Last Updated on 5, February 2017
I met a financial adviser from another firm who told me that his entire FA firm is pushing for X which is a term insurance that covers death and TPD. He told me that X is very competitive and that is why the firm's entire advisers are selling X instead of NTUC Income i-Term. So I decided to do some calculation.
Parameters: DOB 1/1/1980, Male Non-smoker. Quote below covers death and TPD for coverage of 25 years period.
Sum assured = 200000
X's annual premium = $478
NTUC iTerm, annual premium = 342.70
Sum assured = 500000
X's annual premium = $845
NTUC Income iTerm, annual premium = $691.40
By citing two examples, it can be seen that X's product is not cheap at all. As it can be seen that X is more expensive than NTUC Income i-Term by 22% to 40% depending on the sum assured.
Let's take a look at the $500K sum assured. The commission for X is (cumulatively paid over 6 years) = $701.35. On the initial year, X pays $507. On the other hand the commission for NTUC i-Term is $311.13 paid in lump sum on initial year.
From this calculation we can see that X's commission is more than twice that of NTUC Income's i-Term. To me, that is the true reason why those advisers in the firm are pushing so hard for X. The client ends up paying (845-691.40)*25 = $3840 in additional cost (assuming no claim) just because the adviser wants to earn an addition of (701.35 - 311.13) = $390.22 in commission. Is there any logic to this? Take note that for this case, for every dollar extra that the adviser earns, the client has to pay 3840/390.22 = $9.84 in additional total premium. Have anyone heard of blood sucking bats? Yes, these advisers are blood suckers!
I know that the commission for term insurance like NTUC Income i-Term is ridiculously low considering so much underwriting and scolding from clients for so much paper work and visitation to the clinics. I would like to propose a better way to earn money is to charge the client $390.22 and transact NTUC Income i-Term. In this way, the adviser earns the same as that of X but the client will only be paying an extra $390.22 and nothing more. It is better than forcing the client to pay additional $3840. To do that the adviser must be honest with his client that he needs to earn a living. The client should also be reasonable and do not expect others to work at such low wage.
This leads me to the next point that all financial products should be sold at cost without commission. The client than pays the adviser for the advice given. Any administrative cost such as underwriting and paper work should also be charged to the client separately. This is the most fair way as charges are only imposed on actual work rendered. But the issue is whether would financial institutions lower their premiums if there are no commissions to pay. Sometime ago, I saw a direct marketing brochure from an insurance company sent to a person. The brochure was trying to sell him an insurance product. I checked and found that the premiums are identical if bought through an agent and an IFA. I also noticed that the benefit illustration from the insurer state that the distribution cost is ZERO. So what does it mean? It means the insurer decides to take the commissions as profit for its shareholders! Profits for insurers' shareholders are not required to be disclosed to the client and that is why the distribution cost is zero.
The lesson? Ensure you educate yourself to financial freedom because no one cares about you except yourself.
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