New life insurance products

Many new life insurance products introduced in the Singapore market recently provide a poor deal for customers. It is difficult for the customer to calculate the yield on their savings, as the new products offer cash payback at certain intervals.

The products offer a poorer yield compared to the traditional products (which already provided a low yield). To get the cash payback, the policyholder has to pay an additional premium that is at least 10% more than the payback. For example, if the cash payback is $2,000 a year, the policyholder has to pay an additional premium of at least $2,200 and get the cash payback only the second year only (i.e. no payback in the first year).

Does it make sense for you to save an additional $2,200 a year to get back $2,000? It does not, but the insurance agent is trained to tell you that this is a policy that gives you cash back!

There are other products that require you to pay premium for a certain number of years and pay back the benefit over a few years later. It is quite complicated to calculate the yield, but the yield is quite low (from the few examples that I have seen).

The only way to know if you are getting a fair deal is to look at the "effect of deduction" and the "distribution cost" shown in the benefit illustration. Although it come is many pages and is hidden among a lot of other distracting information, you can ask for these figures to be shown to you, as they are mandatory. You should also read my book, Practical Guide on Financial Planning to learn how to interpret these figures and to get the benchmark on what are the fair figures.

Tan Kin Lian