Loss on life insurance policy

26 July 2012 

Editor, Forum Page
Straits Times

Mr. Neo Chern Siang (ST 24 July) said that policyholders who wish to discontinue their life insurance policies have the option to take a policy loan or to convert to a paid-up policy, instead of surrendering their policy.

These other options generally do not help a policyholder who is financially stressed. The policy loan carries a high interest rate, and can eat away the cash value quite quickly. The paid-up policy generally gives a poor yield on the cash value.

The root of the problem is that a life insurance policy is an unsuitable tool for financial planning in an era where jobs and financial needs are uncertain. If the policyholder cannot pay the regular premium, the policy has to be surrendered at a big financial loss to the consumer.

This financial loss is caused by the high distribution cost that is taken away from the premiums paid by the consumer. This distribution cost can amount to almost two years of the premiums!

Financial advisers and insurance agents are doing a disservice to the young people by asking them to commit to the inflexible saving plan in the form of a life insurance policy that has a large front-end charge to pay for the high cost of distribution. Like Mr. Neo, many of them have to face the hard decision of taking a loss on their hard earned savings.

Even if the policyholders continued the regular savings to the maturity of their policies, they get a poor return on their savings, due to the high charges that were usually not explained to them upfront. When they found out about these charges at a later date, there were already locked into the policy.

A better choice is for the consumer to buy a term insurance policy to provide the protection against premature death and to invest their savings in other forms that can give a higher return that provided by the traditional or unit linked policy.

I hope that the Financial Advisory Industry Review (FAIR review) set up by the Monetary Authority of Singapore will look into this issue of the losses on terminated life insurance policies and find effective ways to address it.

Mr. Tan Kin Lian
President
Financial Services Consumer Association