensense to save with the bank.

However, human discipline is weak and imperfect when accorded that freedom. I've heard client telling me, she knew that I made $1k+ on her endowment policy, yet still thanked me. For without the discipline of that policy, she couldn't have saved the $20k+ over 10 years and collect happily upon policy maturity.

When I prospected her, I treated her to western food dinner along with the sales presentation. 10 years later when she collected the maturity proceeds, she called me up and treated me to seafood, even though I was no longer in the industry and no longer her agent.; October 28, 2009 8:24 PM
Vincent Sear said...: I've received some emails asking me about my opinion of this product. I don't have the quotation PS/BI. Therefore, I could only comment generally.

The good features are the 3.5% interest rate on cash benefit if not withdrawn, and the waiver of spread if invested in ILP funds (also worth 3.5%).

T.K.L. is right to say that withdrawing the cashback reduces the low overall yields even lower. But if not withdrawn, these privilege options can actually enhance overall yields.

In any case, got to have the full PS/BI to see if these privileges are worth the while of the distribution cost, and how long it takes to be worth the while.

Anybody who's concerned and have the PS/BI, please send to T.K.L.; October 28, 2009 10:07 PM
Anonymous said...: Vincent,

You have a point. Some of my clients who started off with the monthly unit trust plan (with the banks) stopped it themselves when it broke even and made a little profit. They took out the money to spend on family travelling and whatever they felt like spending.

After knowing the limitation of the endowment plans, at the end, most of them included such products in their portfolio because they wanted a disciplined way of savings, and they do not want something that they can take money out easily. That's even after I told them that endowments returns are not as good as unit trusts.

And contrary to what Mr. Tan has mentioned, there are quite a number of agents like me who disclosed the distribution charges to them and clients don't mind because they wanted me to be around for a long time for them instead of them keep changing agents because the agent cannot survive.

Different folks, different strokes.

Regards

An Insurance agent.; October 28, 2009 11:47 PM
zhummmeng said...: Cashback anticipated plan is like trying to reach your mouth from behind your neck or slipping a straw up your nose and out your nose to your mouth.. It is the most stupid plan schemed by insurers to con CONNEDsumers with the collaboration of the preying insurance agents.It has no financial planning value.
In the first place if fact finding is done it will NOT point to the recommendation of this anticipated cashback.
It can only be sold by dubious emotive manipulation and product peddling .
Imagine if one wants to have cash every year but fickle instead decides to 'reinvest' into another instrument one would suffer an opportunity loss, ie . a year opportunity cost. If is repeated it means the policyholder is not clear about what he or he wants and there is no goal at all. Therefore, the buyer buys not with any goal in mind but some whims and fancies suggested by the agents.
If there is/are clear goals they can be separated and addressed individually.
Eg; If cash is needed save in money market for liquidity and may even get up to 3% return.
For saving, save directly into an endwoment, an ILP.
If protection is needed buy a term for that period.
If it is done this way, it is more efficeint and overall return is higher and there is no wastage of money feeding the stupid insurance agent who contributes nothing or add value to your finance. This, a financial planner would do for you if you articulate your goals clearly. The insurance agent would not do but push and dump it on you and let you rot financially.
The cashback is the most dubious product ever conceived and schemed by insurers to prey on unwary aunties , uncle and young and old ignorant consumers under the guise of lifestyle product.
MAS must do something about this type of products by predatory insurers becuase they don't add value to the financial well being of consumers but only to enrich greedy and unqualified agents who put their clients' interest in the back seat.
You can see no due diligence is conducted on the products by agents before being dumped on their trusting customers.; October 29, 2009 12:24 AM
Anonymous said...: The 3.5% is NOT guaranteed and the waiver of sales charge is no big deal.
Ask ntuc to remove the management fee then I will applaud that ntuc is genuinely for the clients. These are dubious baits. Client would be MUCH better off by investing DIRECTLY, either in the also scam endowment or the regular ID2 which has been discontinued. Retrosave is a scam.; October 29, 2009 12:37 AM
Anonymous said...: There is a saying that the highest level of con is when the victim treat you like you saved his life. In other words, the one who gets screwed thanked you for it.; October 29, 2009 12:51 AM
Anonymous said...: Dear Insurance Agent,

I agree with anon 12:51. You have reached level 10 hero where the victims thank you for screwing them.

If your clients do not have the discipline to keep up with their monthly unit trust plan, they will suddenly find the discipline to keep up with your insurance plan. What a joke!; October 29, 2009 9:45 AM
zhummmeng said...: All insurance agents will defend tooth and nails that wholelife and endowment provide the saving discipline or forced saving. This is an excuse otherwise they will have nothing to cover up the flaws of par products.
All insurance agents are salesmen and they are not planners and therefore there are gaps in the financial 'plans ' of most consumers. In fact the 'gaps' are planned by the agents to ensure their future business. Clever, right? These consumers have no goals and not goal driven and when it comes to an emergency or an unplanned event they dip into what it is the easiest to reach. This is logical.The example by An Insurance Agent' is typical of an unplanned 'plan' . It was a sale without a goal. It could be an investment to save for travelling or for holidays if it was a gaol in the first place but because it was not intended nor for anything. But if it was intended , let's say, for their children education, I don't think they would spend it on holidays. Discipline is driven by goals and the pain of losing it reinforces the discipline and NOT BY THE PRODUCT AS WHAT INSURANCE AGENTS LIKE US TO BELIEVE.
Have you heard even the iron cladded CPF account can be broken in? What discipline? This is really forced saving, water tight, and yet people can break in. Whose creative idea is this? Who else? Of course the insurance agents who thought of this clever idea of cashback using CPF for investemnt. Come on, greed and dishonesty are the mothers of creative ideas such as this.
This is one of the problems why people have not enough balance for CPFlife. Worse, these people are the poor people who are always cash strapped and who are easy preys for exploitation by greedy agents.
Do the right thing and give your best to your clients and earn the commission decently otherwise it is no different from the ill gotten gains.
If a consumers have a proper plan to take care of every aspect of their financial life I dont' see all this and that happening. It is because the insurance agents never plan for their cleints that is why cleints believe them.
All consumers are clueless. This will be the assumption of financial planning in the future. The insurance agents are also assumed to be the 'financial experts' and therefore accountable for their advice.; October 29, 2009 10:27 AM
Anonymous said...: Vincent and An Insurance Agent,

go, check the MAS website for persistencies of par products and tell us about the discipline that both of you are talking about.
It is fig of imagination crap that agents want us consumers believe.
Many par policies died half way down the road and only a few crossed the finishing line, at 60 years old.
The worse casualties happened in the first 2 years. Why? Many were so blurred like sotong , didn't know why they bought. To make their friends happy? to support them because they just joined? bought from the relatives? These people might as well donate to charity instead of feeding these greedy unqualified agents.; October 29, 2009 10:58 AM
Vincent Sear said...: To: Anonymous 10:58AM

I didn't say all savers can be disciplined, regardless of products. But you seem to imply that all savers can't be disciplined, regardless of products. And you seem to imply that all insurance products and agents are bad for savers. You're entitled to your views.

In any case, if you look at, say 70% persistency rate as the glass 30% empty, there're others who look at it as 70% full.; October 29, 2009 4:35 PM
Vincent Sear said...: Persistency is not only an industry yardstick, but also personally important to the agent's career. An agent is normally expected to carry persistency rate of 90% or above. Below 70% and the agent would be disqualified from bonuses and awards and subject to review. Below 50%, that's termination.; October 29, 2009 4:43 PM
Anonymous said...: To: Vincent, 4:43pm

You mentioned persistency rates i.e. 90%, 70%, 50%, as being important to agents. These persistency you mentioned -- are they 1st year persistencies, or as rightfully pointed out by other posters --> till maturity dates for endowment products, and Age 60 for wholelife products?

I believe you are referring to 1st year persistencies, and yes, they are important to agents coz they determine if you kenna clawback of commissions, kenna stoppage of commissions, or kenna sacked. In other words money talks & bodeh walks.; October 30, 2009 2:17 PM
Vincent Sear said...: Agent's persistency rate is measured by policies that are still commissionable. Typically, life policies pay commission over first three to five years.

For example, if whole life policy (supposedly till age 85) lapsed in the 10th year, it doesn't affect the agent's persistency rate.; October 30, 2009 6:25 PM
Anonymous said...: Cashback is the worse of the endowment products. it is literally a scam.It forces you to hold it to maturity or else you will lose . But holding it to maturity you lose too. Your return is 1.6% after 25 years.
This product should be banned.It is more toxic than wholelife products.; October 31, 2009 9:58 PM
Anonymous said...: The cash back revosave is really a scam product.You can design a better product than revosave by buying a term and invest regularly.You have all the benefits of revosave plus many others. Revosave is a retrosave product, a scam.; November 02, 2009 9:22 PM
Anonymous said...: the product is meant for the cheats
to qualify for mdrt and for the company to boost their production in API to be #1; November 03, 2009 6:58 PM
Anonymous said...: They not only sell revosave they bluff their clients to buy revosave and get one free vivolife. Do you think it is true? Do you think that the clients benefit from this? I know the agents got 2 big commissions from this scam.; November 03, 2009 11:36 PM
Anonymous said...: I kenna fool by this buy revosave to pay vivolife..Lucky i asked someone or else i will lose money.
Becareful, you dont gain but the agent get 2 commission. Who is the fool?; November 04, 2009 10:18 PM
Insurance Licensing Courses said...: It's an absolutely useless policy. Anyone who tries to sell it must know that the consumer does not benefit from it and the only reason they would try to sell it to someone would be because they're desparate. End of story. This is not the kind of policy i would stand by for the insurance industry at all.; November 06, 2009 5:24 PM
Anonymous said...: Hope FISCA will expose them and bring them to court for misrepresenting con scheme.
MAS, are you reading this?
What are you going to do with these agents from ntuc? Don't you think that the FAA section 27 has been breached.? or are you waiting for someone to lodge with you officially?
If that is the case you will have plenty.
Hi, consumers, if you have bought revosave and vivolife together or separately have them examined and checked by FISCA.; November 06, 2009 11:17 PM
Unknown said...: cashback should be availed.; July 04, 2013 1:21 PM

Wednesday, October 28, 2009

Cash back insurance policy

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