The Monetary Authority of Singapore (MAS) announced the features of life insurance products which consumers can buy directly from insurers. The bad news is that this will not happen until early 2015.
It was previously reported by the media that the implementation of direct life insurance purchase should have been in middle of 2014. It looks like it has been pushed to early 2015. It is quite a disappointment that things are moving so slowly. It took the relevant parties a whopping 9 months just to decide on the key features of the direct life insurance purchase. Now, another 9 months to implement?
Still, something is better than nothing. The key features of the direct life insurance purchase are:
- Term insurance of maximum sum assured $400,000 covering death and TPD. A critical illnesses rider can be optionally attached to the basic policy. Coverage term is standardized as 5 years renewability feature, 20 years and up to age 65.
- Whole life insurance covering death, TPD and optionally critical illnesses rider. Sum assured cap at $200,000. Period term up to age 70 and up to age 85.
The pros of this direct life insurance purchase features
The sum assured of $400,000 was derived by the estimated insurance required based on 10 times salary of a working adult. So at least the sum assured is not an arbitrary figure.
The direct life insurance purchase offers a relatively hassle free way of purchasing insurance. To meet an agent or financial adviser can be quite a hassle because you never know whether are you going to be ‘upsold’ something else irrelevant. You could end up buying an iPad instead of an insurance product.
The cons of this direct life insurance purchase features
The usage of 10 times of salary is a wrong way of calculating the required amount of sum assured. Using salary to calculate sum assured may be more suited for disability income insurance but not for life insurance. The 10 x salary approached was used by the old tied-agents as a rule of thumb. The right way which professional financial planners use is to calculate the explicit liabilities (such as mortgage debts) and implicit liabilities (such as support for dependents). I am disappointed that the regulator uses the wrong method. I really do not know what to say.
If the consumer needs to meet the insurance company staff to make the direct life insurance purchase, the staff’s remuneration must completely be unrelated to how many cases he or she closes. I have a friend who used to work at a business center of an insurance company. Despite having a salary, he had a quota to meet. If this is the case, the consumer still has a risk of being mis-sold a product.
It is unclear whether the critical illness rider is an Accelerating type or Additional Type.
There is no standardization of exclusions. For example, some insurers exclude congenital diseases while others do not.
Paying premium up to 70 or 85 for whole life is unheard off these days. The standard premium term of whole life is 25 years or shorter.
Third party life insurance such as juvenile policy is not included in this direct life insurance purchase.
Will the direct life insurance purchase help to narrow the underinsured gap?
Yes and no.
This direct life insurance purchase channel is catered for consumers who do not need financial advice. Such consumers are both knowledgeable and pro-active. Even if they are not knowledgeable, they will seek to find out more because they are pro-active. Such a pro-active and knowledgeable consumer is not likely to be underinsured as they would have pro-actively sought to buy insurance already. Of course, moving ahead, all pro-active and knowledgeable consumers will buy direct. Currently, those who want to buy direct from life insurance usually ends up buying Aviva SAF Group Insurance which can be terminated without prior notice. Ladies often ‘piggyback’ their husbands to buy this as well. With the direct life insurance purchase channel to be setup in early 2015, consumers can at last buy a life insurance that will not be terminated.
For other consumers who do not pro-actively seek to ensure they are well insured, they are the ones who are not likely going to buy direct from the insurance company. In fact, these are the consumers who really need financial advice. But these consumers will not approach anyone or do anything as they are not interested in financial planning. So the direct life insurance purchase for this group of consumers will not help to narrow the underinsurance gap.
A new transaction platform for fee-based financial adviser
This direct life insurance purchase channel is a platform which fee-based financial planner can use. I am sick and tired of all the unproductive paper work when comes to life insurance. The benefit illustration is now many pages longer than policy contact itself.
It will be so wonderful when I do not need to do anymore unnecessary paper work and purely focus on advice. The only reason why clients come to me is because they want to seek my advice as I am one of the rare few in the industry who charges a fee for advice. Even my friendly competitor has started to waive their fees (they used to charge a fee and rebate the entire commission). Why would consumers want to come to buy products from me (who will charge them a fee) when there is an army of 15,000 insurance agents (who can give free advice) lining up at bus interchanges and shopping malls who can even give iPads and many of other electronic devices as free gifts?
But for those who engaged me to seek my advice and if there are products to be purchased, I will still help them. If products available on the direct channel are suitable, I will help them purchase the life insurance on their behalf in front of them assuming it is an online platform.
Question from a financial adviser on the direct life insurance purchase competition
The following was a question asked by a concerned financial adviser:
Wilfred, I am one of your subscribers. The insurance industry is changing. More and more are coming out of their own web portal for consumer to buy and compare insurance online. For example, Providend Ltd (which used to charge fee for insurance planning but now offer free advice AND rebates commissions!) and also Dr. Wealth has a software to plan for your own financial plan for free. Would it not destroy the profession in financial planning industry? E.g. Take the case of remisiers, people can just go online to trade stocks. The remisier is not needed anymore, Do you think insurance industry will face the same problem - be it fee based or commission based?
Answer by Wilfred:
Yes, financial advisers who keep on doing the same thing they had done for the past 10 years will surely go out of business. This is especially so if they just sell products or just do 'template' financial planning which is none other than to sell another product. Dr Wealth's online portal is a typical template financial planning tool. If you are in this category of selling products and/or do template financial planning, it is better to find another job.
Remiser went out of business because they cannot provide additional service compared to online stock trading. Many consumers want advice on stock trading but remiser cannot do that because regulation does not permit them to give financial advice.
On the other hand, financial advisers can always give advice on a whole range of financial planning services. Many of these financial planning services are not even regulated. E.g. CPF rules keep on changing every year. It’s a topic that is only getting hotter and hotter. The sky is the limit. But few financial advisers want to do that because there is a lot of work just to keep up and normally there is no product to sell.
Personally, I cannot wait for insurance companies to offer cheap insurance directly. I'll send all my clients to buy directly from the insurers. If they don't know how to buy online, I'll buy on their behalf in front of them. Imagine, there is no longer a need to do paper work, submission and sending clients for medical examination.
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