The good and bad of life insurance

Someone asked me why I am against life insurance, when I spent 30 years in this industry.

Life insurance is inherently good. It provides financial security through the pooling of risk of premature death and encourages thrift and savings. Life insurance becomes bad when it is used to take advantage of the ignorance of consumers by locking them into a bad product and milking them over a lifetime.

When I run an insurance company, I offered to consumers the opportunity to get a financial product that gives them a good yield for their savings. This was made possible through operating with low expenses and declaring high rates of  bonuses from the surplus of the insurance fund.

During the earlier years, the regulators were quite strict in ensuring that the life insurance policyholders were treated fairly in the distribution of the bonuses. They inspected the insurance companies and asked them to justify their practices. The regulatory practice changed around the last 1990s under the "regulate with a light touch" regime. They allowed more leeway for insurance companies to run their operations.

This change of regulation was a big mistake. The insurance companies introduced new products that were quite unfair to consumers. The regulators allowed these practices, so long as they charges are disclosed in the benefit illustrations. Some of these products were clearly ripping off consumers.

The insurance companies also cut their bonuses on the pretext of low investment yields, but were slow in restoring the bonuses when the yields improve. This is unfair to consumers. and would not have been allowed in the earlier years. The insurance companies started to increase their marketing and other expenses, often at the expense of their existing policyholders.

This bad practices were the factors that made me now speak against most types of life insurance policies, except term insurance. I have also decided to intensify my efforts to educate the public to avoid these bad products. I hope that all young people, especially those who has just started work, learn about how to handle their own financial planning (see Practical Guide on Financial Planning) and getting locked into a long term savings plan that give them a poor yield.

Read the FAQs in www.tankinlian.com and attend the educational talks organised by FISCA (www.fisca.sg).

Tan Kin Lian