Insurance 'time-bomb' set to explode

Shocking Discovery On My ILP

Feb 12, 2005

Investment-linked policies incur rising costs which buyers may not be aware of

By Lorna Tan
Finance Correspondent

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.'
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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.