I read with interest Genecia Luo’s interview with Lorna Tan which was published in the Sunday Times yesterday.

Inside the article, she was quoted as being “a conservative investor” and her portfolio consists mainly of insurance products.

These include a whole life policy which her mum bought for her when she was born, and two investment-linked insurance plans (ILP) which are invested in China, India and Singapore funds.

I want to point out to all my readers here that ILPs are definitely not a conservative investment!

Just because a policy is purchased as an insurance product does not mean it is low risk. Depending on the underlying funds that the ILP invests in, the policy can be as high risk as investing in stocks and shares. In the worst case scenario, the value of the funds can dwindle down to zero (if they perform badly) after paying off the mortality charges.

The 5% and 9% projections that you see in the benefit illustration are only projections and nothing else. They can be misleading and seriously, MAS should make it mandatory to include two columns for -5% and -9% as well.

There appears to be a mis-match between Genecia’s risk profile and what she is investing into.

I have seen many similar cases of conservative investors who have been exposed to more risks that they had expected because they had wanted to buy some life insurance but were sold an ILP instead of a traditional product.

Genetia herself mentioned her worst investment to date was buying a single premium ILP in 2006 for $10k, and subsequently selling it in 2009 for only $500. This is a 95% loss in just three years!

I hope Genetia knows (or someone can point out to her) the risks she is being exposed to.

Lastly, I want to clarify that I’m not bashing ILPs in general here but more to highlight that people need to know what they are buying or have bought. Because investment and insurance products are long term in nature, you don’t want to be in for a nasty surprise twenty or thirty years down the road because by then, it will be too late to repair the damage.

Adrian Khiat wrote in to the ST Forum on the moral hazards of having an insurance plan that covers 100% of the hospitalization bill.

I agree with most of his view points.

Anyone who has been to a buffet will know what I mean. The eating behavior is very different when you are paying for a buffet compared to paying for an ala carte meal.

If you do not have to pay a single cent for your entire hospitalization, you will have a greater tendency to go for the best option where wards and treatment are concerned.

Single bed or 6-bedded? Of course you will go for the single bed.

Higher claims will ultimately lead to higher premiums.

The higher premiums that you pay over a lifetime might actually be more than the co-payment that you would have to pay from time to time if you had opted for an insurance plan that requires a little bit of co-payment on your part.

So, before you take up a plan that covers 100% of your hospitalization bills, take a look at the premiums carefully and ask yourself whether you will be able to afford the premiums when you are 60+ or 70+ years old.

Next week, AIA will be launching the S$ 2Pay5 plan, a 5-year non-participating, limited 2-year pay product (Edit: The plan has been launched already).

How it works is that you will need to pay annual premiums for two years, and then receive a lump sum payout at the end of five years.

The plan offers a guaranteed yield ranging from between 2% to 2.2% depending on the annual premium amount.

• 2.00% :  $5,000 - $9,500
• 2.10% : $10,000 - $14,500
• 2.15% : $15,000 - $24,500
• 2.20% : $25,000 onwards

For example, if your annual premium is $10k, your maturity benefit will be

10000 x 1.021 x 1.021 x 1.021 x 1.021 x 1.021 + 10000 x 1.021 x 1.021 x 1.021 x 1.021 = $21961

Suitable Market

Individuals who require a guaranteed return of 2% over 5 years and does not have any immediate cash needs.

Unsuitable Market

Individuals who want short term liquidity.

Risks of the product

• Surrender penalty upon early withdrawal
• Automatic surrender due to non-payment of 2nd annual premium

The death benefit of this plan is the higher of total premiums paid (excluding advance premiums, if any) and the cash surrender value

The plan also provides for an additional 10% accidental death benefit in the first policy year.

If you are interested in this plan, you can contact me here.

Over the weekend, it was reported in the newspaper that insurer Axa Life was trying to claw back S$7 million worth of commissions paid out to Finexis, one of the financial advisory firms in Singapore. The reason was over the high lapse rate or surrender of a particular term plan, Future Protector, that Finexis was aggressive marketing for Axa Life.

You can read the whole article reproduced on my colleague Patrick’s blog below. He’s also the same person quoted inside the article.

Insurer Fumes Over Policy High Lapse Rate

How the marketing worked was that Finexis would offer to pay for the first year’s premiums of this plan to their prospective clients. With such a offer, many people took up the deal. While sales figures looked extremely good to both Finexis and AXA on the surface, what was not apparent to AXA was that many of these clients would cancel the plan after the first year. And so they did.

Of course, this outcome was pretty obvious to many of us in the industry.

In the first place, the act of offering any form of rebates as a inducement to consumers is already a questionable practice, as mentioned by Life Insurance Association (LIA) president Tan Hak Leh.

What made the exercise a complete financial disaster for Axa was that they had paid commissions of almost 120% of the first year’s premiums to Finexis. This excludes additional bonus that was paid for meeting sales target.

This entire episode would have been avoided if AXA Life had not paid out in commissions more than what they had collected in premiums.

Other countries like UK and Australia are already moving towards the practice of zero commissions from the sale of products. I don’t see this happening in Singapore any time soon but one way we can really move forward is to regulate the commission structure that insurance companies can pay to their agents or distributors.

A heavy front-loaded structure provides an inherent bias for agents to churn products and often leaves clients without anyone to service them after their agent leaves the industry. In theory, they would be assigned “replacement” agents but without any financial incentives, the level of service will definitely be affected. Who wants to work for free? Or rather, who has time to work for free?

Currently, is it common for insurers to pay commission over the first five years. For example, it can be something like 50%, 25%, 10%, 10% and 5% over five years. A “not front-loaded” commission structure can be something like 10% for the first year and 5% for the next nineteen years.

The former structure would be one that is commonly used by most life plans nowadays while the second structure is used by the private shield plans. Note that they might be some exceptions. For example, one company already pays a commission of 10% of the premiums over the lifetime of one of their product. So, if the first year’s premiums is $500, the commission is only $50.

However, moving towards a less front-heavy commission structure will not come from within the industry. Any insurance company that “moves first” will be afraid that their agents or distributors switch to promoting for other companies. Who will be brave (or foolish) enough to test the market?

The only way for this to happen is by regulation.

With every company forced to make the change, it will become a level playing field.

The impact of this change will see upfront commissions drop significantly for insurance agents. Unable to sustain for long, many of them will leave the industry and we will see less agents in the market. Imagine a fresh graduate joining the industry earning only $50 for each product sold. He or she will need to sell almost 50 such policies in a month just to make $2500 in commissions.

Not many will be able to sustain long enough financially to stay in the industry.

For a start, perhaps we can ban upfront commissions that are more than one year worth of premiums.

Join us in this seminar and drive off with invaluable knowledge on motoring essentials.

Learn the right mindset for safer driving and avoidance of accidents; get tips for buying cars; understand your options for motor insurance, as well as the correct procedures for making a claim. Topics covered:

TIPS FOR BUYING A CAR
Avoiding & Settling Dealer Disputes by Mr. Thevanathan Pillay – Asst. Director (Legal), CASE

5 PILLARS OF ROAD SAFETY
Call for Action for Road Safety by Mr. Bernard Tay, President, AAS

UNDERSTANDING THE HIGHWAY AND TRAFFIC SYSTEM TO DRIVE SAFELY
by Assoc Prof (Adj) AP Gopinath Menon, Vice Chairman, Singapore Road Safety Council

MCF: UNDERSTANDING WHAT TO DO IN AN ACCIDENT TO ENSURE A PLEASANT MOTORING EXPERIENCE
by Mr. Derek Teo, President, GIA

Date: Saturday, 24 July 2010
Venue: Suntec City Convention Centre, Meeting rooms 208 & 209

Time:  10AM – 1PM

Fee: S$5 per person

Please register via CASE at rsvp@case.org.sg or call 6461 1888 for further enquiries.

A FREE GOODIE BAG will be given away to every participant. Please book early as there are only limited seats available.

This event is organised by CASE and Automobile Association of Singapore.