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Commissions And Cost Of Insurance

>> Thursday, September 29, 2011

Some things I picked up to share while reading through the insurance benefit illustration and product summary:

"- Total Distribution Cost
This shows the total costs the company may expect to incur. These costs include cash payments in the form of commission, cost of benefits and services paid to the distribution channel."

Extracted word for word, this shows the commission paid to the agent.
A look at the information provided works out to be about 80% of the first year premium and 20% for the remainder of the plan. Essentially, about 1 year premium is lost to commission. (Ok, noted, I can save 1 whole year of premium if I cut out the agent's commission)

"- Effect of Deduction
This is the accumulated value of the deductions for the cost of insurance and expenses."

Basically, this is the company's revenue!
From the table, it is roughly 100% of premiums for the first 2 years.
Subsequently, it totals about 30% of the total premiums for my endowment plans @ 5.25% returns.
And I almost fell off my chair when I saw my ILP plans are about 50% @ 9% returns.
But logically, it makes sense, 5.25% and 9% will roughly have 30% and 50% lost respectively. "Lost" means the fixed base, ignoring projected returns, to the company in the form of its revenue, is largely similar for either plans.

Conclusion of analysis

1. Total Distribution Cost (Lost to agent commission, now I know how much they earn! For agents, time to wake up if you are not receiving an amount close to this, you have been short changed) is a subset of Effect of Deduction (Total Lost, Including lost to insurer).

2. 5.25% and 9% is a theoretical projection that can be unrealistic. MAS should enforce to do away with all projections and state clearly what is the "Total Lost" without the "Effect of Deduction" that includes projected returns. Alternatively, include projections at -9% (In this case, the plan may stay perpetually negative!), -5% and 0% for Investment Linked. If there are too many columns, then how about -5%, 0, 5% to be realistic. Most interesting will be 0% returns where alarm bells should ring that at 0% growth rate, the plan returns less than half throughout.

3. Now I am curious to do an insurer to insurer comparison of Effect of Deduction. The one with a smaller value here should be a more cost efficient company.

2 comments:

Alex April 3, 2012 at 4:19 PM  

Hi Mr Lau,

Based on your Theory, tomorrow morning, when you buy your cup of coffee, tell the kopi-soh this "Hey, Coffee Powder cost $0.10, Hot Water cost $0.05, Detergent and water to wash the cup cost $0.05. Why you charge $1.20? Like that I lost $1.00 to you!"

Total Distribution Cost (TDC) includes Agent's Commission, which usually works out to be 50% of the First Year Premium. Insurer hires Admin Staff, Rental of Offices, and also companies profit. It's easy to whine that there are High Costs involved in procuring Insurance when you scrutinize the TDC. But who work without salary? Who do business without profit? DO YOU?

Remember, you LOST 85% of your $1.20 to the Kopi-soh, 70% to the Char Kway Teow Uncle, 90% to Singtel/Starhub/M1. While us Agents, we merely earn our living helping WIDOWS feed their Children and ORPHANS paying for their school fees. Not to mention the fact that we have to skip dinner with our loved ones most nights, neglect our family on weekends to provide our clients and their family a peace of mind asap and, on top of that, dirty looks and whining from people like you.

Thank you allowing me to post on your blog. I am neither angry nor mad at you. Just hope that you can spare a thought for ethical agents who is not rich from swindling money but earning an honest living from helping clients and their family during their lowest times.

Have a nice day.

Cheers!

Lau April 3, 2012 at 6:36 PM  

Hi Mr Alex

Are you comparing your organizing your financial plans to purchasing coffee? Do you think breaking down cost involved in a property purchase logical? Apple to oranges to suit your argument.

I don't suppose there was any mention if agents deserve the profit in the post. Every business requires it, I totally agree, but deserving it is another issue. If I do not like the coffee here because of the high price and lousy service, I go else where.

The discussion here really is about awareness. I am an agent too but I am satisfied with what I am doing that I do not need to vent frustrations to justify my business. In fact, I take pride in separating myself from people like

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