Just two days ago, the Straits Times published an article that went viral on social media about a lady who purchased an endowment plan from Prudential. The endowment plan, which was sold to her during a visit to UOB, has been citied as a classic case of misselling and miscommunication.
But is that really so?
The definition of misselling
As defined by Wikipedia, “Misselling is the deliberate, reckless, or negligent sale of products or services in circumstances where the contract is either misrepresented, or the product or service is unsuitable for the customer’s needs. For example, selling life insurance to someone who has no dependents is regarded as misselling.”
A simple case of miscommunication?
Whenever financial institutions are accused by their customers of misselling, it is always more palatable for everyone involved to put it down to a simple case of miscommunication.
Miscommunication could arise due to various reasons. An overly enthusiastic financial planner trying to hit sales targets. A customer who didn’t quite understand what he or she was purchasing but didn’t question any further, expecting that the financial institutions have already done their own due diligence before creating the product.
In this situation, “misselling” due to miscommunication appears to be a possibility. The individual who bought the endowment policy committed to a total of $200,000 over 5 years despite earning only about $30,000 per year. The reason why she was sold the product was because she had $350,000 at the point in time when she bought the product (this later became only about $100,000 after divorce settlement).
Looking at the details of the product
Perhaps the outcry could have been more manageable had the situation been a unique case of a bad egg in the industry selling something unsuitable to an unfortunate customer.
However, the details of the report did pique our interest. Misselling or not, the benefits illustration do not lie. So we went to check out the Prudential website for further information about the PruSave Max Limited Pay.
This is a straightforward illustration. A person pays a total of $60,265 over 5 years, and would be guaranteed a total of $54,000 after 10 years (yes, less than what they put in).
If the participating fund is able to provide a return of 4.75% per annum, the person will get an additional $16,409 after 10 years.
Expenses Of Policy
By now, sharper readers of DollarsAndSense.sg would have noticed that the mathematics doesn’t quite add up. At a return of 4.75% per annum, a policyholder should expect to receive much more (we did the maths and it’s about $86,696) after 10 years. * Assuming participating fund obtains a return of 4.75% per annum
The reason for the lower amount provided in the Prudential illustration is due to a term call “Effects Of Deduction”.
“Effects of Deduction” is a term used to describe the cost incurred by the insurance company for providing the policy. The commission earned by the salesperson is included in this figure, along with other operating and marketing expenses.
Based on our calculations, the net returns are about 1.8% once you take into consideration the “Effects Of Deduction”. Not too great isn’t it? * Assuming participating fund obtains a return of 4.75% per annum
The big question – who is the policy suitable for? Or rather is this policy suitable for anyone?
We think it is great if Singaporeans are now more familiar with the potential pitfalls that are associated with certain types of policies offered by insurance companies. Demand for a more transparent and accountable industry is the right way forward. This is perhaps the reason why people are frightened out of their skins by insurance products and insurance salespeople.
Yet, at the same time, we cannot deny the fact that this policy, like all other insurance policies, is already as transparent as MAS requires for it to be. A simple glance through the benefit illustration would clearly explain to most people how the policy generally works, and possibly, why investors may not want to purchase it. MAS has been clamping down on certain investment products such as gold buyback and landbanking with tougher regulations. We think they should also take a review of all insurance products to see if there are sub-par products in the market.
People in Singapore should not be angry just because a lady was missold a policy that she couldn’t afford. Rather, we should ask ourselves why such a policy exists in the first place, and more importantly, whose duty is it to protect consumers? The first layer has to be the consumers themselves, but with complicated financial products, maybe more can be done on a national scale.
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