Say no to Investment-Linked Assurance Schemes (ILAS) if you are not totally certain you can keep up with the payments regularly over the long term .
For early surrender prior to maturity of such joint investment and insurance policies is almost sure to incur substantial financial loss to the policyholders.
This advice from the Consumer Council may sound drastic but many consumers are apparently still unwary of the full consequences of early termination of what are essentially long-term life or other insurance products with an investment fund.
In a survey conducted by the Council, nearly one-third (11/36) of the insurance companies involved claimed they were unable to breakdown the charges in detail or clearly explain the calculation of the surrender values of the policy, on grounds that it was too complicated.
In 2003, the Council received altogether 478 consumer complaints concerning insurance, of which 104 were policies with investment or savings elements. The majority of these complaints were due to early surrender.
In general, complainants were dissatisfied that they were not fully and clearly informed by the intermediaries of the long-term nature of the plans, and the hefty charges involved in early surrender or reduced premium payment. Allegations of misleading information provided by the intermediaries were also raised in some instances.
In one case, the complainant was persuaded to buy an investment plan which actually was an ILAS, and was assured of free withdrawal at any time. Five months later, he decided to terminate the plan due to financial reasons.
To his surprise and dismay, the complainant found that he could only get back a bare 3% of his total contributions - $95.86 out of $3,325.45 - a loss of 97%.
In another case, the complainant was advised to divide a fund of $350,000 into 30 monthly payments for an ILAS, and thereafter no further contribution would be needed.
He did as advised but as it transpired, due to lower-than-projected investment return, there was insufficient value in the account and that additional premiums would need to be paid in 24 months later.
The complainant also learned that the ILAS he entered into was in fact a 15-year plan and that early surrender would require the payment of the management charge of the remaining years.
The survey revealed a complicated pricing structure of a wide range of ILAS products, the financial implications of which are not readily comprehensible to the ordinary consumers who are increasingly called upon to purchase them.
In the survey, it was shown that substantial loss upon early surrender would be incurred as policyholders are liable to pay various preliminary charges in the initial period (the first 2-10 years) and surrender charges (usually within the first 1-8 years).
Further, in some schemes, it was noted that fund units purchased in the initial period (up to the first 3 years) are allocated to a separate initial contribution account, and that the preliminary charges are calculated based on the value of the initial fund units throughout the term of the policy.
As ILAS combines insurance and investment, both components are subject to the levy of fees and charges - preliminary charge, policy administration, insurance cost, surrender charge, bid-offer spread, fund management, switching, to name but a few.
To illustrate and drive home the message of the long-term nature of ILAS, a hypothetical case based on a male aged 30 years, a non-smoker, with a basic death benefit of $1 million and a monthly contribution of $3,000, was drawn up as example for the reference of consumers.
Should this person choose to surrender at the end of the third policy year, then assuming even a 5% net rate of return (less fund management charge), the ultimate surrender value can still be as low as only 28% of the total premium paid.
In view of the current low interest rate for depositors, consumers are urged to exercise due caution when approached for the purchase of ILAS products.
Before making the decision for long-term commitment, they should familiarise themselves with the product, paying particular attention to the contents of both the principal brochure and the Illustration Document, where information on fees and charges as well as surrender values are disclosed.
Insurance companies are required by regulation to illustrate the impact of fees and charges on the surrender values in the Illustration Document to be signed by the policyholder.
Consumers should therefore read the principal brochure and the Illustration Document carefully and, if in doubt, seek clarification from the intermediaries, professional advisors or the insurance companies.
In view of the above, the Consumer Council believes that there is much room for improvement in the current self-regulatory regime for insurance intermediaries. Also, the transparency of ILAS products could also be improved if providers would consider including a column listing out the total charges in the Illustration Document.
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