Admin executive paid yearly insurance premiums higher than annual pay

PUBLISHED

OCT 5, 2015, 5:00 AM SGT
http://str.sg/Z6MZ

Administrative executive's policy requires her to fork out $40,000 a year

Lorna Tan  Senior Correspondent

An endowment insurance plan bought two years ago by Madam Corinne Han has proved a costly mistake.

The Prudential policy, which Madam Han, 57, bought at United Overseas Bank (UOB), requires her to pay yearly premiums higher than her annual pay.

She told The Straits Times that her intention in visiting UOB in 2013 was to open an account and inquire about fixed deposits. Instead, she ended up purchasing the policy that came with freebies like an air-fryer and a steamer.

Madam Han, an administrative executive with O-level education, earns about $30,000 a year, but the policy requires her to fork out an annual premium of $40,000 for five years, translating to total premiums of $200,000. So far, she has paid $80,000.

Back in 2013, when she visited UOB, she had $350,000 on hand due to a divorce settlement.

But after accounting for legal fees and loan payments, she would be left with about $100,000, insufficient to pay for the total premiums of $200,000.

As she was staying with her mother at the time, she rented out three rooms in her HDB flat. This gave her a combined monthly rental income of $2,000 in 2013. It has since dropped to about $1,000.

This is how the PruSave Max Limited Pay plan works.

At the end of the 10-year maturity period, Madam Han is projected to receive a maturity benefit of $236,000 - that is, a potential gain of $36,000 - if Prudential can earn 4.75 per cent on its investments.

By then, the value of the accumulated premiums, based on the illustrated rate of 4.75 per cent, would have grown to $291,172.

However, the "Effect of Deduction" (EOD) would amount to about $55,000, which leaves a non-guaranteed maturity sum of $236,000 to Madam Han. The EOD - which is due to Prudential - includes the cost of insurance, distribution cost, expenses and surrender charge.

If Prudential's investment return is 3.25 per cent, the maturity benefit is projected to be $217,768.

However, both the projected maturity figures of $236,000 and $217,768 are non-guaranteed.

The figures are used by the insurer for illustrative purposes, something that may be the source of confusion as the maturity benefits may be misconstrued to be between these two rates of returns.

The figure that is guaranteed, as indicated in the policy's benefit illustration, is actually $181,000 - a sum that is lower than the total premiums Madam Han would have coughed up for the plan.

The plan she has comes with a death benefit of 105 per cent, which means the policy provides negligible protection.

Endowment plans typically are savings plans that come with insurance protection which, in this case, is nominal. Customers pay premiums over a fixed period and, typically, a small portion of the premiums is deducted to pay for insurance cover. The rest is invested. So most customers would expect to get their money back, plus interest, when the endowment policy expires.

"I didn't know that I may get back less than $236,000, which I believed was guaranteed," says Madam Han.

The policy documents state that it is not a savings account and that the actual benefits are not guaranteed.

There is still the question of how Madam Han ended up buying this plan.

After paying for two years, she now faces financial difficulty in paying future premiums. UOB has informed her that the annual premiums could be reduced, but she would have to forgo the excess premiums that were paid in the first two years.

This means that if she pays a reduced annual premium of, say, $20,000 for the remaining three years, she will forgo the excess $40,000 that was paid in the first two years.

Madam Han has complained to UOB and wants to surrender the policy and recover her premiums.

A UOB spokesman told The Straits Times: "We will be arranging a meeting with Madam Han to clarify and address the matter with her."

Madam Han has four children, aged 20 to 27. Two of them have not completed their formal education.

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Comments from Investment Moats

Source: http://www.investmentmoats.com/budgeting/admin-exec-overextended-40000yr-premium-payment-evaluation-system-flawed/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+InvestmentMoats+%28Investment+Moats%29

The Admin Exec overextended her $40,000/yr premium payment. Evaluation system was flawed Posted: 06 Oct 2015 06:30 AM PDT There was a post by Ms Lorna Tan on Monday on a 57 year old Admin Executive plight when she thought what she put into the bank with UOB is guaranteed and that she has problems pulling it out. The article sought to create awareness of this specific case so that readers can learn from it. I have my own take away, hence this post. You can read the article here. Here are some of the facts from the article: The product is an insurance savings endowment PRUsave Max Limited Pay Pay for 5 years $40,000/yr, total premiums $200,000 Policy will mature in 10 years with a Maturity Benefit The Maturity Benefit is part guaranteed and non guaranteed The guaranteed portion will eventually be less than the total premiums paid The distribution cost in total, or the amount paid to the agents and the insurance company comes up to $55,000 If Prudential Investment Return is 3.25%, the maturity benefit is projected to be $217,768. If 4.75%, the maturity benefit is projected to be $236,000 She earns $30,000/yr and have 4 children aged 20 to 27 years old Her original intention was to put in as a time deposit During that time, she got $350,000 in divorce proceeds but after legal fees and loan payment, she was left with $100,000 which cannot pay for all the premiums She has paid $80,000 out of the $200,000 premium The policy was purchased with freebies of a steamer and an airfryer She purchased this thinking it is with the bank and it is guaranteed Insurance Savings Endowment rarely lose Money The experience folks may hold a different view, but based on my research, and how these plans are structured, they rarely end up poorer. This is even when some of my friends says so, but when I look at their statements, it proves otherwise. In my aggregation of some of my readers and friends matured or soon to matured policies they end up being positive or at least 2.5% in the past. (Post here) While the coupon rates on bonds these days are much lower, they shouldn’t lose money. That should not construe to be equal to guaranteed. If the maturity benefit is projected to be $217,768, the internal rate of return is 1.22%. Its not the best, and if you put it next to the Singapore Savings Bonds of 2.78%, this looks bad. If the maturity benefit is projected to be $236,000 the internal rate of return is 2.38%. These are projected which means it might be less. If the sales person feels this PRUSave is a better product, then it should at least yield more than time deposit. With the XIRR of the former, I wondered if it is indeed better. In any case, this is still a way to build wealth, for the risk adverse. This product in most scenarios should at least reach the buyer’s expectation of not losing money. Jumping into a lion’s den The problem for her is that she jumped into a situation where the sales person have an economic bias to up sell her products that earn the sales person a better commission. With a commission structure, people have a propensity to be pushy. There will be imaginary false promises being put out, such as that when is the last time 6 blue chip companies every collapse (when one of them happen to be a bank called Lehman Brothers) There are also incentives to tempt the person to act more irrationally, pushing them closer to buying. In this case, the steamer and air fryer. We all need a good evaluation system or process The biggest problem here is that, she could always say no if the product is risky and not good enough. Or that she does not know enough of it. She seem to have a problem seeing that $40,000 per year is a lot of money. Not just that, but did not think thoroughly whether she is able to pay for the full premium. This problem is not constraint to her alone. I have seen many peers and family members making the same mistake. It can be better overcome by a better evaluation system: When being marketed a product, don’t give the answer immediately if you are not familiar with it, or it have much moving parts Sit on it for a period, to see if you still want it Always have folks trusted, and with competency to act as a sounding board Have a habit or system to read widely, even if its not a lot Have a system of doing research Have a trigger that any big sum of commitment, needs a more thorough evaluation Sales Persons are genuinely motivated to sell and cannot be trusted These are rather general pointers and for some of you would know about them, but honestly if I don’t put them out, most would not do. I find these rule of thumb rather useful even for myself. Due to my condition, I have been marketed much MLM health products, and each of them seem to think they are the end result to solving my auto immune skin conditions. So I have also expanded much energy, and money in this area. In all health solutions, I derive on certain triggers in my system to save me from calamity: try your best to make sure the products do not have adverse health effects, check the sources do your own research on it have a budgeted amount monthly and annually for medical supplementation. If it exceeds this amount too much, just forget about it Summary My dad have a time deposit with UOB, thus I am rather disappointed that UOB was in this equation. I can see my dad in her shoes and this becomes my problem. I somehow think that there is more to this story than meets the eye. Its important to have a system or process of evaluation. We cannot be an expert in every areas, but we can try to be as adequate as possible, or network well to know folks who supplement us where we are deficient. This is applicable for legal advice, financial advice, medical, wellness and career.