Wednesday, January 26, 2011

Poor yield on Vivo-life

A consumer showed me the benefit illustration for a Vivo-life. He found that the deduction at the end of 25 years appeared to meet my benchmark of 20%. The deduction was 20% based on a gross yield of 3.75% and 32% at the gross yield of 5.25%.

I was surprised at the difference between the two deduction figures of 20% and 32%. The difference is too wide and does not make sense. It suggest to me that there is something wrong with the system of allocation of bonus to produce such wide results. I asked him to get the insurance company to confirm the figures. I am quite worried that as insurance companies introduce complicated and exotic tables of bonus rates, they may end up with mistakes that are quite unfair to certain groups of policyholders. I hope that MAS is paying attention to this feedback.

For the particular policy, the premium was paid for only 5 years. It is not appropriate to use my benchmark which is based on premiums being paid for 25 years. For the Vivo-policy, the calculation should be based on the premium period of 5 years. here are the figures:

A Prem
Gross yld
Net Yld

I was shocked that the cash value at the end of the premium payment period is lower than the total premiums. This gives a negative yield. The total deduction is excessive, as shown by the above table.

It does not make sense for a consumer to be paying $59,680 in premium for 5 years to get a cash value of only $53,349. The consumer loses $6,331 for 5 years. The cost of the insurance cover for 5 years should be probably be $500 (in total) and not $6,300. It is such a bad deal for the consumer!

Tan Kin Lian


zhummmeng said...

The cash value will become the source of revenue and income for the insurer, guaranteed for life.
Very clever scheme/scam under the guise of 'no neeed to pay but insured for life'. Is it true? Is it true that policyholders need not pay?
This is where there is information blackout. It is NOT mentioned in the BIs too. Of course , never asked the insurance salesmen are taught not to tell. Disclosure? FAA disclosure based? Why no crime here?
Customers should wake up to the fact that wholelife products, especially limited payment WL is loaded against the policyholders.The benefits are skewed in favour of the insurer and the insurance salesmen.

Spur said...

Their actuarial modelling and investment projection is painting a positive future far into the future. Hence a generous amount of leeway given to commissions, incentives, bonuses, and expenditure resulting in the 32% effect of deduction for the more optimistic scenario of gross 5.25% yield of par fund.

In the event of lousy investment scenario panning out resulting in the 3.75% par fund performance, their financial engineering has build-in a consideration to aggressively slash costs and overheads, thus giving you the 20% effect of deductions under the gloomy scenario.

However it is quite obvious that their financial engineers still think that 80% probability of good times ahead for the next 20-30 years. That's why they still insist on giving you only 0.7% bonus for their policies, and give you projected big terminal bonuses 20-30 years later. By then even if you kena screwed, you'll have no money to hire good lawyers to fight expensive court battles.

zhummmeng said...

It doesn't make sense for the consumers but it makes a lot of sense for the insurance salesmen and the company for both laugh all the way to the bank. That is why they push so hard and con them on a one liner spiel , 'pay 5 years only and insured for life'. Insured for how much? This question hardly asked or told because becuase it is NOT about sum assured but budget...this is financial need analysis ntuc sales champions do.Their ceo loves them because it brings in sales. Customers under insured NOT their business...poor return also not their business so long the premium adds to the annual API production.
Sales champions indeed they are but everyone disguised under a fierce title like Executive Financial Consultant to mislead their customers. Their clients think they are financial experts. Their clients think 'execute their order' is some sophisticated financial planning in the 30 page crap of find find rubbish. You want to vomit and laugh the same time when you see the fact find booklet, colorfool and most of the times 3/4 of the pages never used by their so called financial consultants. It is execute only financial insultants. The first execution is to tick option 3.

Vincent Sear said...

Personally, I won't believe in 3.75 to 5.25% projection (before deduction) for any traditional par policy. 20 years down the road when the agents and executives responsible for were gone, the clients are most likely to be faced with a torrent of explanations why bonuses need to be cut by the new executives.

And if the client is able to understand the effect of deduction of distribution costs on yields, there's not much yield left anyway even if the projection is matched.

If you need life insurance coverage, buy term. Forget about returns on traditional par policies. The savings would be more than sufficient for you to generate at least fairer and more reasonable returns from a low-cost balanced unit trust or SP-ILP fund, even after deducting the cost for your term policy.

Regine said...

Hi Mr Tan,

May I ask how is the yield compared to other insurance company's life insurance plan?

zhummmeng said...

better abt 2.5% after 25 years..It is still a loss in real term, right? Remember , saving is about growing or making your money work harder and not losing. Only wealth is created AFTER overcoming inflation. What is the inflation rate? If the department of statistics says it is 3.1% the actual is 6.2%..Don't be conned by the massaged conservative in your projection for your clients.
Anyway, avoid this product and all WL products by any name or variations, they are still the evil products created for insurance agents to rip off their trusting customers to help their company with high APIs to become #1.

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