为何你不应该买 investment-linked insurance

arno

(http://straitstimes.asia1.com.sg)  
  
March 3, 2005
Five reasons why ILPs are an insurer's best friend
by Lorna Tan



OVER the past two weeks, investment-linked insurance policies (ILPs)
have attracted a storm of attention from policyholders, the consumer
watchdog, insurers and insurance practitioners alike.

From the controversy that has erupted from articles in The Straits
Times, one point is clear - that there must be more clarity on the various
costs and benefits of an insurance product.

The problem, therefore, has to do with adequate disclosure - and not
the ILP product.

Indeed, much has been said by insurers about the advantages of regular
premium ILPs as a financial planning tool.

They say that these ILPs give customers the best of both worlds -
allowing them to get insurance protection and participate in the growth of
financial markets around the world.

The product is also flexible enough to allow policyholders to vary the
amount of protection and investment they want to buy, both at the point
of purchase and at any time during the life of the policy.

To be fair, these reasons are as good as any for a customer to buy a
product - provided, of course, he is sufficiently informed of the
corresponding risks and drawbacks.

While a lot has been said about why ILPs are great for some consumers,
hardly anything has been said about why, as a product class, they are
even better for insurers.

Here, if one digs deep enough, one will find that a regular premium
ILP surely counts among an insurer's best friends.

There are five reasons why this is so.

Firstly, it is one insurance product where the policyholder bears all
the investment risks.

For traditional whole life and endowment plans, the insurer guarantees
a minimum rate of return.

So, for example, if the guaranteed rate is 2 per cent, the insurer
bears an investment risk.

In an ILP, the investment risks are borne by the policyholder, not the
insurer. This is because most ILPs do not guarantee a minimum return.

Since the values of the ILPs are linked to the investment performance
of the assets they are invested in, the values can rise or fall with
the underlying assets - which makes ILPs riskier than non-linked
policies.

The fact that insurers bear less risk makes the ILP attractive to them
in a second way.

Having products that are 'asset or guarantee light' augurs well for
the new risk-based capital (RBC) regime which has applied to the
insurance industry since the start of this year.

This regime puts the onus on insurers to make sure they have enough
capital to set aside as a buffer against losses.

The less risk an insurer bears, the less capital they need to set
aside.

This means that under the regime, insurers are able to enjoy
relatively lower risks from selling 'RBC-friendly' products that are
investment-linked and those that require regular premiums, rather than single
premiums.

Regular streams of premiums are preferred to one-time payments because
it is easier to match assets with liabilities on an ongoing basis.

A third reason why insurers are hot on ILPs is that the mortality or
death cover provided for most regular premium ILPs is actually a yearly
term policy.

In a normal level term policy, the mortality charges, or the costs of
protecting the policyholder, for the entire duration of the policy are
calculated once-off and reflected in the premiums that you pay.

But in most regular premium ILPs, the protection costs are based on
yearly renewable rates.

So for such products, the insurer may revise the rates to compensate
for the higher risk as the policyholder ages, unlike a level term
policy. This reduces the risk of conducting business.

Fourthly, some insurers ensure that they are paid upfront before
allocating your premiums to the protection and investment portions.

In the past for these insurers, none of the first-year premiums was
allocated to pay for protection charges nor to investments.

Instead, the entire first-year premiums are typically used to pay for
the agent's commission and other administration fees.

This improved only slightly two years ago when at least 15 per cent of
first-year premiums were allocated to pay for protection and invested
in units, with the balance paying for commissions and insurer's
administration fees.

The allocation rises to 50 per cent of premiums in the second and
third year, respectively.

Only in the fourth year are premiums fully allocated to cover
protection and investment.

To consumers, this means the initial three years of premiums do not
buy many investment units.

Finally, the reason why regular premium ILPs are a significant source
of revenue for insurers could be partly attributed to something called
the 'bid-offer spread'.

The bid-offer spread is the difference between buying and selling
prices of the investment funds.

What happens in most ILPs is that each time you pay your premium, it
is used to purchase fund units at the offer price.

Some of your units are then sold at the bid price, which is typically
5 per cent lower, to pay for the cost of insurance protection and
administration.

So, in fact, you are paying a 5 per cent sales charge for nothing,
paying a fee on transacting units that you do not even get to keep!

Some have proposed that a more logical way is to deduct the insurance
costs first from the premium, with the rest used to buy units.

Better still if the spread could be reduced to say, a nominal 1 per
cent.

What's the moral of the story? Get the full picture before you buy any
product, whether it is an insurance policy or something as specific as
a regular premium ILP.

Financial institutions and their sales staff are very good at telling
you what's in it for you.

But always find out what's in it for them, so you can better assess
whether something is really in your interest to buy, or someone else's.