It is easy to be cheated (4) - Participating policies

A participating life insurance policy offers a low guaranteed rate of return for the premiums paid over many years. The insurance company promised that, if the insurance fund earns a higher rate of return than the assumed rate (used to compute the premium), the additional return will be distributed in the from of non-guaranteed bonuses.

They project the bonus to show a fairly attractive return on the policy after it matures in many years time. The snag is that the bonuses are not guaranteed.

The consumer believed in the sales pitch by the insurance agent and buys the policy for the projected return. 

After the policy is issued, the insurance company may reduce the bonuses due to the low investment yield. However, the consumer cannot tell if the reduction is fair or is more than required. 

By paying a low rate of bonus, the insurance company is able to use the additional profits to strengthen its financial position, but this is at the expense of the policyholder. 

The low bonuses results makes the policy unattractive. To increase the sales, the insurance company introduces a new series of policies that give a more attactive return than the old policies, and trains the agent to sell the new series.  

If the policyholders decide to terminate the policies, they will suffer a large penalty as the cash value may represent less than half of the premiums paid. 

The insurance agents tell the policyholders that the low cash values is due to the insurance coverage provided by the policy. The real cost of the insurance coverage is less than one-fifth of the amount taken away. Most of the premium are taken away to pay commissions and expenses. 

Recently, many insurance companies reduce their annual bonuses and increase the terminal bonuses on the maturity of the policies or on death.  They use the terminal bonuses to show an attractive payout. However, the terminal bonuses are not guaranteed and may be reduced or withdrawn close to the payout date. 

If the policies are surrendered, these terminal bonuses are usually not paid, or paid at a lower rate than what is fairly due to the policyholders. There is no way that the policyholders can find out if they have been give a fair payout. 

In some countries. there are stronger measures to protect the interests of the policyholders and ensure that they are fairly treated. In other countries, the level of protection of the policyholders are weak. 

Tan Kin Lian

The Standard:HKMA urges banks to act on allegations over structured products

"The Hong Kong Monetary Authority has asked banks selling complex structured products issued by Morgan Stanley to inform clients when such items become more risky.

It urged the banks to investigate allegations of mis-selling of these products.

The HKMA will also investigate those retail banks for any alleged marketing misconduct involving sales of credit-linked products, called Octave Notes, which have plunged in value, deputy chief executive Choi Yiu-kwan told a Legco panel yesterday.

"Distributors have to assess related transactions of products to see if there's been any mis-selling. If yes, they have to report to the HKMA," Choi told the Legco subcommitee probing the Lehman minibonds fiasco.

Choi said HKMA would not start issuing warnings when any structured products start to lose value. "It's inappropriate for regulators to warn against a specific product or a specific issuer when there's potential problems," Choi said. "When something happens, the issuer is responsible for minding investors."

Raymond Ho Chung-tai, chairman of the subcommittee, said the Securities and Futures Commission has so far declined to make public three reports on the minibonds fiasco. He said the subcommittee will continue to push for release of those reports.

Personal accident insurance

Dear Sir,

Thank you for your good work in educating common folks like us on Finance. I have a FA friend who recently looked for me to buy an accident policy. I like to understand more before deciding but could not find any information regarding  this.  Could you kindly advise on whether is it worth while to look into an accident policy.

 REPLY

Read this FAQ

http://www.tankinlian.com/faq/pa.html

Get quote from 3 companies and decide on which offer you the best rate and cover.

Excessive increase in motor insurance premium

Dear Mr. Tan

I read a report that an insurance company increased the premium for motor insurance by 400% on its renewal. The motorist is not able to get another insurance company to accept his risk. Is it fair for the premium to be increased by so much?

REPLY

The increase of 400% is excessive. The authority should set some reasonable cap on the increase in premium on its renewal. An increase of 100% is already too high. The customer should not be placed at the mercy of the insurance company.  The consumer should lodge a complaint with the Consumer Association (CASE) to take up this matter.

An alternative arrangement is for MAS to set up a residual market (or pool) for motorist who are not able to get insurance from the standard market. The premium rate for the residual market is higher, but cannot be excessive. The risk is the residual market is shared by the insurance companies in proportion to their share of the market.

State Funderal for Late Presidents - Learn from the South Koreans

MR   TAN KIN LIAN

Can you post this to your blog.

I refer to the news on 25 May 2009 “State Funeral for Roh” from Straits Times internet news.  It was reported that “South Korea is planning a state funeral for former president Roh Moo Hyun as thousands of people gathered in the nation's capital and his hometown to mourn him. Mr Roh jumped off a cliff near his rural home on Saturday after being hounded for weeks in a widening corruption scandal involving his family members.

His suicide came just 15 months after he left office and just when prosecutors were to announce if they would seek his arrest. Investigations centred on a payment of US$1 million (S$1.44 million) to his wife from a wealthy shoe manufacturer, and another of US$5 million by the same man to the husband of one of Mr Roh's nieces.”

I think we should learn from the South Korean that takes the people’s feeling and grants state funeral to ex-President Roh, although he is being investigated currently.

I know this may be old issue that President Ong Teng Cheong and President Devan Nair were not granted state funeral when they passed away.  Singapore should treasure the few good leaders we have.  Granting state funerals to true sons of Singapore is not only for the benefit of these respected pioneers, but more for the people of Singapore and generations to come.  Singaporeans need to have our very own hero and role model. 

I hope it is not too late to grant state funeral to President Ong Teng Cheong and President Devan Nair.   Even in communist China, Deng Xiao Peng also paid respect to those who died during cultural revolution, when the event settled down eventually. People need closure to events of life journey.  In essence, we are all pilgrim in each of our journey of life, some are greater but others are no-smaller. We are all little sparkles in the expanse of time and space.   Can somebody help us to make this petition to President Nathan?

CASHEW NUT

2 JUNE 2009

Tan Kin Lian's Magazine

This magazine contains the articles and FAQs written over the past two years. 

Invest in land banking

Dear Mr Tan,

Recently I have been approach by a friend to invest in land in the US. In your opinion, how safe is this kind of investment?

 REPLY

My views on land banking are set out in various articles in my blog. See below.

http://tankinlian.blogspot.com/search?q=land+banking

I do not like this type of investment. All the best!