My life insurance policies

Dear Kin Lian
I am insured with NTUC. Seriously. I am naive and ignorant, how I should address my concerns (of the poor return) to the management board? Do you still have NTUC policies?

REPLY
I had about 15 life insurance policies during my time with NTUC Income, including policies taken for my children. Many of them have matured. Some were transferred to my children.

I cancelled four whole life policies (on my life) during the past two years, due to the reduction in bonus rate and the increase in management expenses. As I am past 60, I do not need the insurance protection.

I have only a few investment linked policies left. I shall cancel them at the right time.

Insufficient savings? No wonder with poor insurance returns

Published in Forum Page, Straits Times on Aug 10, 2009

I AGREE with the views expressed by Mr Larry Haverkamp in his letter last Thursday, 'Policyholders underpaid?'.

Many life insurance policies taken today require more than 15 years to 'break even'. This is the point where the cash value of the policy is more than the premiums that were paid over the years.

During this period, the insurance company must have earned more than 40 per cent on the premiums that have been invested. As an actuary, I know that the real cost of providing life insurance cover is about one-quarter of the gain. The remaining three-quarters are used to pay the agent's commission and expenses, or retained as orphaned money, as pointed out by Mr Haverkamp.

If the orphaned money is distributed to the policyholder, as suggested by Mr Haverkamp, the return would at least have been slightly better.

In recent years, consumers have been given a poor deal on their long-term savings in life insurance policies. A careful study of the Benefit Illustration will probably bring out this point. But the Benefit Illustration is difficult for consumers to understand and needs to be explained by an insurance adviser, who tends to skim over the negative points.

This is similar to the situation with the prospectuses issued for Minibonds and other credit-linked notes.

If consumers are given a poor return on their long-term savings in life insurance policies and other financial products, and in many cases they actually get a negative return, is it a wonder why many Singaporeans do not have sufficient savings for retirement after many years of hard work, thrift and savings?

I call on life insurance companies and financial institutions to reconsider their roles and responsibilities to provide a fair deal to consumers, as they strive to make profits for their shareholders. I hope the Government will also review this unsatisfactory situation in Singapore.

Tan Kin Lian

Prudential Yield 15/20 (2)

Someone posted a comment that the Prudential 15/20 is similar to the Great Link Choice. Can policyholders of this product give feedback on:

a) The structure of the product
b) Does it guarantee against the failure of a certain number of CDOs
c) What is the current value of the various tranches of this product?

TRANSPARENCY IN INSURANCE: Policyholders underpaid?

Aug 6, 2009
TRANSPARENCY IN INSURANCE
Policyholders underpaid?

THE report last Friday, 'Insurance funds need more transparency', is a good start. But there is more.

We have invested more than $60,000 per household in whole life and endowment policies.

The money goes into a huge policyholders' fund at each life insurance company. We know little about the fund or how the money is invested.

It is very different from buying a unit trust, where you get a certain number of units in proportion to your ownership in the fund. These units amount to the fund's net asset value or NAV. It is updated and published daily.

Policyholder funds have the same concept but use the term 'asset share' instead of NAV.

Another difference is insurance companies do not disclose the asset share. This makes it easy for insurers to underpay policyholders without them knowing it. Insurers acknowledge this happens with early surrender policies, but do not say if it also happens with policies held to maturity.

As the rightful owners are policyholders who have left the fund - and supposedly cannot be found - it is called 'orphaned money' or money without a home.

Underpayments to policyholders accumulate over the years, and are now huge. Aviva in Britain made a distribution of $2.7 billion last year. In that case, policyholders got 70 per cent of the money and Aviva kept 30 per cent. The company claimed that legally, it could have kept it all.

That is one way insurers benefit from orphaned money. Another is earning a risk-free 10 per cent on the income it generates.

A third way is to provide a buffer to absorb losses in case of a market downturn. It means the fund avoids dipping into tier 1 capital, which is largely stockholders' money.

Officially, the rationale for holding orphaned money is different: It provides a buffer for policyholders to avoid bonus cuts in downturns. Not correct. Insurers typically cut bonuses in downturns - like now - while the orphaned money keeps growing.

Singapore insurers disclose nothing about orphaned money. We do not know how much there is or where insurers keep it. Does it remain in the policyholders' fund or has it been transferred to stockholders?

Larry Haverkamp

GreatLink Choice insurance products valued between 19.2 and 29.8 cents

By S.Ramesh, Channel NewsAsia Posted: 03 August 2009 2151 hrs

SINGAPORE: Great Eastern Life's customers who have bought its GreatLink Choice investment-linked insurance products have started receiving letters to exercise the redemption offer made by the insurer.

Last Friday, Great Eastern announced that it would buy back S$594 million worth of GreatLink Choice products from 18,000 policyholders.

In the letter, the insurance company's managing director Mr Tan Hak Leh said the financial crisis has had an especially adverse impact on the market value of GreatLink Choice 3, 4 and 5 products.

The prices of these tranches as at June 30 this year were between S$0.192 and S$0.298 and they have a credit rating of CCC- (minus) from Standards and Poor's. Each unit was sold at S$1.

Great Eastern added that in view of the challenging market conditions, it has decided to make a one-time redemption offer to all GreatLink Choice customers who had bought tranches 3, 4 and 5 of the structured product.

Customers have until August 28 to decide if they want to redeem the policy. Great Eastern said customers will receive their money within two weeks after the close of the offer.

The company added that the redemption price is 90.2 cents per unit, compared to the latest GreatLink Choice 3 price of 29.8 cents per unit.
http://www.channelnewsasia.com/stories/singaporebusinessnews/view/446602/1/.html

Great Eastern's managing director, Tan Hak Leh, hopes the one time redemption offer will give customers peace of mind during these challenging times. - CNA/vm

Health care realities

Article in New York Times

Quote: ... private markets for health insurance, left to their own devices, work very badly: insurers deny as many claims as possible, and they also try to avoid covering people who are likely to need care. Horror stories are legion: the insurance company that refused to pay for urgently needed cancer surgery because of questions about the patient’s acne treatment; the healthy young woman denied coverage because she briefly saw a psychologist after breaking up with her boyfriend.

The Health Debate: At a Fever Pitch

Letter to New York Times.

Pelosi lashes out against insurance companies

WASHINGTON (Reuters) - U.S. House of Representatives Speaker Nancy Pelosi on Thursday ramped up her criticism of insurance companies, accusing them of unethical behavior and working to kill a plan to create a new government-run health plan.
"It's almost immoral what they are doing," Pelosi said to reporters, referring to insurance companies. "Of course they've been immoral all along in how they have treated the people that they insure," she said, adding, "They are the villains. They have been part of the problem in a major way. They are doing everything in their power to stop a public option from happening."
(Reporting by Richard Cowan, Editing by Sandra Maler)

BBC; Car insurance premiums rising

Read this article of what is happening in UK.

Company Y not wanting to pay out my insurance claims

Dear Mr. Tan,
I was diagnosed and operated upon for my brain cancer. The cancer is classified as terminal. With the doctor's recommendations & letters, CPF paid all my savings into my bank account. Company X initially refused to allow me to claim my DPS but after I send them the CPF statement - they paid me as well.

I did a similar claim with Company Y for 3 policies. For more than a year, they have been giving excuses after excuses in not wanting to pay me by saying the requirement for us to pay a claim for Total & Permanent Disability is:-

"totally & permanently disability so that life assured cannot engage in any occupation, business or activity which pays any income"

OR

"suffers total and irrecoverable loss of effective use of
- both eyes; or
- any 2 limbs at or above the wrist or ankle;
- or one eye and any one limb at or above the wrist or ankle"

Company Y is adamant in not wanting to pay me - I even got a letter from my last employer as to why they could not hire me back and they verbally told me they need more proof of further rejection letters. I had paid my insurance premiums monthly for the last 23 years without any default to date.

I hope you can take advise me on how best to approach Company Y.

REPLY
You can lodge a complaint with the Insurance Commissioner's Office in MAS. Show them evidence of payment by CPF and Company X. MAS will ask Company Y to justify their delay.

You can also make a complaint to Fidrec, www.fidrec.com.sg. As your claim exceed $100,000, you can select one or two policies that fall within this limit to lodge your complaint.

Lesson: Insurance companies usually make it difficult for the customer to claim under its permanent disability of critical illness cover, especially for large sums. This is why I recommend against insuring for large sums under critical illness. There is no point in paying so much premium and to face difficulty in making a claim.

Personal accident insurance

Dear Mr. Tan
I have a personal accident plan, which cost me about $150/annum with a sum assured of $100,000. Is it too expensive? I am in class 2.

REPLY
What is the coverage under the personal accident policy? Some policy covers death, accident, and temporary disablement. To decide whether to continue with this policy, it is best for you to get a quote for a comparable product from another company.

Existing whole life policy

Dear Mr Tan,
I am looking for an insurance plan to increase my cover. I was looking for some low-cost insurances (due to my increasing expenses), such as decreasing term insurance.

I bought a whole life policy about 2 years ago, paying almost $160 monthly (for 15 years). I read from your blog that this insurance come with a high cost. What should I do with it? Should I terminate it and take the cash? Or I should hold on to it until the cash value is enough to cover the premiums I paid?

I had now decided to take a decreasing term, personal accident and a medishield plan.

REPLY
Please read the FAQ in my website: www.tankinlian.com/faq

For the whole life policy which has been taken for 2 years, it is probably better to continue with the policy, rather than to terminate it. However, you can ask for the cash value in 5 years time to decide on the best option. Read the FAQ on "existing insurance policy".

True cost of life assurance

Many people know that life assurance is useful to provide for the financial security of their family. But they are not aware that the protection can be obtained at a low cost using term insurance or accident insurance.

They are recommended to buy a whole life, endowment, critical illness or a specially designed plan (marketing under branded names) that have high hidden cost and gives a poor return on their savings.

This FAQ explains the true cost of life assurance. It will help you to make a better choice in buying your life assurance in the future. It does not help the policyholders who already bought the life assurance and the past and has already paid the high upfront cost.

Read this FAQ and pass it to the younger people to be educated, before they buy the wrong life assurance policy.

A poor return on savings in life insurance

When you pay premium for a whole life or endowment policy, a portion (say $X) goes to provide the insurance cover and another portion (say $y) goes towards savings to pay your the maturity benefit or cash value in the future.

The insurance company aims to earn a return of say 5% per annum on the savings portion. However, they take away more than half of the gain to pay commission to the agent, overhead expenses and profit for shareholders, giving a net return of less than 2.5% to the policyholder.

This net return is not guaranteed, as it takes the form of a bonus that can be adjusted by the insurance company.

When the investment return is bad (as has happened every few years), the insurance company cuts the bonus and gives you a lower return. If the investment return is good, the insurance company may not increase the bonus, as it prefers to keep the excess gain as "orphan money" in the insurance fund. The policyholder is likely to lose out in the long run and get a return lower than projected.

After deducting the cost of insurance (i.e. $X) the net return may be less than 1% per annum. This is a poor return for a long term savings plan.

This very low return is possible only if the policy is maintained for more than 15 years. If it is terminated earlier, the cash value is likely to be less than the total premiums paid, giving a negative return to the policyholder. Many policyholders lose more than half of their savings on early termination.

To give a fair return to the policyholder, an insurance company should follow this approach:
a) reduce its expenses, especially commission to agents
b) distribute most of its investment gain to policyholders

Unfortunately, to my knowledge, none of the life insurance company in Singapore follow this approach.

Hence, it is best to avoid all types of life insurance policies that have high expenses. Buy term insurance for the life insurance. Invest your savings in government bonds or an exchange traded fund.

Tan Kin Lian

No-fault motor insurance

Hi Mr. Tan,

What are you views on the no-fault motor insurance, that is proposed by the Consumer Association?

REPLY

I sent the following views to the Straits Time. The journalist mentioned it in his report.

There are two types of third party claims and they require to be dealt with differently.

a) Injury claims

For injury claims, it is useful to have a "no fault system" to compensate the injured party, similar to worker's compensation. Here is the experience of such a system used in Sweden. It allows for the compensations to be paid more promptly and fairly, and reduces the litigation cost. See this article in my website:

http://www.tankinlian.com/articles/compensation.html

b) Damage claims

For damage claims, a better solution is for the regulation to require a motorist to lodge a third party claim directly with the insurance company, prior to arranging the repair of the vehicle. The past practice was that the third party will arrange the repair the vehicle with his workshop (who can inflate the claim) and then get a lawyer to lodge the third party claim against the insruance company (hence, adding up the litigation cost as well). (Note: I am not sure if the Motor Claim Framework introduced last year has already addressed this matter).

If the third party damage claim can be put on a proper framework, there is no need to change to law to introduce a "no fault" system for damage claims.

ATE (After The Event) Insurance

The ATE insurance covers the litigation cost and is now available through an insurance broker operating in Singapore.

I have written a paper to brief the insurance broker about the legal position on the credit-linked note and ask them to see if insurance is available for the investors to take legal action against the distributors.

Vista Plan (from Zurich)

Only 3 policyholders replied to my survey on the Vista plan. I have given the contact details to these respondents to contact each other, and decide on their action.

NTUC Income AGM, May 2009

At the AGM of NTUC Income held in May 2009, I raised a few questions on the cut in bonus and increase in premium rates on motor insurance. The answers provided by the management are shown in the attached document.

Insurance company has a duty to render a clear statement on ILP

Hi Mr Tan,
I'm writing regarding a recent blog post "Full refund of premium under ILP". I was surprised and envious when I read this.

For the past 6 months, I have been pursuing X for two ILPs I bought a few years ago. I wanted to track my investments and insurance, but was not given the full disclosure of fees involved.

The total contribution I make every month goes to 1) policy charges, 2) mortality charges, 3) insurance, and 4) investment funds. The fees and charges were not disclosed to me explicitly. I learned about these fees only very recently when I started to track my investments. I realised that the numbers cannot balance month to month. Then I read the policy booklets in detailed, and learned of all the extra charges.

X was also not able to give me the number of fund units that I buy every month, after the deductions of the charges. Hence I am unable to track the performance of my investment. I tried to contact them several times. But every time I'm told this is
not possible.

The company sends a yearly statement on the "Average" no. of units I have, and I'm told that is the only best info they can provide me. Unfortunately, it is not clear how many units are deducted for charges, and how many are added. I've spent many nights on Excel spreadsheets, running the statements, the info they provide, and the amount deducted from my bank. I tried to balance the numbers to the current units I hold, to no avail.

I get a lot of pressure from X and my financial advisor. They told me I'm being unreasonable when I ask for the funds' units every month, and that no insurance or fund companies can give me this information. I cannot imagine being stuck with these two policies for the next 36 years, not knowing where my money is going every month.

I am considering bringing my case to MAS and FIDREC. Is my request for more transparent information an unreasonable one?

REPLY
I support your idea to bring up this matter with MAS and FIDREC.

The insurance company owes a duty to the policyholder to provide details of the charges and a clear statement of how the money is being invested. No policyholder, regardless of how well educated, will know what is happening, unless a clear statement is rendered each month. It is not possible to know at the end of the year from a consolidated statement.

Many insurance companies fail to provide a clear statement, and in the process the policyholder is unaware about the high charges that are being deducted. This is an unacceptable practice, from the consumer's point of view. This shabby practice cannot be condoned.

All the best in lodging your complaint.

Full refund of premium under ILP

A policyholder was shocked to learn that the surrender penalty under his ILP policy at the end of 2 years was so high that it took away 90% of his savings. He was not properly advised of this matter by the distributor who sold the policy to him.

He pursued this matter vigorously against the distributor who sold the policy and the insurance company who created the product. He met with the senior officials of both organisations and also complained to MAS.

He was given various types of excuses and disclaimers. He was not discouraged but continued to fight on.

He was finally offered a full refund of the premiums paid for the 2 years and was asked to sign a non-disclosure agreement.

Lesson: If you are willing to fight for your right, the financial institutions may surrender, instead of the consumer.

Tan Kin Lian