There was a post by Ms Lorna Tan on Monday on a 57 year old Admin Executive plight when she thought what she put into the bank with UOB is guaranteed and that she has problems pulling it out.
The article sought to create awareness of this specific case so that readers can learn from it.
I have my own take away, hence this post.
You can read the article here.
Here are some of the facts from the article:
- The product is an insurance savings endowment PRUsave Max Limited Pay
- Pay for 5 years $40,000/yr, total premiums $200,000
- Policy will mature in 10 years with a Maturity Benefit
- The Maturity Benefit is part guaranteed and non guaranteed
- The guaranteed portion will eventually be less than the total premiums paid
- The distribution cost in total, or the amount paid to the agents and the insurance company comes up to $55,000
- If Prudential Investment Return is 3.25%, the maturity benefit is projected to be $217,768. If 4.75%, the maturity benefit is projected to be $236,000
- She earns $30,000/yr and have 4 children aged 20 to 27 years old
- Her original intention was to put in as a time deposit
- During that time, she got $350,000 in divorce proceeds but after legal fees and loan payment, she was left with $100,000 which cannot pay for all the premiums
- She has paid $80,000 out of the $200,000 premium
- The policy was purchased with freebies of a steamer and an airfryer
- She purchased this thinking it is with the bank and it is guaranteed
Insurance Savings Endowment rarely lose Money
The experience folks may hold a different view, but based on my research, and how these plans are structured, they rarely end up poorer.
This is even when some of my friends says so, but when I look at their statements, it proves otherwise.
In my aggregation of some of my readers and friends matured or soon to matured policies they end up being positive or at least 2.5% in the past. (Post here)
While the coupon rates on bonds these days are much lower, they shouldn’t lose money. That should not construe to be equal to guaranteed.
If the maturity benefit is projected to be $217,768, the internal rate of return is 1.22%. Its not the best, and if you put it next to the Singapore Savings Bonds of 2.78%, this looks bad.
If the maturity benefit is projected to be $236,000 the internal rate of return is 2.38%.
These are projected which means it might be less. If the sales person feels this PRUSave is a better product, then it should at least yield more than time deposit. With the XIRR of the former, I wondered if it is indeed better.
In any case, this is still a way to build wealth, for the risk adverse. This product in most scenarios should at least reach the buyer’s expectation of not losing money.
Jumping into a lion’s den
The problem for her is that she jumped into a situation where the sales person have an economic bias to up sell her products that earn the sales person a better commission.
With a commission structure, people have a propensity to be pushy.
There will be imaginary false promises being put out, such as that when is the last time 6 blue chip companies every collapse (when one of them happen to be a bank called Lehman Brothers)
There are also incentives to tempt the person to act more irrationally, pushing them closer to buying. In this case, the steamer and air fryer.
We all need a good evaluation system or process
The biggest problem here is that, she could always say no if the product is risky and not good enough. Or that she does not know enough of it.
She seem to have a problem seeing that $40,000 per year is a lot of money. Not just that, but did not think thoroughly whether she is able to pay for the full premium.
This problem is not constraint to her alone. I have seen many peers and family members making the same mistake.
It can be better overcome by a better evaluation system:
- When being marketed a product, don’t give the answer immediately if you are not familiar with it, or it have much moving parts
- Sit on it for a period, to see if you still want it
- Always have folks trusted, and with competency to act as a sounding board
- Have a habit or system to read widely, even if its not a lot
- Have a system of doing research
- Have a trigger that any big sum of commitment, needs a more thorough evaluation
- Sales Persons are genuinely motivated to sell and cannot be trusted
These are rather general pointers and for some of you would know about them, but honestly if I don’t put them out, most would not do.
I find these rule of thumb rather useful even for myself. Due to my condition, I have been marketed much MLM health products, and each of them seem to think they are the end result to solving my auto immune skin conditions. So I have also expanded much energy, and money in this area.
In all health solutions, I derive on certain triggers in my system to save me from calamity:
- try your best to make sure the products do not have adverse health effects, check the sources
- do your own research on it
- have a budgeted amount monthly and annually for medical supplementation. If it exceeds this amount too much, just forget about it
My dad have a time deposit with UOB, thus I am rather disappointed that UOB was in this equation. I can see my dad in her shoes and this becomes my problem.
I somehow think that there is more to this story than meets the eye.
Its important to have a system or process of evaluation. We cannot be an expert in every areas, but we can try to be as adequate as possible, or network well to know folks who supplement us where we are deficient. This is applicable for legal advice, financial advice, medical, wellness and career.