Hidden charges may eat into investments
THE higher charges result from the increased costs of
insurance cover as people age and the likelihood of
illness increases.
The costs could end up soaring so much that they eat
into the 'investment' part of a person's policy,
resulting in it lapsing altogether. 'That's the time
when you may need the cover most,' says financial
adviser Evelyn Seah.
Feb 12, 2005
Insurance 'time-bomb' set to explode
by Lorna Tan
WHEN engineer Kelvin Yee bought an investment-linked policy
(ILP)
eight years ago, he thought he had done the right thing: it gave
him life
insurance, while at the same time his savings worked harder by
being
invested in unit trusts.
But Mr Yee, 37, now finds that the investment product he purchased
has
been described as a 'time-bomb' by one financial adviser - one
which is
set to explode as a new scandal on the insurance industry
scene.
Mr Yee, along with potentially tens of thousands of others who
bought
the hugely popular policies over the years, has found out that, as
he
gets older, hidden increased insurance charges mean that the
premiums
that are meant for investment purposes are being eaten up just to
keep
the policy going.
Under most ILPs, premiums are invested in securities such as
unit
trusts and pay for life insurance coverage as well. But Mr Yee's
annual
insurance charges are set to escalate at such a rate they will one
day
outstrip the annual premium he pays.
When he turns 67, the charges work out to double that of the
annual
fixed premium of $3,600 for coverage of $100,000. At 73, the
charges are
expected to climb to $11,500 and when he turns 81, they will surge
to
$20,000.
Mr Yee said: 'This policy does not meet my needs. My impression
was
that it was a savings plan that gives decent annual returns of 2 to
3 per
cent guaranteed, at least.'
He alleged that he was unaware of the existence of the
increased
charges until a financial adviser whom he consulted did the
sums.
The higher charges result from the increased costs of insurance
cover,
as people age and the likelihood of illness increases.
In some cases, the costs could end up soaring so much that they
eat
into the 'investment' part of a person's policy, resulting in it
lapsing
altogether.
The problem is emerging now as people who bought such ILPs
several
years ago are seeing charges leap now that they are older.
Once a policyholder hits 40, an ILP's annual insurance
charges
typically rise 'exponentially', says Life Insurance Association
(LIA)
president Mr Raymond Kwok, who is calling for greater transparency
on the
issue.
The problem lies in the small print. Most people's eyes would
have
gone to the policy's 'benefits' table, illustrating how much
their
investments would increase each year based on growth rate
projections of 5 and
9 per cent.
No doubt they would have been tantalised by the big figures their
lump
sums grew to at those rates - even though many financial
advisers
nowadays say such high percentages are unrealistic.
What people probably glossed over were figures in a column
generally
labelled 'effect of deductions'. With no breakdown given of
the
'deductions', few, if any, policyholders would have realised these
contained
the costs of coverage for death, disability and critical illness,
say
financial advisers.
The older you get, the more of a risk you are to the insurer, so
it
costs more to cover you. In industry jargon, these costs are
'non-guaranteed', which means they don't stay fixed, unlike your
premiums. In fact,
they rise - astronomically in the case of ILPs that have
regular
premiums with high protection elements.
People may have assumed the costs were included in the fixed
premiums.
But in reality, they needed to break down the costs from the effect
of
deductions column to get a complete picture.
Billions of dollars worth of ILPs have been bought here, many
with
Central Provident Fund savings.
In echoes of the 'critical-year' controversy which rocked insurers
in
2003, at least a few reckoned they were mis-sold the product. In
that
scandal, policyholders were shocked to find that, due to the fall
in
value of an insurer's investments, they had to keep paying premiums
longer
than expected.
That controversy largely involved one big-name insurer. This time,
all
except UOB Life offer the so-called regular premium ILPs.
Prudential Assurance was the first insurer to launch the first
regular
ILP here in 1992.
As for Mr Yee, his financial adviser from Cornerstone Planners,
Ms
Evelyn Seah, who did not sell him the original policy, noted that
there
may come a time when the pool of units in the investment part of
the
policy will be depleted.
This is because 'units will be deducted from this pool to pay for
the
increasing non-guaranteed insurance and administrative charges when
the
annual premium is not sufficient to cover these charges.
'When it happens, the policy lapses. That's the time when you may
need
the cover most.'
