In yesterday’s newspapers, there was an article about Tan Kin Lian, NTUC Income’s ex-CEO, mounting an online protest over some changes announced by NTUC recently.
The changes involve restructuring bonus payouts for life policies sold after 1993. Essentially, the annual bonus will be reduced but this will be offset by an increase in the terminal bonus.
What does all these mean exactly?
Before we go into that, let’s take a look at how a whole life insurance policy works.
When you purchase a participating whole life policy, your premiums go into a life fund that will be invested by the insurance company.
There are two things policy holders usually look at – the sum assured and the cash value (or surrender value) of the policy.
Depending on the investment performance of the life fund, you will be given a certain amount of annual bonuses that will increase your sum assured and cash value. This will be credited to your policy every year. Once an insurance company has declared these bonuses, they are guaranteed and cannot be removed.
If a person dies or surrenders the policy, he will also be given a terminal (or maturity) bonus. The amount of maturity bonus he gets will be dependent on the year it is given.
NTUC Income has announced that they will be reducing the amount of annual bonus that will be declared every year. They have reassured policy holders that their terminal bonus will be increased and in the end, it will not make much difference to them.
My Ken Ng, chief actuary of Income said that the change is necesary as it will allow Income to be more flexible with the investing of their life fund. Typically, when an annual bonus is declared, a certain portion of the assets has to be set aside in bonds to guarantee the returns. With a lower annual bonus, they will have more assets that can be invested in higher yielding products like equities. This will be better for policy holders in the long run.
The argument makes sense but the main danger to policy holders is that the terminal bonus is not guaranteed. What happens if the life fund takes a big hit during a particular year and the maturity bonus given out for that year is low? When that happens, there is nothing much you can do about it.
This had happened in the past with AIA before. In 2000, they annouced that it would reduce the terminal bonuses substantially.
I think it is unlikely that Tan Kin Lian will get his way as the insurance company has plenty of leeway in how they want to declare their bonuses.
However, the publicity generated by this event is a good wake-up call for consumers.
The moral of the story is to never purchase all your insurance cover from a single insurance company.
An insurance policy is a long term “investment” and unlike most other investments, you might not get another chance at it. In this case, diversification is even more crucial.