Insurance 'time-bomb' set to explode
-
Hidden charges may eat into investments
THE higher charges result from the increased costs of
insurance cover as people age and the likelihood of
illness increases.
The costs could end up soaring so much that they eat
into the 'investment' part of a person's policy,
resulting in it lapsing altogether. 'That's the time
when you may need the cover most,' says financial
adviser Evelyn Seah.
Feb 12, 2005
Insurance 'time-bomb' set to explode
by Lorna Tan
WHEN engineer Kelvin Yee bought an investment-linked policy (ILP)
eight years ago, he thought he had done the right thing: it gave him life
insurance, while at the same time his savings worked harder by being
invested in unit trusts.
But Mr Yee, 37, now finds that the investment product he purchased has
been described as a 'time-bomb' by one financial adviser - one which is
set to explode as a new scandal on the insurance industry scene.
Mr Yee, along with potentially tens of thousands of others who bought
the hugely popular policies over the years, has found out that, as he
gets older, hidden increased insurance charges mean that the premiums
that are meant for investment purposes are being eaten up just to keep
the policy going.
Under most ILPs, premiums are invested in securities such as unit
trusts and pay for life insurance coverage as well. But Mr Yee's annual
insurance charges are set to escalate at such a rate they will one day
outstrip the annual premium he pays.
When he turns 67, the charges work out to double that of the annual
fixed premium of $3,600 for coverage of $100,000. At 73, the charges are
expected to climb to $11,500 and when he turns 81, they will surge to
$20,000.
Mr Yee said: 'This policy does not meet my needs. My impression was
that it was a savings plan that gives decent annual returns of 2 to 3 per
cent guaranteed, at least.'
He alleged that he was unaware of the existence of the increased
charges until a financial adviser whom he consulted did the sums.
The higher charges result from the increased costs of insurance cover,
as people age and the likelihood of illness increases.
In some cases, the costs could end up soaring so much that they eat
into the 'investment' part of a person's policy, resulting in it lapsing
altogether.
The problem is emerging now as people who bought such ILPs several
years ago are seeing charges leap now that they are older.
Once a policyholder hits 40, an ILP's annual insurance charges
typically rise 'exponentially', says Life Insurance Association (LIA)
president Mr Raymond Kwok, who is calling for greater transparency on the
issue.
The problem lies in the small print. Most people's eyes would have
gone to the policy's 'benefits' table, illustrating how much their
investments would increase each year based on growth rate projections of 5 and
9 per cent.
No doubt they would have been tantalised by the big figures their lump
sums grew to at those rates - even though many financial advisers
nowadays say such high percentages are unrealistic.
What people probably glossed over were figures in a column generally
labelled 'effect of deductions'. With no breakdown given of the
'deductions', few, if any, policyholders would have realised these contained
the costs of coverage for death, disability and critical illness, say
financial advisers.
The older you get, the more of a risk you are to the insurer, so it
costs more to cover you. In industry jargon, these costs are
'non-guaranteed', which means they don't stay fixed, unlike your premiums. In fact,
they rise - astronomically in the case of ILPs that have regular
premiums with high protection elements.
People may have assumed the costs were included in the fixed premiums.
But in reality, they needed to break down the costs from the effect of
deductions column to get a complete picture.
Billions of dollars worth of ILPs have been bought here, many with
Central Provident Fund savings.
In echoes of the 'critical-year' controversy which rocked insurers in
2003, at least a few reckoned they were mis-sold the product. In that
scandal, policyholders were shocked to find that, due to the fall in
value of an insurer's investments, they had to keep paying premiums longer
than expected.
That controversy largely involved one big-name insurer. This time, all
except UOB Life offer the so-called regular premium ILPs.
Prudential Assurance was the first insurer to launch the first regular
ILP here in 1992.
As for Mr Yee, his financial adviser from Cornerstone Planners, Ms
Evelyn Seah, who did not sell him the original policy, noted that there
may come a time when the pool of units in the investment part of the
policy will be depleted.
This is because 'units will be deducted from this pool to pay for the
increasing non-guaranteed insurance and administrative charges when the
annual premium is not sufficient to cover these charges.
'When it happens, the policy lapses. That's the time when you may need
the cover most.' -
I think people who do not buy insurance do not understand how grave the above issue is. Billions of dollars gone down the drain. A real scam!!
-
Not surprising
-
Always feel that insurance is over-rated.
-
With NTUC and many GLCs engaged in providing insurances, we cannot expect them to listen to such feedbacks unless there is a major crisis coming like that of the scale of Asian Financial Crisis.
Many changes so far that have happened happend not because of self-enlightened spirit or management initiatives but due to external forces at works. Examples : PSA, SIA, HDB. Other than these no actions will be taken from my observation.
This is one reason why government should not get involved in business as they will have difficulty in being objective once their own companies are affected.
For now, any idea whether CASE or any departments will be charged with responsibility to oversee potential conflict situation or self-interest in contract ?
-
I am from NTUC Income. I hereby extract the reply from NTUC Income CEO to this topic. It has been sent to ST, but not sure whether ST wants to publish it.
************************************************************
Sent to:
Editor
Forum Page
Straits Times
I refer to the article entitled "Insurance time-bomb set to explode" (ST 12
Feb).
Your correspondent quoted the example of an investment-linked policy taken
by Kelvin Yee. This policy had insurance charges that increase with age. The
charges are projected to consume the entire premium at the older ages.
Your article may give the impression that all investment-linked policies are
structured in this way. This is not correct.
The investment linked plan from NTUC Income, called the Ideal Plan, is
structured differently.
The single and regular premiums are used entirely for investment. The
charges are modest and are clearly disclosed in the policy. The net amount invested
is expected to produce an attractive return to the policyholder.
The performance of our investment funds, especially the combined funds,
have been exceptionally good during the past two years. The growth and balanced funds
produced a total return of over 25 percent, after deducting expenses.
Over the longer term, we aim to earn a return of 6 percent per annum, net of
expenses. This is not guaranteed, but is a realistic projection.
We collect a separate premium for the insurance riders that provide death,
accident and medical protection. This premium is usually fixed at a level
rate for the entire duration of the rider. It is paid separately, and not a
deduction of units from the investment.
The cost of the riders are about 10 to 30 percent lower
than similar coverages under a separate insurance policy.
In the future, jobs are less certain and most people may be required by
circumstances to make a few career changes.
It is advisable for these people to select a flexible investment and
insurance plan, such as an investment-linked plan. It allows
the policyholder to change the regular savings to reflect their
earnings, and even to stop saving for a temporary period, without any
penalty.
It still impose the discipline of regular savings that comes with
a long term insurance plan.
I hope that you will publish this article, so that your reader will get a
more balanced picture about the features of an investment-linked plan.
Tan Kin Lian
Chief Executive Officer
NTUC Income
************************************************************
Those who want to know more about the Ideal Plan, may email me at [email protected] -
Can I say that NTUC Insurance is better because it is linked to the Government?
-
It's time to terminate the policy.