The Shocking Case of An Insurance Policy
Just last week, there was a shocking case of an insurance policy which went viral. Apparently, this person's dad bought an endowment policy from prudential in 1994 where the maturity payout of the policy is suppose to be $42,000. He got a shock when his dad got a cheque of only $20,000+ just recently when it matured.
What happened to the shocking case?
Throughout the past few years, I've reviewed my own insurance policies, both which I bought when I was still a student and those which my parents bought. I've took actions to eliminate the unnecessary premiums which I've been paying and make sure I have enough insurance coverage also. For the case above, it was an unfortunate case where the maturity payout was less than what was expected. For us to know what happened, we must first understand how an endowment policy works.
Insurance, as the name implies, should cover us for some sort of misfortune such as death, critical illness and disability. All insurance policies will cover us for some of those mentioned but most of us would have bought policies with savings and investment elements also. Whole life plans, endowment and investment link policies all have the savings and investment elements in it.
Breakdown of the insurance policy
1. Guaranteed and Non-Guaranteed
If we take a closer look at our insurance policies, we will always see a guaranteed and non guaranteed portion in the policy illustration which is prepared for us by the insurance agent. The policy illustration is only applicable for plans which have insurance and savings/investment elements in it. For plans which are only for insurance coverage, such as term plans and personal accident, there is no such illustration needed as the premiums paid are only for insurance coverage.
The guaranteed portion is the amount which we will definitely be able to get at the time of the illustration. If you look at this portion in your benefit illustration, it is very low. The amount you get back just on the guaranteed portion alone will 100% be lesser than the premiums you paid.
Then, there is the non guaranteed portion which seems like a lot of money. This non guaranteed, as its name implies, is not guaranteed to you. The amount is based on the projected investment return which your insurance agent put in when he/she did the benefit illustration. This is the tricky part. Some agents put in projected investment return so high that is it really quite impossible to achieve. Many people who bought insurance policies many years ago back in the 1980s and 1990s, have very high non guarantee amounts because the projected investment return was put in much higher in the past. It is understandable as interest rates were so high back then and we can easily get 5% just putting money in the bank. This doesn't apply to now at all.
Therefore, if we really want to know the value of our policy, we can actually get a revised policy illustration or check the actual value of the policy with the insurance agent of the company directly. This will ensure we do not get a shock when the time comes for us to cash out.
2. Not all Premiums are put into the policy value
The premiums we pay on the whole life, endowment and investment link policies are not all part of the policy value.
Let's breakdown the premiums into a few portions:
My dad bought this prudential savings plan twenty years back and he was supposed to get 40k+ this year during March. However, they've only sent my dad a cheque for 20k+ (the initial investment is 30k+).
My family went up to the prudential office to lodge a complain and to enquire as to why the company isn't giving the full sum as promised on the contract. The company dismissed my dad with a convenient bullshit excuse " our company isn't earning much so that's the sum you'll have ".
Is this ethically right? What's the point for anyone to save with prudential if you're going to make a loss in the end after 20 years? That money could've been many times more if my dad invested in other financial instruments and inflation.
Is there any case if we were to sue them? My parents are just Hawkers, I don't understand why you've to make the old generation suffer so muchI have reposted the original post on Facebook above. Insurance is always a complicated topic. Buying insurance is definitely a long term commitment as we will have to continue paying the premiums for at least 20 years and more. If we surrender early, we will lose a lot of money.
What happened to the shocking case?
Throughout the past few years, I've reviewed my own insurance policies, both which I bought when I was still a student and those which my parents bought. I've took actions to eliminate the unnecessary premiums which I've been paying and make sure I have enough insurance coverage also. For the case above, it was an unfortunate case where the maturity payout was less than what was expected. For us to know what happened, we must first understand how an endowment policy works.
Insurance, as the name implies, should cover us for some sort of misfortune such as death, critical illness and disability. All insurance policies will cover us for some of those mentioned but most of us would have bought policies with savings and investment elements also. Whole life plans, endowment and investment link policies all have the savings and investment elements in it.
Breakdown of the insurance policy
1. Guaranteed and Non-Guaranteed
If we take a closer look at our insurance policies, we will always see a guaranteed and non guaranteed portion in the policy illustration which is prepared for us by the insurance agent. The policy illustration is only applicable for plans which have insurance and savings/investment elements in it. For plans which are only for insurance coverage, such as term plans and personal accident, there is no such illustration needed as the premiums paid are only for insurance coverage.
The guaranteed portion is the amount which we will definitely be able to get at the time of the illustration. If you look at this portion in your benefit illustration, it is very low. The amount you get back just on the guaranteed portion alone will 100% be lesser than the premiums you paid.
Then, there is the non guaranteed portion which seems like a lot of money. This non guaranteed, as its name implies, is not guaranteed to you. The amount is based on the projected investment return which your insurance agent put in when he/she did the benefit illustration. This is the tricky part. Some agents put in projected investment return so high that is it really quite impossible to achieve. Many people who bought insurance policies many years ago back in the 1980s and 1990s, have very high non guarantee amounts because the projected investment return was put in much higher in the past. It is understandable as interest rates were so high back then and we can easily get 5% just putting money in the bank. This doesn't apply to now at all.
Therefore, if we really want to know the value of our policy, we can actually get a revised policy illustration or check the actual value of the policy with the insurance agent of the company directly. This will ensure we do not get a shock when the time comes for us to cash out.
2. Not all Premiums are put into the policy value
The premiums we pay on the whole life, endowment and investment link policies are not all part of the policy value.
Let's breakdown the premiums into a few portions:
- Insurance coverage
- Critical illness rider
- Disability rider
- Life fund
As we can see above, the premiums we pay can go into different portions. Take note that the premiums we pay for the insurance coverage, the critical illness and disability riders are not part of the savings. These amount will never be given back to us.
The rest of the premiums are put into a life fund to generate some investment returns. The amount we can receive back depends entirely on the fund performance.
Managing our expenses on Insurance
Depending on your insurance policies for retirement may not be a good choice as the amount you will get back at maturity is really not in your control. It can be much lower than what you expected. For myself, I try to limit the money I spend on insurance to 10% of my income. In this way, I can save up more and plan for my own retirement which I have more control over.
It is important to review the policies we have and see what we can do to get enough coverage while limit the premiums we pay. To get the most coverage, we can consider term insurance which is really simply just insurance in itself without any savings or investment elements in it.
Now, we can even purchase insurance direct from insurance companies without going through an agent. You can check out MoneySense website on the direct purchase insurance here. Do note there are limitations on the coverage you can get which is at $400,000 currently. Any coverage above that, you'll still have to go through an agent.
For the case on Facebook, it was unfortunate that the policy holder got back lesser than what was expected. For those of us who are still holding on to endowment or whole life policies, it is timely to review again if it serves our needs.
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