Tan Kin Lian's Blog: Do not trust unrealistic projections

Tuesday, April 06, 2010

Do not trust unrealistic projections

Dear Mr. Tan,
I would like to seek your advice on a policy which I had signed up, which is still within the 14 day free look period.

1) The benefit illustration of my policy showed that the "effect of deduction" drops significantly in the 25th year as compared to the 20th year. Would you know the reason for this?

Reply: I do not trust this type of projection where the effect of deduction drop "magically" after 20 years, i.e. the maturity value increases "magically" on the 25th year. When the time comes, the insurance company will find many excuses to tell you whey they are not able to pay out the "magical" increase. Remember, these figures are not guaranteed.

2) I am a bit confused as to which year I should take to calculate the "effect of deduction". Assuming 5.25% Investment Return, the effect of deduction at the 20th year is 37% while at the 25th year, it is 17%. The difference is vast and if I take the 20th year calculation, the policy is obviously too expensive but if I take the 25th year calculation, the policy appears reasonable. Can you advise which is the correct figure I should use?

Reply: Do not trust the "magical" figure shown on the 25th year.

3) I informed my agent that distribution cost works out to be 7.3% which is quite high in my opinion. However, he informed me that over 25 years, the distribution cost only works out to be 0.3% a year and that if I buy ETF yearly, the transaction costs will work to be around there. Is this argument valid?

Reply: If you invest in ETF, the distribution cost is 0.3% of the total invested sum, compared to 7.3% for the life insurance policy. It is dishonest for the agent to divide the 7.3% by 25 years and say that the cost is the same. The agent is telling you a blatant lie.

4) I informed my agent that I have heard horror stories of policies falling way off projected returns upon maturity. However, he mentioned that in the past, the projections were very high and that now, MAS has regulated the projections to be a very reasonable and definitely acheivable 5.25%. Again, is this true?

Reply: The horror story will happen again in the future, due to the unrealistic projection on the 25th year.

5) I highlighted that saving through ETF or investing in equities may yield more but my agent informed me that it is easier said than done and it takes a lot of discipline to keep investing and monitoring shares and buying the policy would be a disciplined way to save for the future. What do you think of this?

Reply: It is easy to keep investing in ETF. You will have better control of your money. There is no need to monitor the ETF as it is well diversified and invested in 30 large shares.

6) Finally, do you think that this policy is reasonable and I should keep it or is it too expensive and I should terminate it while I still can?

Reply: I would take advantage of the 14 day free look period, and give up the policy for a full refund.

You can buy my book, Practical Guide on Financial Planning here. Spend $12 and save a few thousand dollars. Be educated. Do not be misled by dishonest agents.

15 comments:

OTB said...: Just a personal opinion, I think self-investing with equities or ETF is exciting face of life, it keeps you total control of your life.
-OTB-; April 06, 2010 8:19 AM
Anonymous said...: Why do you think the effect of deduction is drastically reduced after the 25th year?
This is a trick of insurance companies to 'entice' you and to hold you hostage for life becuase any premature termination means you lose a big chunk and in order to achieve the so called projection you are forced to hold till that year.In this way the insurers continue to recieve premium income from you for a very long time.
However, you should terminate for the following reasons.
1. the BI shows the odds are stacked against you as it is designed to ensure a continuous streams of premium to them.
2.Even you hold it to the end nothing good awaits you but a miserable return.
3.Meantime you are under insured because the money could be used to buy a term that covers you adequately and you have peace of mind
4.All WL plans lack flexibility abd every feature is against you , from cash value to sum assured.
5.If you do need money YOU MUST BORROW YOUR OWN MONEY and pay a hefty interest to the insurer.
6.Both the company and the agent are NOT putting your interest first.
These are of the reasons why you should terminate while you can get a total refund.
Just do it...don't have to think.
Don't waste time on this kind of products.; April 06, 2010 9:31 AM
Anonymous said...: Its irresponsible to advise without understnding the overall financial circumstances and needs of each unique individual.; April 06, 2010 9:34 AM
Vincent Teo said...: I am very curious to know from this gentleman / lady here, what is the purpose for buying this life policy? For saving? protection? or investment?; April 06, 2010 10:20 AM
Anonymous said...: Anon,April 06, 2010 9:34 AM
there is no need to consider the circumstances of the person to tell him that this is a rotten product.
All WL products are rotten and he just took it up and all the more he should quickly cancel it before he loses more and kenna locked.
There is nothing in WL that serves anybody's purpose. For protection it is too expensive and you can't afford enough. For saving? no need to say the scam return you get.; April 06, 2010 11:13 AM
Anonymous said...: Hi everyone. this is the first time I'm commenting on this blog. Just want to info all those who reads here. I bought a WholeLife with CRB in 1983,annual premium abt $1700, last week i ask my agent to give me an update on this policy. My total paid premiums to date is abt $46K. The current cash value is $59K. My protection value is $164K. Do you all see how pathetic these figures are ???
This is just my situation. If you want protection buy Term policy. Period. If you want investment, don't buy insurance as a way to do it, use other investment vehicles.
I do not need to elaborate to you what my initial policy projections were; even my 30-yrs experience insurance agent cannot explain to me satisfactorily. Period.

From: Wiser; April 06, 2010 1:09 PM
Anonymous said...: If you buy an ETF, you pay only 0.3% comm to your broker.

If you buy a life insurance policy, not only do you pay comm to your agent friend, you also have to pay over-riding comms to his team leader, his manager, his snr manager, his section director, his district director, his area director, his divisional director, his region director, etc.... Yes, life insurance sector is probably the only legalized pyramid selling schemes in Singapore, and some foreign FIs (e.g. AIA) are activelly involved in this.

That's why a lot of agents who have been promoted to managers and directors spent most of their time doing recruitment. More agents mean even when the mgr/director pang sai, some agent is out there earning money for him. Just open the classifieds on any day and see how many rrecruitment ads placed by AIA managers and directors. And these agents have no cost to these pyramid managers. If they don't perform, or they get into trouble with law, the mgr/ director simply recruit some more agents.; April 06, 2010 1:15 PM
Consultant said...: I believe all insurers in Singapore now operates their wholelife & endowments in this way --- low annual bonuses for the first 20 to 25 yrs, and then project a big terminal or maturity bonus after 25 yrs. I.E. Operate on "hope for the best".

In the old days, ntuc WAS the exception --- it gave out reasonable annual bonuses, with average maturity bonus. The principle was fairness -- give out a fair share of ongoing profits to policyholders as and when it was due, instead of locking away this money to invest or speculate in hopes of getting more money for management (immediate returns), for shareholders (immediate or short-term returns), and hopefully for policyholders (after 25yrs).

Unfortunately since 2008, ntuc's new management has decided to adopt the rest of the insurance industry approach to annual bonuses and accumulated cash values. Too bad the rot will only be exposed 20 yrs later.; April 06, 2010 2:25 PM
H.F. said...: i'm not the original poster but this is what my insurance agent shared with me.

The reason why the difference is great between year 20 and 25 is because of the great increase in the surrender value in the later years of the policy. The surrender value of traditional policies accumulate more quickly towards the end of the policy because the bonuses increase at a faster rate the longer the policy is in force. Also, at the end of the policy, there is also a maturity bonus which greatly increase the surrender value. That explains why the effects of deductions drops and the big difference between the years.

The effective interest rates of an endowment plan may be 2% to 3% when it matures, and it may be deemed too low for some people. However, the risks-returns relationship always stands true. If a person is willing to take risks with the savings and go for unit trusts or stocks and shares, the potential returns are higher. But so will the risks. Endowment plans are considered low-risk financial instruments, thus the potential returns will also be lower in comparison. Even if a person has a very big risk appetite, his portfolio should be diversified across the risk spectrum and not all in the high risk instruments.

Thus, endowment plans serve a certain role in a person’s portfolio as a safer and more conservative instrument.

I think it make sense for people who are finanical illiterate like myself. It is more accessible as insurance companies market these product aggressively unlike ETF, it's a DIY, there won't be a insurance/financial adviser to advise you when is a good time to buy in and what to buy and apparently, i've gotten myself a CDP account and stuck here. Don't know how, when, what to begin with.

Anyway, this is not an excuse. I believe in increasing financial IQ. Benjamin Franklin once said, “Investment in your own Knowledge (Financial Knowledge) will give you best Dividends (Returns) in the Long run than your any other Investment.”; April 06, 2010 3:02 PM
Anonymous said...: Foreign FIs should be grateful we give them opportunity to sell insurance in Singapore. They should not take advantage by using pyramid selling schemes to exploit agents and aged/illiterate/retarded consumers. I see some foreign FIs not being able to compete in the general insurance market, but choosing to use pyramid selling to exploit consumers in life insurance market.; April 06, 2010 3:16 PM
Anonymous said...: "4) I informed my agent that I have heard horror stories of policies falling way off projected returns upon maturity. However, he mentioned that in the past, the projections were very high and that now, MAS has regulated the projections to be a very reasonable and definitely acheivable 5.25%. Again, is this true? "
When I saw this I nearly fell off my chair! This was what my agent told me 21 years ago when I first bought a policy. I was told that NTUC Income was very conservative in its projections. I believed that but when my policy matured, it did not achieve even half of its projections and my questions to the CEO were not even acknowledged, let alone explained. Even in the AGM, they kept repeating that the economic climate is no good and they have to smooth the bonuses, inspite of the fact that the two years before my policy matured they were making over 10% profits from their investments. Do you think your insurer will be making double digit profits when your policy mature decades down the road or will they be telling you another cock and bull story again. By then probably Singapore will be overrun by foreigners and even their frontline staff will not even answer you because they think you are daft.; April 06, 2010 4:47 PM
Anonymous said...: HF,
low risk should give 5-6% and not 2%.If you can emulate your insurer's life fund portfolio and invest regularly you should get at least 5.25% which is minimum projection.
But having longer time horizon your portfolio should be of higher risk. Higher risk means zero risk after 20 years. But putting in a WL you continue to bear the risk until after 25 years when your real return is a loss. 3% is still a loss. This is definitely too low
for many many people except the millionaires.At best your 3% is a refund of premium.Is this saving?
If you are a millionaire it doesn't matter but if you are middle income earner this is status quo.
Come out of this risk averse syndrome. Everybody PREFERS no risk, it is natural but it is NOT RATIONAL not to take risk if you have to accumulate. Risk averse people are assumed to have no desire and no need to accumulate.
People prefer more than less.; April 06, 2010 5:28 PM
Anonymous said...: Wiser,
I hope more are wiser now. You were taken for a ride for 27 years and maybe looking forward to the day when you can dip into the till . But , alas, the till is not as full as expected or as told or as projected. It looks that it had been lie and you were , like many people in Singapore, cheated of your goal.Baby boomers were cheated too and today they are forced to delay their golden years. If only insurance agents had been truthful and more careful when they pushed those products and should had done some due diligence knowing that many clients' financial future were in their hand. Unfortunately, it never crossed their mind nor it was their interest to put their clients interest first that they achieved their goals.
Insurance agents bashing? Do you watch idly and do nothing about it?
Or you want to warn others that there prowling the streets are unscrupulous salesmen and women who have no qualm stealing your future and your dreams. These so called financial consultants who are paid handsomely and supposed to help you with your goals.Instead , you find and see years later your dreams of good retirement go up in smoke.
Wiser , you are not alone. There are many like you, disappointed with the insurance company and the trusted agent, both colluded to cheat you. What happened to the old fashion honesty?; April 06, 2010 8:14 PM
Chin said...: Hi,

By using the data given by Wiser at 1:09pm, his annualized return worked out to be less than 1%.

That is a total rip off! You can/almost achieve that by putting all your money in fix deposit.; April 06, 2010 10:23 PM
Anonymous said...: Product pushing agents should be paid a one time commission of 10% if their clients choose product advice option. Their rest of the commission be returned to the customers becuase the customers receive nothing but product explanation and form filling.
If the agents persuaded their clients to choose option 1 or 2 becuase of commission they should be checked for the recommendation whether they are of reasonable basis.If the recommendation is not of reasoanbale basis they should be charged for breaching section 27. For breadh the agents should be punished. If it is deliberately cheating the clients it should be fine and jail and loss of license.
All this in place I am sure the agents will be well behaved.; April 06, 2010 10:58 PM

Tuesday, April 06, 2010

Do not trust unrealistic projections

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