Growth in life insurance sales

The life insurance sales grew by 40% during the first quarter of 2011. However, the total assets grew by only 8% - a large part of it can be attributed to the higher stock market values. What account for the difference?

I suspect that a significant portion of the increase in sales is due to replacement of life insurance policies. Many insurance companies introduce new insurance products every year. Their insurance agents use the new products to get customers to stop an existing policy and "upgrade" to a "better policy". This is called "replacement of policy". When it happens, there is really no increase in sales. However, the insurance company usually count the new policy as a sale and does not deduct the termination of the existing policy.

When a life insurance company reports a spectacular increase in sales, the real increase may be quite small, as a large part can be attributed to replacement.

When the policyholder replaces a policy, the policy has to incur the upfront expense all over again. This can be up to 2 years of the regular premium or 5% on the single premium. The cost is exorbitant, and eat away the yield on the policy - giving a poor net yield. The policyholder is usually not aware about these high charges and may be misled by the high "projected yield".

Many investment-linked policies are still being sold on the high projected yield of 9%. The policyholder is not told that the net yield, after deducting the charges, is only 5% (i.e. a reduction in yield of up to 4%. If the real yield in the future is 6%, the net yield will only be 2%, which cannot cover inflation. This is a poor yield, considering the investment risk that has to be borne by the policyholder.

When an insurance agent approaches an existing consumer to recommend a new product, the consumer should reject the recommendation. There is a high risk that the consumer will be taken for a ride. I am not aware of any new insurance policy that make sense for a consumer, considering the high charges that are taken away to pay the agent and to make profit for the insurance company.

Read about the evaluation of the insurance policy from my book, "Get Value from your Life Insurance Policy', which is available from i-shop.

Tan Kin Lian