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No-commission life insurance up ahead

Govt-mandated scheme from next year involves cover of up to S$400,000

[SINGAPORE] From next year, life insurers in Singapore will have to sell protection up to a sum assured of S$400,000 under a government-mandated direct-purchase scheme - the first in the world.

The scheme involving two products - term life insurance and whole life insurance, both with total permanent disability (TPD) cover - essentially cuts out the agent.

It was crafted as part of the Financial Advisory Industry Review initiative, a key reform that began a couple of years ago to let consumers get basic protection without having to incur an agent's commission. Agent commission is part of distribution costs, which make up 8-10 per cent of premiums paid.

The scheme, said the Monetary Authority of Singapore (MAS) yesterday, takes into consideration the need to balance the interests of all stakeholders, while ensuring that the product design meets the primary protection needs of consumers. "The features of these direct-purchase products will be broadly standardised to make them easier for consumers to understand and purchase without the need for financial advice."

MAS will require all insurance companies that serve the retail market to offer the two products.

Term life insurance is significantly cheaper than whole life because the latter has an investment component and a surrender value, and requires longer- term commitment - which translates to much higher premiums.

Term life insurance is basically for pure protection as it pays out only upon death or TPD. The annual premium of a term life product for a non-smoking male aged 30 for a sum assured of S$100,000 until he turns 65 is S$774, compared to S$2,912 for a whole life product until he turns 70.

Yet, term life insurance makes up just about 4 per cent of insurance contracts.

The maximum sum assured for direct-purchase products will be set at S$400,000, with a sub-limit of S$200,000 for whole life products, on a "per person per insurer" basis, MAS said. The sub-limit is meant to protect against the risk of consumers buying whole life products beyond their means and protection needs.

"This is because whole life products have higher premiums than term life products, and typically require a longer-term premium commitment," MAS said.

Policyholders who surrender their whole life policies in the early years of the policy also stand to lose a significant portion of their premium outlay.

In setting the maximum sum assured, MAS took into consideration the protection needs of the average working adult, estimated at 10 times annual income based on a 2012 protection gap study commissioned by the Life Insurance Association (LIA), Singapore.

According to the Ministry of Manpower 2013 comprehensive labour force survey, the median gross monthly income of full-time employed residents, including employer's CPF, was S$3,705 in 2013. Based on MAS estimates, this will amount to a gross annual income of about S$44,000, translating to protection needs of about S$400,000.

The protection gap based on LIA's 2012 survey was S$242,500. Going by the working adult population here, the protection gap came to S$462 billion.

The scheme will hit insurance agents; some had proposed a lower maximum sum assured for products sold directly. On the other hand, consumer advocates questioned the need for a cap when direct sales are meant to benefit consumers. It was also felt that a lower maximum sum assured would not sufficiently meet the protection needs of consumers.

Lee Boon Ngiap, MAS assistant managing director, capital markets, said that the direct-purchase products would provide consumers who do not require advice cheaper access to life insurance.

LIA president Khoo Kah Siang said: "Consumers who require holistic financial planning should approach their financial advisers as the advisers are trained to offer customised solutions to meet the needs of each individual."

Great Eastern Life chief distribution officer Ben Tan said that consumers will be able to research the direct- purchase products online via the company's website and buy directly at customer service counters. "Our customer service personnel will be on hand to assist in general product queries and the application process."