A lady have wrote in to The Straits Times Forum on the 25th July 2011 sharing her experience of getting insurance advice from 3 different banks (Banks should not act like insurance agents). She and her husband visited the banks with the impression that banks are independent and would not push only their own companies’ products. But they met representatives from each bank that focused on only one of the insurers’ policies.

There are 3 main distribution channels in Singapore:

• Through Agency – All products from 1 insurer distributed through their own agents. A small number of products may be distributed through banks or IFAs.
• Bancassurace – Products from a few insurance companies distributed through the banks’ relationship managers/consultants
• IFA channel – Most products from majority of the insurance companies

Generally, agents and IFAs do not have fixed salaries and make their living based on commissions. A minority charge fees for advice. Bank consultants are paid a salary and commissions for productions in excess of their sales targets.

The general argument in favour of the agency model is that the agents, being only exposed to their own products, know them inside out. The counter-argument is that they only have their own company’s products and have no choice but to promote them. Commissions may drive them to promote only the high-comm products. I have come across agents who mis-sold products even though they should have known them inside-out. I have also seen insurance portfolios with all high-comm policies. On the other hand, I do know of agents who does a good job and really know their stuff.

Because they are paid a salary, bank consultants have to meet sales targets. This is common in the sales industry. Sales targets drive people to work hard. Simple. Problem is, sales targets may drive the consultants to choose promote the products that will help meet their targets or engage in aggressive selling practices. There have been a number of criminal offenses committed due to the pressure of meeting sales targets.

IFAs on the other hand, claim that they are independent and is able to choose from a wide stable of products to suit the clients’ needs. While it is a fact that they have a wide stable of products, it may not be so straightforward to judge if they are really independent. More products does not mean that the best ones will be picked. In the extreme scenario, the rouge IFA can do more damage for picking the most lousy stuff with the highest comm. Give a full set of tools to a sculptor and he can come up with works of art. Give the full set of tools to a criminal and he and think of all sorts of ways to cut you up!

So, back to the question: how can you get the best advice? There is no way of guaranteeing it.

Ultimately, it is the adviser who makes the difference. The perfect scenario will be a ethical and competent adviser having access to all products.

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An old lady went to the insurer after she received a letter stating that her policy had lapsed. Shocked as she is, she was told that  the ILP had lapsed because the units in her ILP policy were insufficient to pay for the charges. The lady said that the money were her ‘coffin money’ (棺材本) and she made complaints.

In came the compliance department to investigate the case. It was found that the agent who sold her the policy had already left the firm and the new agent did not take note if the cash value is enough to meet the charges.

There is nothing extraordinary about this story. It can happen to any ILP policy holder.  In the policy wording is a statement that the policy would lapse if the cash value is insufficient to meet policy charges. The mortality and mobility charges increases with age.

When the policy holder is young, the charges will be low, reflecting the lower risk of a younger life. The premium is more than enough to pay for the charges. As the policy holder ages, the charges increase, finally meeting the premium at some point in time, normally in the late 50s or early 60s. From this point onwards, there would be no more investment as all the premium will be used for the charges. But the policy holder continues to grow older and the charges continue to increase. To pay for the unpaid charges, the insurer will deduct from the accumulated cash values. Finally, in the event that the accumulated cash value is insufficient to pay for the charges, the policy lapses.

Some people may point at finger at the agent who took over the policy for not monitoring the cash values. That in my opinion, may not be totally justified. Why?

First, it is not the 2nd agent that sold the policy. Why did the original agent sell an ILP to an old lady? Consider that ILPs only got popular in the 90s, the old lady would not be that young at that time.

2nd, even if the 2nd agent took note of the policy values, what can he do? If he ask the old lady to surrender the policy, how much surrender value would be left? What if a insured event occurs after surrendering of policy? The damage is already done when the policy is sold.

Everyone needs to earn a living. In taking over the servicing of the policy, the new agent would probably not be taking any commissions or count as sales targets. Most or all of the commissions would probably have been taken by the original agent. The 2nd agent has to find other clients or in this case, sell something to the old lady. The commission/pay structure does not promote servicing on a long term basis. Would anyone work for free? Advisers work to earn a living, not work for charity.

Unlike other with-profits plans like endowment or whole life, the responsibility on the investment lies with the policy holder, not the insurer. If there is no proper monitoring, disasters could happen, just like what happened to the old lady. When someone gets an ILP for protection, there are some basic questions to answer. Would the policy-holder be savvy or active enough to monitor the investment values? Would the agent who promised to do that for you be around years later?

As ILPs got popular in the 90s, would may see an dramatic increase in ILP complaints in 10 year’s time.

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The interest rate for SMRA will be pegged to the 12 month average yield of the 10 year Singapore Government Securities (10YSGS) plus 1%. The 12 month average 10YSGS yield from September 09 to August 2010 is 2.52%. Plus 1 % will give 3.52%. This is lower than the current 4% interest rate for SMRA. Figure 1 shows the historical 10YSGS yield.

As we can see, CPF account holders would have received less than the current 4% interest rate over the last 3 years should the new rule be implemented in 2007. From the graph, we can also see that the low bond yields occur during crisis. This comes as no surprise as investors take flight to quality during market panics and drive down yields. This in turn would cause the SMRA interest rates to comes down.

Singapore uses the exchange rate to combat inflation and the Sing dollar is seen as a strong currency. The 10YSGS yield has been relatively low over the last 10 years. We cannot expect the government to install the 4% floor every time the peg falls below 4%. Also we should not expect the SMRA yields to be much higher than 4% when the world economy recovers.

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Many industry players view this ‘free’ 1st year coverage as a marketing gimmick. Many other industries run similar campaigns. For example, electronic stores may offer a free DVD player for purchase of a LCD TV. The intention of promotion is to get the attention and interest of consumers and to sell them other products. An important to answer is – Have the products that have been proposed meet the needs of the client?

The high lapse rate signal that the policy owner do not view that coverage as a need. The strong economic numbers would make financial hardship an unlikely reason for the phenomenon. Many promoters of similar ‘free’ campaigns would tell you “If you don’t like it, you can just cancel it’. Only those that have been approached know if similar tactics have been used.

I had the thought that most of the policy owners would have conveniently continued with the policy after the 1st year as it would be ‘troublesome’ to cancel. After all, it is a common tactic that telcos and tele-marketers use to get consumer to sign up plans. To my surprise, this has not been the case. However, no lapse numbers was published. We do not know it is 20% or 80%.

There is no free lunch in this world. If you are offered something for ‘free’, most probably, you will be paying through other means.

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In an Straits Times article on 26th June 2010, Excuse me, are you an independent adviser?, the issue of volume bonus was raised by Lorna Tan. Volume bonus are extra bonus for hitting certain sales quota or renewals. Volume bonus may be paid in advance for the commitment to deliver certain amount of sales in a stipulated time. Volume bonus can sway the firm and the adviser to push certain products.

A ‘fee-only’ advisory firm  was quoted as treating its independent status seriously by rebating commission. The question to ask is whether ALL commissions are rebated. While a ‘fee only’ model may be a good idea, it does not remove the chances of unethical conduct totally. As the income is derived from fees, an unethical adviser may try to position the client into a fee paying setup when a commission-based solution may be more suitable.

Different advisory models have its pros and cons. Some models are inherently handicapped by the range of possible solutions while others may be abused by the adviser. At the end of the day, the honesty of the adviser plays a key role in the journey to one’s financial goals.

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The Minimum Sum Scheme

Depending on your birthday, the corresponding  Minimum Sum (MS) will be different for different ages. This MS would provide a monthly payout that would last approximately 20 years. The prevailing Minimum Sum (MS) is $117,000.

The Draw Down Age (DDA), ie when you can start receiving the payout, is different for different ages.

Table 1 MMS DDA

Assuming a CPF member aged 55 having the MS of $117,000 fully in cash, he can start receiving a monthly payout of $1,040 for about 20 years. The interest rate is assumed to be 4% per annum.

Payout under CPF LIFE

Certain CPF members will automatically be included under the CPF LIFE scheme while others can opt to join in. Table 2 below indicates the various scenarios.

Table 2 CPF LIFE Eligibility

Upon joining CPF LIFE, depending on the age, gender and plan selected, a certain percentage of the RA savings will be transferred to the CPF LIFE account as premium for the annuity. The Table 3 shows some figures derived from the CPF LIFE Payout Estimator. As the LIFE Plus and LIFE Income plan deducts ALL of the RA savings as premium, only LIFE Basic and LIFE Balanced plan is shown.

Table 3 CPF LIFE Premium Rate

In addition to the Annuity Premium deducted upon joining CPF LIFE, the extra 1% interest earned first $60,000 in the SMRA savings and and top ups (if any) will also be deducted as Annuity premium around 2 months before DDA in the same ratio as the initial deduction when first joining CPF LIFE.

Payout will start with whatever amount that is left in the RA account after deducting the annuity premium plus earned interest. Payout from the CPF LIFE Annuity will begin after the monies in the RA account exhausted. Figure 1 shows how the  payout is derived from the RA account and the CPF LIFE Annuity.

Figure 1 CPF LIFE Annuity Payout Graph

The Table 4 shows the annuity payout starting age for the different ages. Only 3 of the plans; LIFE Basic, LIFE Balanced and LIFE Plus provides a refund of any unused premium. LIFE Income does not provide any refund of annuity premium.

Table 4 Annuity Payout Start Age

Interest gain from the annuity premiums is paid into the Lifelong Income Fund and pooled together with interest earned from the annuity premium from other CPF LIFE participants to fund the life long payout. Meaning to say, participants will potentially loose the interest if he/she pass away too early. However, the participant will gain more than his/her rightful share of the interest by living beyond a certain age. The Table 5 illustrates the estimated  amount of interest lost at different passing age for a 55 year old make with $117K in the RA. Note that for LIFE Income, the ‘loss’ includes the annuity premium as this plan does not provide any refund of unused premium. Calculations do not take into account the extra 1% interest for the first $60K from the SMRA account nor any top-ups. Negative figures indicate a ‘gain’ for the participant. Also note that the red region does not indicate the exact age of end of premium refund as the table only illustrate ages in 5 year increment. The calculations are from my own understanding of the scheme and is very much a rough estimation. Readers should be mindful that there could be errors in my assumptions and/or calculations.

Table 5 Estimated Interest Lost

The following table shows the estimated break-even age for the various plans in order to get back all the principal and rightful interest for a 55 year old male with $117K in the RA account with a 3.75% annual interest . As the monthly payout is different, different plans will give a different break-even age. Dying before the break-even age will result in a ‘loss’. Again, the extra 1% interest from the first $60K from the SMRA account is not taken into account. Figures shown are rounded to the nearest whole number.

Table 6 CPF LIFE Estimated Break-even Age

Compared to the MMS payout, CPF LIFE plans (other than LIFE Income) give a lower monthly amount but provides a lifelong income, unlike the MMS which lasts around 20 years. For MMS, there won’t be any ‘loss’ of principal or interest as any balance in the Minimum Sum will be refunded to the beneficiaries. CPF LIFE participants face a possible  ‘loss’ of principal and/or interest as only the unused annuity premium is refunded for 3 plans. CPF Income does not refund any annuity premium at all. CPF LIFE participants take on this risk of loss in exchange for a lifelong income. However, as the interest rates and mortality rate are not guaranteed and subject to change, any changes to could impact the payout amount.

As there are too many permutations to the payouts depending on gender, age, interest and RA amount, the above comparison for CPF LIFE are done for a 55 year old Male with $117,000 in the RA account. Interest rate is assumed to be 3.75% pa. Also, limited information relating to how the payout calculations are arrived at is clouding the understanding of CPF LIFE.

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There have been no official word on the reason for the plan withdrawal. My personal take is that:

• The low interest rate environment has made it difficult and risky to offer high guaranteed cash values. Low bond yields is a bane to the insurer. This is 1 of the reasons quoted for the controversial restructuring of NTUC’s bonus structure in 2008.
• The uncertain investment climate is no help for policies with high guaranteed values. Investment performance going forward may be choppy. Low bond yields have compounded the problem.
• The insurer is under the ‘curse’ of being the only insurer with 100% record of meeting bonus projections. Any insurer would give an arm and leg to have this distinction. Laden with the task of meeting the bonus projections for the legacy of old policies, newer ones may have to come with lower bonus projections. We are already seeing more participating plans (from other companies) with lower bonus projections.

I certainly wish to be wrong and see TM AsiaLife come out with even better endowment plans. But I do not harbour high hopes. Lets keep our fingers crossed.

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When I first got to know they are going to place advertisement in the papers a couple of days ago, I was worried that they will place fancifully colored full page advertisements that cost tens of thousands of dollars. I was pleasantly surprised to find their their advert taking just slightly more than a quarter page in simple black and white.

This insurer rarely places advertisements in the media. In my opinion, this is good for policy-holders as marketing cost is lowered, thus translating into better value for policy-holders. When coming up with premiums, insurance companies has to take into account mortality and morbidity rates, investment income, expenses and a profit margin. Advertisement is a form of expense. A lower expense would normally point to a lower premium, if not, a bigger amount for investment. Investment return is an unknown future occurrence. Expenses is a known current outflow. If the outflow is lower, this would naturally mean a lower risk for the insurer and thus the policy-holder. However, a lower expense would not mean lower premiums as the insurance company may use different mortality/morbidity tables, take different investment return estimates or go for higher profit margin. A competitive market with balanced distribution channels would mitigate the chances of having too high a profit margin.

In my opinion, the responsibilities of the insurance company is not to generate publicity but to provide the promised coverage and a reasonable return in the case of participating plans. But without publicity, consumers may not even know that such companies exist. Many man-in-the-street would never bother to check out such companies. The responsibility then rest with advisers who then have to recommend the products with superior product features and not the ones with superior commission structures. This is sadly, easier said than done.

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