Last week, MAS released a consultation paper to seek feedback on MAS’ proposed treatment of settlement options in life policies.
Currently, some life insurers offer settlement options under their life policies. Such options allow the policy owner or beneficiary, upon the surrender, maturity or a valid claim of the policy, to leave the insurance proceeds with the insurer. These include depositing the lump sum insurance proceeds with the insurer to accrue interest, converting the lump sum to installment payments over a fixed period of time or converting the lump sum into a life annuity.
One point of clarification that the paper addresses was that the current Policy Owners’ Protection Scheme (PPF) does not cover an instance where the insurance liability obligations of the insurer have ended and the policy owner or beneficiary has made an active decision to exercise the settlement option and leave it with the insurer.
Thus, if you choose to leave your policy settlement proceeds with the insurers and it subsequently goes bust, your money will not be covered under the PPF. It will be ranked after other policy liabilities and equally with the unsecured liabilities of the insurer.
For the avoidance of doubt, coupon deposits, advance premium payments and unclaimed monies from policies are still covered under PPF.
This consultation paper proposes to do a few things:
Proposal 1: To disallow insurers from offering settlement options in their new business.
Proposal 2: To grandfather existing insurance policies with settlement options provision regardless of whether such options have been exercised (In other words, this will not apply to old policies).
Proposal 3: Insurers should ensure that there would not be any cross subsidy between the settlement option monies and funds that belong to other participating policies.
Proposal 4: To require insurers to inform policy owners and beneficiaries (upon request for new take-ups and for existing take-ups) that settlement option monies:
a) are not covered under the PPF Scheme; and
b) rank after policy liabilities and equally with the unsecured liabilities of the insurer in the event of insolvency of the insurer.
Proposal 5: To require insurers to disclose the interest rate on settlement option monies and state whether such interest rate is guaranteed or non-guaranteed, and the amount of settlement option monies to the policy owners and beneficiaries. Such disclosure is to be made upon exercise of settlement option and thereafter, on at least an annual basis.
The full consultation paper can be downloaded here :
Any comments should be sent by 30 July 2012 to: [email protected]
I think it is a good idea to disallow leaving of settlement money with the insurance company. An insurance company’s function is to provide insurance, and not to take over a bank’s role at accepting deposits.