Being a wise investor is about actually knowing what insurance policy you’re signing up for in the first place, your basic rights as a consumer and the best way to protect it.
By Kevin Neoh
Not too long ago, we read a post that went viral on social media about how a person, who had been paying for several insurance savings plan for more than a decade, realised now that the policies were not what he initially signed up for.
The victim in this story complained that he had been led to believe that he only had to service the premium for a fixed period of years and then “the policies will take care of itself”.
Besides ‘sharing’ this post, many netizens also came forward to share similar experiences. A few even made the much-dreaded conclusion that insurance is unreliable and insurance companies are not to be trusted.
While others opined that the policy owner should have been more careful and conducted his due diligence, which could have prevented such an unfortunate incident.
A few also expressed concern about their own insurance policy and its coverage, and were worried they would be the next victim.
Granted such incidents paint a very negative picture of insurance; however, it is often not the case.
In these instances, I feel that many policy owners or financial consumers in Malaysia lack proper understanding about what an insurance policy is.
What you should know?
An insurance policy is a commercial contract in which the insurer and policy owner (proposer) enter into, and is legally binding for both parties; so that the rights of policy owner becomes an obligation to the insurance company, and vice versa.
Therefore, it is important for the financial consumer to understand their rights and obligations under such an agreement, besides paying the premium at the determined frequency.
In this case, the policy holder had taken an endowment insurance plan, or commonly known as savings plan.
This is an insurance agreement in which the insurance company agrees that should the policy owner live long enough to see through the duration of coverage, it will pay the policy owner a sum of money, thus mitigating the risk that the policy owner outlive his wealth.
What most of us know is this policy will pay the policy owner a sum of money according to the ‘sales illustration’ document provided by the insurance agent.
However, what we fail to understand is that this sum of money payable under the contract can be divided into two broad categories – guaranteed and non-guaranteed benefits.
As such, it is crucial for us to first understand if the “attractive” figure is mainly from the non-guaranteed or guaranteed portion.
Chances are, most of the maturity benefits ‘promised’ by your insurance agent are numbers that hardly materialise because it appears under the non-guaranteed column; what it means is there is a risk that this number will not be realised in the future.
Of course, one may argue that this number must be possible; otherwise it would have no purpose being shown in the document, right?
The possible reason for it to not materialise is partly because in this document called “sales illustration’, most of the figures are based on a projection made on the future, including the investment environment in future.
This also includes the assumed projected rate of return on the bonuses accumulated by the insurance company, which is usually assumed to earn between 4.0% – 5.5% per annum (p.a.).
If this rate is highly correlated to the deposit rate, and that the 5.5% p.a. (which is high) interest rate is unlikely to stay uniform during the stipulated timeframe, therefore, your accumulated bonus is assumed to grow at this rate for 15-20 years.
In this scenario, chances are the final amount will be a number that is very much inflated; thus not realistic. This hurts the chances of receiving your maturity benefits as printed in the sales illustration. After all, any illustration is not supposed to be accurate, right?
Next, let’s look at what determines the amount of bonus a policy owner stand to receive. In the illustration, there will be a good (X) and bad (Y) scenario. Whether a year is good or bad is very much dependent on the performance of the participating fund of the insurance company.
Should the investing performance of the life fund for one insurance company exceed the benchmark for X scenario, then a higher bonus will be credited, and vice versa.
Usually, the benchmark for X is about 6% – 7%, and since insurance companies invest most of their funds into conservative assets like bond, equities and real property, the return performance of this life fund is unlikely to consistently stay at such a high-water mark.
Hence the non-guaranteed bonus has the risk of not being realised as promised. This also depends on how the life fund is managed.
No matter what the fine prints says, as a consumer, we should always understand our basic rights and do our best to protect it. In this instance, consumers should be aware that certain insurance agents produce self-generated sales illustrations using a spreadsheet.
However, as consumers, we have the right to ask for a Product Disclosure Sheet (PDS) and an official sales illustration; not any spreadsheet version illustration.
Also, we have the right to cancel the policy within 15 days from the day the policy contract is received.
Don’t just sign to receive the contract and keep it in your drawer for ten years, only to get it out and realise certain clauses or terms are not supposed to be there. By the time this happens, it may be too late to do anything!
Regardless, consumers are urged to understand the financial products or instruments that they are considering. Investing after a ‘promised’ return can be like chasing a unicorn. We may never catch it.
It is foolish to sign on the dotted line and invest your hard-earned money into anything if you fail to consider your life goals, and how this particular product or instrument will fit into your plan.
As a wise financial consumer, it is imperative to first understand your own aspirations, and make a plan using the aspiration as a foundation.
It also means we should refrain from buying or investing into something just because our friends or neighbour do.
Personal finance, after all, is supposed to be very personal; we cannot just follow other people blindly, can we?
About the author:
Kevin K.M. Neoh, RFP, MBA, CFP CERT TM is a Licensed Financial Planner who is licensed by the Securities Commissions Malaysia and Bank Negara Malaysia.
A recipient of the Malaysian Financial Planner of The Year Award (MFPYA) 2016, Kevin is one of the financial planners from VKA Wealth Planners Sdn. Bhd. He can be contacted at firstname.lastname@example.org