Understanding Life Protection

Against the backlash on poor claims experiences, the Association of Financial Advisers (AFA) is warning Australians that jumping to conclusions could be inadvertently costly and a livelihood liability.

"It is vitally important Australians understand what life insurance they have, and the quality of the contract before making any decision to cancel or vary it," said AFA chief executive, Brad Fox.

"If Australians cancel their insurance — it could mean that if their health changes in the future, they won't ever be accepted for cover again."

Life insurance is generally sourced in three different ways — group insurance through a super fund, through a financial advisor, or directly from an insurance provider and according to the AFA, this is equivalent to around $7.2 billion a year in claims paid out to around 100,000 Australian families.

For Australians sourcing their life insurance directly from insurance providers, there is a risk of inflated price to cover marketing costs. If your choice is group insurance, the associated risk is having to work directly with your super fund without the guarantee of talking directly with the insurance company.

By working directly with a financial advisor, Fox states that the process is simple and effective, with the advisor liaising with the insurer for you.

"Advised retail policies have the highest quality contracts, the highest claims pay out and are ironically often the cheapest," he said.

A whitepaper commissioned by the AFA in 2013 traced the claims experiences of Australians and showed that there was a significant gap between consumers perceptions of the claims process and the reality of the experience.

"Life insurance is a real life saver for families," said Fox.

"It provides the money that gives them to recover from serious accident and illnesses, and time to grieve and maintain financial dignity after a partner or parents' death."

Who Is Quah Ah Hin & Ong Ah Sim

The RM1 nasi lemak couple in Jelutong market are now armed with a shiny, stainless steel pushcart.
They started selling the food just a month ago and shot to social media fame because they kept the price low.

At that time, Quah Ah Hin, 65, who is still recovering from a stroke and his wife Ong Ah Sim, 63, had been doing it the hard way, using a trolley from their Batu Lanchang home to the market to haul a folding table and about 200 packs of the food in a polystyrene box and a basket.

Moved by their humble demeanour, 1Malaysia Hawkers and Petty Traders Foundation bought them the pushcart costing RM3,000. The RM1 nasi lemak couple in Jelutong market are now armed with a shiny, stainless steel pushcart.
 

Good Behavior & Great Politic

Creative politic & professionally managed - DAP at Skohn, Penang

Caution To Investment-linked Policyholder

Life insurance should be managed as an asset that can serve as an essential part of retirement planning. It can provide a sufficient legacy so that retirement income can be maximized for long-term care and medical expenses can be funded with less concern for heirs. And cash value life insurance can also function as an important resource that can provide emergency funds, or, if carefully managed, supplemental retirement income.

Although a surprisingly large number of Americans do not realize that some life insurance policies may contain a cash accumulation account that is usually guaranteed to increase in value and that may provide tax benefits, many others have come to rely upon the tax advantaged growth and low risk that may be promoted by these contracts.

For some holders of older cash value policies structured as “universal life” contracts, this reliance has been met with disappointment as several insurers have of late resorted to raising the mortality costs charged against the cash value accumulation, requiring premium increases or benefit reductions in order to keep the policies in force.

While it has become a familiar experience to face premium increases in these flexible contracts when the performance of cash accumulations do not match original illustrations, in this case policy guarantees may actually be responsible for the changes.

Because of the relatively high guaranteed rates in some older policies—often as much as 4 or even 5%—and with insurers facing the advent of an extended period of low available interest rates on insurance company reserves, some issuing companies look to restore profitability to these blocks of legacy business by raising the internal death benefit costs of the contracts (since the interest rate credited to the cash accumulation accounts can no longer be lowered to match the companies’ earnings).

Although the contracts allow for these increases and increases must be approved by each state’s department of insurance, they have come as a surprise to many policyholders, pointing to the importance of reviewing and managing this type of contract on an ongoing basis.

But, in this case, changes were unexpected because policy provisions were often presented as applying only in cases where a company’s mortality experience departed from expectations, and mortality tables continue to reflect increasing life expectancies (which should operate in the policyholder’s favor).

This, along with the fact that this kind of change had not taken place in the past, led most advisers to think that it was unlikely to take place short of some disastrous occurrence that resulted in reduced (general) life expectancy. Few anticipated changes in death benefit costs in response to losses engendered by interest rates’ falling below policy guarantees.

At the beginning of this month, the Consumer Federation of America issued a warning to state insurance commissioners warning that companies are quietly hiking these costs in order to recover losses due to what now appear to be high guaranteed internal rates. So there is some hope that the states will begin to pay closer attention to similar rate requests on the part of other companies

Protection Before Investment

Life insurance protection (term) plans, though cost-effective, have found few takers in recent years. The value proposition is huge, but it is yet to gain popularity among customers.

 

Why do you think people are reluctant to buy term plans?

The perception towards protection is that one does not get anything in case one outlives the policy term. Most people overlook the fact that it provides financial security to the family if the policyholder dies before completion of the term.  

 

The rates for protection premiums have fallen by over 50 per cent in the last 15 years due to increased awareness about healthy living and availability of rich data on mortality collected by life insurers. We insure our goods, property and other assets against damage or loss, but life, which is the most important aspect, is left uninsured. While property can be rebuilt, life lost cannot be replaced.

 

What should customers be aware of while buying a term plan?

Term insurance is the first product that one needs to buy while creating a financial portfolio. One needs to ensure that the life cover is adequate to take care of the family and then focus on building a savings pool. Secondly, one needs to ensure that the quantum of protection (the sum assured for the term plan is commensurate with the financial support the family will need in the absence of the policyholder). One needs to select a life insurer with a consistently high claims settlement ratio to ensure that the family receives the policy proceeds in a hassle-free manner.
What in your perception would be an ideal protection cover?It is simple - based the sum assured of 5 to 10 times the annual salary. This life cover should continue until retirement or till adequate corpus is built to take care of dependants.

 

The opportunity that you see in the term product category

Large sections of our populace are either underinsured or uninsured. Given the fact that by 2020 a majority of our population will comprise young working individuals, the demand for financial protection will only grow. Various reports has highlighted the size of the mortality protection gap for Malaysia.

 

Have there been any changes in term plans in recent years?

Plenty, particularly on the product front keeping pace with evolving needs of customers. In the past, individuals needed to buy multiple products, such as one for life, one for health, accident cover, etc. Now, there are products providing the benefits of different products in one. Customers, therefore, need not worry about managing separate policies. To provide financial support, plans these days provide nominees the option to receive payout in the form of regular income. 

 

Which financial services product should customers buy first?

Protection is the need of every working individual. The term plan will provide a safety net to the family. So, an individual should purchase a term plan before proceeding to develop a financial plan to achieve long-term goals. A term plan will ensure that the family is not left financially vulnerable in case of demise of the policyholder. A savings-oriented financial plan can be developed subsequently. 

Insurers Help To Siphon Money Out From China

George recently bought a US$60 million life insurance policy in Hong Kong. The mainland private entrepreneur had many reasons to do so. George was terrified.

 

One of his acquaintances had been stopped at the airport, put in a room under a painfully sharp light and denied sleep for 72 hours by anti-corruption enforcers seeking information to use against a senior provincial official. Another was kicked and punched for refusing to speak.

 

He didn’t think about death but the future. He needed to move his money out of the country. There is no easier way to move a large sum out of the country than by signing an insurance policy with a Hong Kong broker.

 

Just swipe your card. Until last month, multimillion yuans could be paid in insurance premiums with a Union Pay card. As long as the money headed to an insurer’s account, the regulators asked no questions.

 

So in minutes, George turned 130 million yuan in Mainland China into US$20 million in Hong Kong. All it required were several cards linked to different bank accounts. Alternatives such as buying a flat or business here are far too cumbersome. Trafficking the cash on speed boat is too dangerous.

 

Thanks to the safe and speedy transfer, 22 cents in every dollar of new insurance money paid last year came from mainland visitors. A decade ago, it was only six cents.

 

The size of policy has also swollen. The single premium involved in each policy for the mainlanders has more than tripled to HK$3.6 million with the past three years showing dramatic growth, according to statistics from the Commissioner of Insurance.

 

What concerned George was not just the cash. An insurance policy also set free the value of his business listed in Shanghai, at least to a certain extent.

 

 

 

The price tag of his controlling stake had risen to multibillion yuan since its listing. Yet in a country where majority shareholders need approval to sell any stake, that is paper wealth.

 

In Hong Kong, his significance as the key man and controlling shareholder got to “materialise” in the amount assured by the policy.

 

If he got struck by a thunder bolt tomorrow, his wife won’t have to wait for the prolonged sale of the listed shareholding after pooling billions of yuan to pay off the estate duty as required by mainland laws. The Hong Kong insurance would make it less painful.

 

His business friends love the policies for a different reason – to cheer up or gag their handful if not dozens of mistresses. Each of the women has a policy that names her as the benefactor should their sugar daddy go to heaven.

 

Hopefully, the financial security would discourage the women from going to the wives or the anti-corruption officers. After all, a mistress always knows more than the wife.

 

George did not have a big-mouth concubine to worry about. He did, however, share the gambler spirit of his peers.

 

The leverage and therefore gain provided by the insurance is appealing. The truth is private bankers scrambled to offer loans pledged against the insurance policy.

 

In fact, George was introduced to the insurer by his private banker who volunteered to loan him 70 per cent of the premium. He chose to pay with his own money but borrowed US$14 million from the banks at 1.5 per cent interest.

 

He invested the money in some prime bonds that pay 5 to 6 per cent. He then pledged the bond for US$7 million to invest in stocks with 3 to 4 per cent return.

 

Minus the cost of the loan, he is looking at a 6 per cent gain. That is on top of the 3 to 4 per cent return from the insurance policy.

 

What business is churning out such a mouth watering return nowadays in the mainland?

 

No wonder mainlanders have flocked into the city and signed HK$12 billion worth of new policies

last year. That is fivefold more than the record before the anti-corruption campaign.

 

“A village came before the Lunar New Year,” said an agent.

 

Yet that counted for only those who arrived with a mainland identity card. An industry source estimated a total of HK$30 billion yuan if mainlanders with foreign passports or Hong Kong Identity cards were included.

 

Unsurprisingly, regulators up north slammed the door to ease the pressure on the yuan last month. They capped the daily transfer of insurance premiums via a card at US$5,000.

 

Yet, rules are meant to be broken. The flaw is in the word “daily”.

 

At least one state-owned bank is known to offer bridging loans to pay the premium while locking in the daily transfer as repayment. It is painstaking but profitable.

 

Communicating Life Insurance Effectively

The commercial for New York Life, which is part of an advertising campaign to get consumers to associate the company with the good things in life rather than the insurance it sells, is just one example of how an insurer is trying to solve a difficult problem: how to market a product that reminds people of their own mortality.

 

“That’s not an easy subject for people to talk about,” said Todd Fancher, president of the American Family Life Insurance Company. “You’re really talking about buying death insurance.”

 

Life insurance companies must overcome other significant barriers. Life insurance, for one, is optional, and most people do not think about buying it until marriage, the birth of a child or another significant event. When it comes time to make a decision, insurance’s complexity and people’s misperceptions about how much they need and what it costs can drive people away.

 

“What’s interesting about life insurance is that we know that most people value it,” said Todd A. Silverhart, director of insurance research at Limra, an insurance trade organization. “But we also know that there’s a lot of confusion in consumers’ minds in how to go about buying it, how much they need, who to buy it from.”

 

Over the last several decades, the percentage of households in the United States that own life insurance has fallen. Seventy percent of American households now own life insurance, down from 83 percent in the 1970s, according to Limra.

 

Anek Belbase, a researcher at the Center for Retirement Research at Boston College who helped conduct a recent study on life insurance purchase decisions, said people generally shied away from making the difficult financial calculations required to determine how much life insurance they needed. He said they resorted instead to mental shortcuts when budgeting for life insurance, which could distort how much coverage they thought they should buy.

 

For instance, people tend to think about how much money their family will need to pay off big future liabilities like a mortgage, but few consider how much life insurance they will need to replace their monthly income. As a result, he said, people often miscalculate how much insurance they need.

 

Mr. Silverhart of Limra said that for a 20-year, $250,000 term life insurance policy, about 80 percent of consumers overestimated the annual cost, making it seem less affordable.

 

Howard Kunreuther, a professor at the Wharton School of the University of Pennsylvania who studies insurance and behavioral economics and who has written a book on the subject, said another barrier to selling any kind of insurance was that people thought of it as an investment rather than a protective measure.

 

“The hardest thing to convince people on an insurance policy is that the best return on a policy is no return at all,” he said. “The whole idea is to try to convince people that insurance is a form of protection.”

 

But that kind of thinking can make life insurance a tough sell. Why buy protection now for an event that is uncomfortable to think about anyway?

 

To break down some of these barriers, companies are trying new marketing approaches to reach consumers more directly and make the buying process easier. In 2013, MetLife set up kiosks in Walmart locations in South Carolina and Georgia where customers could buy the first month of a life insurance policy for $5. The pilot program ended in 2015.

 

Protective Life has worked with Costco Wholesale to offer life insurance to the retailer’s members. Massachusetts Mutual Life Insurance Company started the Society of Grownups to promote financial literacy, with a location in Brookline, Mass., where people can meet with a financial adviser or attend a class.

 

“It is really about building relationships with customers,” said Telisa Yancy, vice president for marketing for American Family Insurance, which tries to connect with local communities through civic groups and religious organizations.

 

Some companies also try to persuade consumers to buy life insurance through advertising campaigns that deliberately have nothing to do with mortality.

 

In addition to its recent commercial featuring babies learning to walk, New York Life also has ads that depict parents doing things with their children, like riding roller coasters. American Family Insurance recently introduced an ad showing the football player J. J. Watt and the basketball player Kevin Durant, who go around encouraging various people, including a nurse and a runner.

 

There have also been missteps. Nationwide Insurance, for instance, ran an ad during the Super Bowl last year to promote a program to make homes safer that featured a young boy lamenting the things he would never be able to do because he had died in a preventable accident. The ad was criticized as being too dark.

 

Maybe worse, few marketing efforts by life insurance companies are memorable.