An unfair life insurance policy

A policyholder sent to me a benefit illustration of a 20 year endowment policy bought four years ago. This policy provide a sum assured of $100,000 and requires an annual premium of $6,000. It pays an annual cash dividend which can be re-invested to earn an interest rate (illustrated at 3% per annum).

The first year's premium is entirely taken away. For each subsequent year, the cash value increases by about $5,000. This means that the cost of insurance is $1,000 to insure $100,000.  The cost of this cover under a group insurance should be less than $100 a year.

If the policyholder keeps the policy to maturity at the end of 20 years, the benefit illustration shows a return of about 3% per annum, but a large portion of this return is not guaranteeed and may not be realised. If the policyholder terminates the policy at any time, including the 19th year, a large part of the potential gain is forfeited. The cash value in most years is less than the total premium that has been invested.

This type of policy goes against the concept of fairness. Why should a large part of the gain be taken away on the 19th year? Surely, in the case of a participating policy, there is the principle that the policyholder should be entitled to 90% of the surplus, rather than have this share to be confiscated.

It is time for our regulator to look into this type of practices that are quite unfair for consumers. Although the features of this policy is shown in the benefit illustration, the consumers (including those who are well educated) cannot be savvy enough to know about these catches.

I encourage all consumers to join FISCA (http://www.fisca.sg/), to attend the FISCA talk on financial planning, and to buy my book, Practical Guide on Financial Planning. Be educated, so that you do not fall frey to bad financial products in the future (even if you cannot do much about the bad products that you have been sold in the past).

Tan Kin Lian