There was a letter sent to the Newpaper by a person complaining that: - The cash value of policies bought (assuming they are the traditional par products) are below the premium paid;
- Not able to get medical insurance due to existing high blood pressure;
The letter can be found HERE but I also appended it below this blog in case the link is removed in the future. My comments will be on the (1) Bonus cuts (2) Wrong assumption about par policies (3) Anti-selection.
Bonuses Cut It is true many many insurance companies cut their bonuses. There is only one insurer who has never cut their bonuses. Of course, there is absolutely no guarantee that they will never cut their bonuses. Instead of complaining and asking “somebody” to do something, consumers must take charge of their financial by taking pro-active steps to do something by research and equipping one’s knowledge. There is no rocket science to financial planning. If there is a fear of buying the wrong insurance, just do research. There is no secret to insurance planning. All information is available. It is a well-known fact for years and years that all insurers cut their bonuses (except one) because they had made unrealistic projections of their return. In response to greater transparency, the existing benefit illustrations are transparent enough to show the performance of the life insurance life fund for the past few years. During the market bull, we can judge for ourselves which one is doing better and which one is not. Even the asset allocation of the life fund is known. Existing consumers must read and understand the benefit illustration. If they cannot understand, they must ask a competent adviser to explain to them. If they do not ask, they cannot blame anyone but themselves. If the adviser cannot explain, sack the adviser. This is a free world. No need to complain to LIA, MAS or Newpaper. Take charge of one’s finances is the key to financial freedom. Ignorance is not an excuse and is the start of one’s financial failure. The continuous bonus cut is not something that is “sudden”. It is shown on the yearly statement given to the policy holders. The reduction in bonuses happened for a very long time already. If policyholders do not read the statement, who can they blame? If they do not understand, they just need to engage a financial adviser to help them to understand. Clients must be willing to do a regular review in their finances. Not just insurance but generally in cash flow, protection, investment, retirement etc. Many people do not want to do review for fear that the insurance adviser will try to sell them another product. If there is such a fear, just get a fee-based consultant to do that. Of course many consumers do not wish to pay a consultation fee and hence many advisers do not wish to take on such cases since all advice given comes with the liability of incorrect advice. Again, if the consumers do not want to do anything or pay a fee to get good advice, who can they blame? No-action is the start of one’s financial failure. If one would to use insurance as a saving tool, a person should only look at the “guaranteed” maturity value. This guaranteed value is the only portion that the insurance company is obligated to pay. If they cannot pay, the shareholders are liable to pay. The “non-guaranteed” portion should be ignored. Advisers who sell on the high “non-guaranteed” value should be sacked because history has shown that all insurers cannot meet their “non-guaranteed value” (except one insurer of course). Thus, advisers’ ignorance is not an excuse. Advisers’ ignorance is the start of the client’s financial failure. Clients who keep on engaging ignorant advisers are themselves to be blame too since this is a free world. Why they keep on engaging lousy advisers? Who is to be blame? Government? Is there a place for using insurance as a saving tool? Yes. This is for a conservative person who ones to ensure capital guaranteed with guaranteed (positive) return. As there is no bond that have such a long maturity which allows for regular contribution, insurance endowment is the only way to achieve guaranteed return for a regular saving policy over a long-term basis. There is only one insurer that can give a high guaranteed maturity value. Consumers have to ask which product is that but if they go to the bank or a tied-agent, they will not likely know which one will it be. Consulting a competent independent financial adviser is the only solution but of course if the consumer wants “free” advice only than good luck to them. Ignorance is not an excuse and it is the start of one’s financial failure. For person who are not conservative in their risk profile, endowment is not likely a good solution and thus pure investment unit trusts might be more suitable. I say “might” be more suitable because some unit trusts cannot even outperform their index. The best is just to buy an index fund. Wrong assumption about par policies The writer use the phase “investment policies” to describe her par policies. This shows she is financially ignorant. Such par policies can never be used for investment purposes. I mentioned above, if one’s risk profile is not conservative, “pure” investment is preferred. If unsure what to do, seek a competent adviser to help. There is no excuse as to cannot find someone for help. Singapore has so many advisers. It is ridiculous to say that none is competent. It just take a little bit of effort to find one. Laziness is not an excuse. Laziness is the start of one’s financial failure and please do not ask government for help because this will ultimately increase taxes like GST. Anti-selection The writer had high blood pressure and wanted to buy a medical insurance but ultimately she got rejected. I wanted to a laugh and cry at the same time. Insurance is about risk pooling. For insurance to work the risk must be random and the probability of occurrence relatively low. Let’s say the probability of claim for each person is 0.1% for each year. For simplicity each claim is $50,000. If there are 1 million policyholders, than 1 million * 0.1% = 1000 policyholders are expected to claim. Since each claim is $50,000 than the insurer is expected to pay 1000 * 50,000 = $50,000,000 for each year. Thus the minimum premium for each policyholder will be $50,000,000/(1 million policyholders) = $50 per year. The actual premium will be $50 plus expenses plus profit margin. The underlying assumption is the probability of claim. To keep the premium low, the probability of claim must be as low as possible. This means that new clients entering the pool should be as healthy as possible. But imagine a person with a high blood pressure would have say a probability of claim of 50% (just for illustration) and if every tom-tick-and-harry new but unhealthy customers are accepted by the insurer into the pool, what will happen? Premium will escalate because claims experience will increase dramatically. Insurer are not stupid. Even a co-operative insurer must remain profitable otherwise they will become insolvent and go bankrupt. In order to remain profitable, premium must increase. Those healthy policyholders will end up paying more premium for these new unhealthy consumers. Many consumers want to buy insurance when they are sick. Most of my insurance cases consist of mostly sick people. As I do not prospect and approach others to buy insurance, many of many insurance clients approach me and guess who is interested in insurance? The sick and the ill. The healthy ones usually think they will be healthy forever and if one day and become sick, they will seek government help and if government do help, who pay? Tax payers of course. Government are not stupid and must ensure a long term positive cash flow. Thus taxpayers like me will have to end up paying for someone’s folly. Yesterday I had a client who bough some insurance. She is very healthy but has a parent who is sick. Fortunately she already started planning before she is unhealthy but due to family history, I cannot assured her that her insurance will be standard case (it could be loaded or rejected due to family history). Personally I have a term insurance bought many years ago when I was perfectly healthy. The insurer loaded my term insurance premium because my family has a history of all the urban diseases in the world (high blood pressure, diabetes, cholrestrol, etc). Thus I suggest for people is to get insurance when young and healthy. Do not delay getting the plan. Proscrastination is not an excuse and ignorance is the start of one’s financial failure. Do not blame MAS, LIA, Government and whoever. There is a saying that when one points a finger at others, 4 fours are pointing back at one’s self. In other words, one must be willing to help themselves. Please do not always complain and complain and complain. If the Great Baby Sitter (government) would to help, GST will increase and everybody suffers. Inflation is already 6.5%, any increase in GST is going to cause great misery to everybody. For those who are already insured (or think they are covered), they should seek a review with their agents on a regular basis. If the agent try to upsell another product without really reviewing, sack the adviser and get another one. I will be happy if I am asked to review but I'll charge a fee. Unlike others who claim to give free advice (but actually will end up selling another lousy product), I never claim to give free advice. I also never claim that my advice is cheap either. I'll immediately turn down anyone who is only looking for cheap adviser. This is a free world. Pro-castination guarantees failure. (Side note: I am passionate in my occupation and readers should understand that at times, I do not necessary write very friendly and politically correct blogs. My apology if this blog offends anyone) FROM NEWPAPER ONLINE PUBLISHED IN 9 SEPT 2008 I AM so happy that you published the report, 'Truth about insurance payouts' (The New Paper, 6 Sep), about how insurance companies in Singapore are not compelled by regulations to pay back their policyholders an amount close to the asset share (an individual policyholder's paid premiums in addition to investment income, minus the insurance company's expenses), when policies have matured or are terminated. I found out about this practice lately when I summarised my financial commitments because I am hitting 55 this September.I called my insurance companies to find out what was the 'surrender' value of the existing policies that I bought from them 14 to 15 years ago. To my surprise, most of the policies I bought from one company are all under value - none of them can match or are on par to the principle sum I have been paying for the past 14 to 15 years. In order to break even, I have to continue to pay the premium for another six years. My investment policy is supposed to mature when I am at the age of 60 in 2013. I have been paying the premium annually at $6,000 from my Central Provident Fund's Ordinary Account since 1994 - that is about $84,000 I have paid in 14 years. I was told the surrender value is less than $80,000 and no disclosure of how they come up with this golden number. However, it gave me an estimation of a maturity value of $160,000 in 2013. Frankly, I doubt the company's estimation and commitment. I can't even break with my principle sum after paying premiums for the past 14 to 15 years, so how can the company double the payout within the next five to six years? I feel cheated. I believe many policyholders like me buy policies as another instrument for saving purposes, as well as for insurance coverage for family members and ourselves. None of us really know how the insurers work out the cash value when we surrender our policies prior to maturity or even at maturity. Apparently, we are at their mercy and are left with no choice because of the lack of transparency. I would like to bring up another issue which I think is very important to the ageing population in Singapore. I tried to upgrade my medical insurance plan lately as I thought it was necessary. I submitted my medical report to another insurance company since I have had a history of mild high blood pressure. My blood pressure is measured daily and has been stable with no problem. I keep myself fit and exercise every single day. Unfortunately, I was turned down after its review. My question now is, what is the social commitment from this insurer to a common Singaporean like me who wants to have better medical coverage in the event of sickness? I believe most of us are willing to pay higher premium for such coverage, but why turn us down when we need it most? Medical insurance is the only means for us to cover the pricey medical care in Singapore. The insurer must have social commitment to offer various packages of medical coverage to Singaporeans, and not just turn us away because of risks. Social commitment and transparency are needed. FROM READER LIM PECK HENG, JAMES |
