FAQ: Ask the right questions

1. What is a benefit illustration?

A life insurance agent is required to provide a benefit illustration for the life insurance policy that they want to sell to you. This benefit illustration is mandatory, as a life insurance policy is a long term commitment. The format of this benefit illustration is approved by the Monetary Authority of Singapore. It can comprise of more than 10 pages and contain essential information about the policy.

The insurance agent is required to explain to you the key facts in the benefit illustration. In practice, the insurance agent is likely to avoid the key points that are important to the consumer, such as the yield on the policy and the commission earned by the agent.

2. What should the consumer look for in the benefit illustration?

You should ask the following questions to the agent:

a) What is the total premium paid, cash value and the net yield to the policyholder after 5, 10, 15 and 20 years

b) What is the amount paid as commission to the agent and the agency managers?

c) What is the gross yield expected from the insurance fund?

If the reduction in yield, i.e. the difference between (c) and (a), is more than 2%, the life insurance policy gives poor value to
the consumer.

3. What yield should the consumer expect from the life insurance policy?

If you expect to pay premiums for 20 years in a savings type product (such as a whole life, endowment, critical illness or investment linked policy) , you should look for a net yield of at least 4% per annum. If you do not get this yield, the insurance policy gives poor value.

You should ask the agent to point out to you the paragraph in the benefit illustration that covers this point.

4. What is a fair rate of commission that should be earned by the agent?

As the consumer, you are paying for the commission earned by the agent and the agency managers. This is stated under the item of "distribution cost". You should ask the agent to point out this paragraph to you.

If you save a premium of $300 a month, the distribution cost can be more than $6,000. This is the money taken from you to pay the agent and the agency manager. This is too expensive. A fair rate of commision to the agent should be $200, and not a few thousand dollars.

If the agent cannot provide the information or a clear explanation to you, you should avoid the agent as he or she is incompetent or dishonest.