Wednesday, May 27, 2009

One Year Free Term Insurance

Someone giving free lunch
I get to learn of a big IFA firm giving one year free term insurance from a particular insurance company(Insurer A). This is probably a marketing tactic to create new business for the company and their advisers. I get to know about it when one of my prospects went to that IFA firm and took up the Sum Assured that I’d recommended. The premium from that insurer is about 10% - 15% higher than the insurer(Insurer B) I’d recommended. (Example $1,190 Vs $1,060p.a; $130 more expensive).

Analysing that free lunch
On analysing the remuneration structure from Insurer A, they are paying 60% commission and 95% over-riding to that IFA firm. This means that the IFA firm will get 60% + (60% x 0.95) = 117% of 1st year premium. For a premium of $1,190, the firm will get $1,392.30 as first year commission. We have not factored the 2nd to 6th year commission which adds up quite substantially too.

What if Client surrender policy after 1 year
Even if the client surrender the policy after 1 year, the firm will still earn $202.30. Why?
The firm received $1,392.30 from the insurer and premium paid for the client is $1,190. ($1,392.30 - $1,190 = $202.30)

If 100 of their advisers submit one such case, the IFA will get a revenue of $139,230. Even if 50% of such cases lapse, they will still get ($1,392.30 x 50 + $202.30 x 50) = $79,730. Even if 100% surrender the policies, they still get $20,230.

How about Insurer B?
For the insurer B that I'd recommended, it is paying 10% + (10% x 0.45) = 14.5% as first year commission. For a premium of $1,060, the IFA will only get $153.70 commission. If 100 of advisers like me recommended Insurer B, the company will get only $15,370. Even if all 100 clients surrender their policies in Insurer A and all 100 clients keep their policies in Insurer B, the firm that recommend Insurer A will still get $4,860 more than the firm that recommend insurer B.

Whose interest was served here?
I explained to my client that he may save the premium in the 1st year but over longer term, he will incur higher premium. The $1,190 that the adviser paid for him is able to absorb 9 out of the 30 years. He will eventually pay $2,730 more over that next 21 years. He decided to buy from that IFA firm and his reason is simple. He will get the free insurance for this one year and decide next year if he wants to switch back to me. I explained insurability issue and he told me that he’ll take the risk. So was the client's interest served?

The IFA firm is smart
The IFA firm is smart because someone already holding to an insurance may not take the trouble to terminate it and the person with a large term insurance may not seek alternative view from another adviser for comparison. The client will eventually pay $2,730 more over that 30 years for exactly the same cover. There will be surrenders but unlikely to be 100% or even 50%.

I'm angry and disappointed to see how IFAs themselves are undercutting each other in such intense environment. In my opinion, client interest is not served here and this is definitely not true professionalism at work. I hope that this particular IFA firm will stop telling their advisers to do such thing and Insurer A should revise their remuneration structure.


Anonymous said...

Hi I don't quite get the figures.

Anyway, if A is able to provide equal sum assured at similar terms and conditions, wouldn't this also point to inefficiency on B's part? B needs to collect more money to provide the same coverage.

Anonymous said...

Wouldn't there be a clawback of commission if the surrender occur within the first year? But I guess even if there is a clawback,it shouldn't be more than the commission given and so that firm worst case scenario is just a return of commission.

Freebies such as MP3, "free premium" for children if both parents buy the policy, shopping vouchers are common. This IFA firm is just joining the fun. And guess what? MAS just walks away without bothering. Can someone come together and sue MAS for being such a useless fellow?

Khiat Han Hwee Adrian said...

The premium charged from Insurer B is lower than Insurer A for similar terms and conditions. The adviser should recommend insurer B for client's interest.

Premium is not claw back if surrender is after 1 year.

Anonymous said...

This is the kind of game the ifa is playing and for that matter everybody is.
I don't see anything wrong with that. It is business arrangement. The loser is you and the greedy customer.
Charging a fee for advice is the right way. The stupid customer can buy from anyone.
My advice to you is to throw away this customer. It doesn't seem he trusts you. Why work with someone who doesn't trust you, right? The next time he comes to you just turn him away.

Anonymous said...

If you are good enough, you can charge fees for all your clients. You don't need to bother how Insurer A or Insurer B is paying.

This is a business arrangment and there are nothing wrong with it. That IFA firm is able to spot an opportunity which you did not. You will be the loser because your clients will not appreciate when you recommend a low commission plan. Cost is not everything!!! If you cannot earn enough and go out of business, you will still let your clients down.

Don't always complain when others are making more money than you do.

Anonymous said...

Adrain, adopt IPP's model . Fee and commission or fee only..This will make sure your advice doesn't go to waste.There are many suckers and consumers who think fee is another layer.Start now .

Anonymous said...


Through this, you get to know that this client only look at freebies rather than good advice. He does not bother about getting a good adviser. It is a good thing he did not buy from you. Potentially this is the kind of client that will get you into endless trouble.

Anonymous said...

My question is:

after DEDUCTING for commissions, B still requires more money to provide similar coverage compared to A.

To the client, B is cheaper than A by a little bit. To the adviser, shouldnt you be asking why A can afford to pay so much commissions compared to B? Both offer similar coverage.

Simply put: presuming $0 commission and transaction costs, B needs to collect more money for the insurance pool. Why is that so?

Is it because
1) Insurer A is not collecting enough money for the insurance pool?
2) Insurer B is collecting too much money for the insurance pool?

Anonymous said...

Since the insurer is giving 117% of the first year as premium, it means that the IFA still earns 17%.


IFA pays insurer $100 (example) first year premium for client
Insurer pays $117 of commissions.

IFA still earns $17. Now I get it. The profit actually comes at the expense of the insurer lost for the first year.

Anonymous said...

Wow! This IFA Firm is good. They have created a win-win situation for themselves and their customers.

I saved on the first year and only pay for the next 29years. So what if I have to pay a little bit more monthly?.. The $2700 difference is spread over 30yrs and if you know anything about time value of money, it means the $2700 is actually neligible.

Are you dumb or what? I would go for that IFA firm since they have financial intelligence. Unlike you, you are so straight and follow the books and not very financially knowledgeable.

Anonymous said...

You can report to MAS if you like to but do you think this large IFA firm with intelligent people in it don't know what they are doing?

Tell your company to follow them and you should stop selling for NTUC anymore. They pay suckers commission. Only customer win, you lose, your company lose.

Anonymous said...

To "May 27, 2009 11:50 PM",

MAS is sleeping. Don't bother about them.

Khiat Han Hwee Adrian said...

To all Anonymous,

I'm not a green eye monster as some of you linked me to me. I'm only sharing what I'd observed. It may not be good for me or the industry to say all these things but i really want to share my disappointment with my readers.

In my opinion, such way giving free insurance is as good as giving rebates back to the customer. Its is enticing people to buy for sake of freebies, whether they need it or not. Imagine you pay the $1,000 premium today and the insurer refund $1,000 back to you 1 month later.

I'm also disappointed that this IFA firm is pushing a plan with highest commission when they have many options and know who is better.

This firm is full of young and inexperience fresh graduates who may not have the ability to guage what is good for the client. When freebies are given like this, its eventually at the expense of the advisers and the whole industry at large.

Anonymous said...

i agree with you , Adrain, that many young people attracted to insurance because of high commission and not because of their desire to help the clients with the best solution.
Churning and twisting is so rampant now and MAS is sleeping. I heard ntuc has spotted a lot of churning and mis-selling and the compliance is taking steps to discipline the unethical agents. As long as MAS is not doing anything this sort of things will continue to trouble the industry and more people are joining the industry because of easy money and consumers are blur and easy to con , like your client. He thinks he is smart, he will regret.

Anonymous said...


It takes too hand to clap. An unethical transaction took place because

(1) The adviser commits a crime by inducing the client to buy a policy from him and
(2) The client is attracted to the freebie offered by the adviser.

Both are at fault but MAS prefer to act blur and take their salary.

For you as an ethical adviser, it is good you don't participate in these sinful transactions and at the same time good not to have clients who are attracted to freebie. These clients should not and will not be part of your client base. Remember, you choose your clients - clients do not choose their advisers.

Anonymous said...

He decided to buy from that IFA firm and his reason is simple. He will get the free insurance for this one year and decide next year if he wants to switch back to me. I explained insurability issue and he told me that he’ll take the risk. So was the client's interest served?It is better that you tell your client upfront that you will not permit him to buy the insurance from you 1 year from now. This is because implicit in the above reasoning is that he will surrender the existing one. This is the kind of things that will cause your license to be suspended and even put you to jail. A scenario could happen that after he surrenders the policy & buy from you, he is stricken with an illness that is a pre-existing. He or his family will complain that you did not tell him about pre-existing exclusion in surrendering older plan. You end up have to pay the sum assured to him or his family, lose your license and go to jail.

I say, just dump this client and has nothing to do with him.

Anonymous said...

just write him off and close the chapter and move on. Don't let this one idiot hinder you.

Anonymous said...

Anonymous May 28, 2009 10:58 AM,

I heard from a friend in ntuc that many more churning and twisting will be dug up. I am not surprised. When ntuc agents were promoting buy one get free, ie. buy revosave and use the coupons to buy vivolife, they were heading for trouble. But the agents should not be the only ones punished, the supervisors, the underwriters and the ceo should also be punished. Ntuc should have a culture of putting the clients' interest first, the culture expected by MAS guidelines.
Well,so much for honesty is the best policy. Isn't it NATO?

la papillion said...


I got this free term plan that you mentioned too. I got it because I've already got my insurance done, so when I learnt of this free one year policy, I jumped at it to have a free 1 yr coverage, with the intention to cut after 1 yr.

I did my comparison when realised that the premiums for this particular company is indeed very high. No way for me to do this over the long term.

What i'm trying to say is that if a person is trying to get this free insurance for long term, just forget it. To me, it serves as an additional free 1 yr coverage over and above your existing one.

Anonymous said...

la papillion said...
so you worry that you die within this year your family can get a big ang pow? So you jumped at the freebies and not because you need.Isn't this greed? and the poor adviser who did all the paper work and Adrain who provided the advice, both got played out.
You said you already got all the insurance and fully covered why did you seek an adviser. I am puzzled , after analysis adrain found that you needed more coverage.If it is true you are i n danger of not being covered next year. Don't play play.

Anonymous said...

It looks to me that this insurer is going to be in trouble one year later when many its policyholders start surrendering their term policies after just 1 year all thanks to this stupid IFA for getting rebates.

Although Adrian did not say, based on the commission rate and overriding stated, everybody now knows which insurer this is.

la papillion said...

Hi anonymous,

1. "so you worry that you die within this year your family can get a big ang pow?"

No, I do not worry about that. I can't predict my death.

2. "So you jumped at the freebies and not because you need.Isn't this greed?"

Yes, you can say that. If it's free and I've no cost, why not? If another person gives me additional coverage for free, I'll do it over again. I don't see anything wrong over this.

3." and the poor adviser who did all the paper work and Adrain who provided the advice, both got played out."

For my case, my adviser is the person who told me about this offer. He also told me that it's best not to carry this plan for long because it's more expensive over the long run. I don't see why the adviser will be played out, at least for my case. It shows that my adviser is looking after my needs. He could be evil and not tell me.

4."You said you already got all the insurance and fully covered why did you seek an adviser."

There's something called follow up. My needs are covered, but I still keep in constant contact with him. If doesn't mean that if I don't want to buy anything, I can't meet him up for lunch. Besides, for my case, it's the adviser who called me to tell me this 'lobang', so to speak.

5."I am puzzled , after analysis adrain found that you needed more coverage.If it is true you are i n danger of not being covered next year. Don't play play."

I didn't seek adrian's advice. He is not my FA, in case you misunderstood. I'm not the person adrian mentioned in his article. So, this statement that you mentioned isn't applicable in my case.