Admin executive paid yearly insurance premiums higher than annual pay

Madam Han, who has O-level education, earns about $30,000 a year but has to pay an annual premium of $40,000 for five years. She now faces financial difficulty in paying the endowment plan's premiums.
Madam Han, who has O-level education, earns about $30,000 a year but has to pay an annual premium of $40,000 for five years. She now faces financial difficulty in paying the endowment plan's premiums. ST PHOTO: DESMOND WEE

Administrative executive's policy requires her to fork out $40,000 a year

An endowment insurance plan bought two years ago by Madam Corinne Han has proved a costly mistake.

The Prudential policy, which Madam Han, 57, bought at United Overseas Bank (UOB), requires her to pay yearly premiums higher than her annual pay.

She told The Straits Times that her intention in visiting UOB in 2013 was to open an account and inquire about fixed deposits. Instead, she ended up purchasing the policy that came with freebies like an air-fryer and a steamer.

Madam Han, an administrative executive with O-level education, earns about $30,000 a year, but the policy requires her to fork out an annual premium of $40,000 for five years, translating to total premiums of $200,000. So far, she has paid $80,000.

Back in 2013, when she visited UOB, she had $350,000 on hand due to a divorce settlement.

But after accounting for legal fees and loan payments, she would be left with about $100,000, insufficient to pay for the total premiums of $200,000.

As she was staying with her mother at the time, she rented out three rooms in her HDB flat. This gave her a combined monthly rental income of $2,000 in 2013. It has since dropped to about $1,000.

This is how the PruSave Max Limited Pay plan works.

At the end of the 10-year maturity period, Madam Han is projected to receive a maturity benefit of $236,000 - that is, a potential gain of $36,000 - if Prudential can earn 4.75 per cent on its investments.

By then, the value of the accumulated premiums, based on the illustrated rate of 4.75 per cent, would have grown to $291,172.

However, the "Effect of Deduction" (EOD) would amount to about $55,000, which leaves a non-guaranteed maturity sum of $236,000 to Madam Han. The EOD - which is due to Prudential - includes the cost of insurance, distribution cost, expenses and surrender charge.

If Prudential's investment return is 3.25 per cent, the maturity benefit is projected to be $217,768.

However, both the projected maturity figures of $236,000 and $217,768 are non-guaranteed.

The figures are used by the insurer for illustrative purposes, something that may be the source of confusion as the maturity benefits may be misconstrued to be between these two rates of returns.

The figure that is guaranteed, as indicated in the policy's benefit illustration, is actually $181,000 - a sum that is lower than the total premiums Madam Han would have coughed up for the plan.

The plan she has comes with a death benefit of 105 per cent, which means the policy provides negligible protection.

Endowment plans typically are savings plans that come with insurance protection which, in this case, is nominal. Customers pay premiums over a fixed period and, typically, a small portion of the premiums is deducted to pay for insurance cover. The rest is invested. So most customers would expect to get their money back, plus interest, when the endowment policy expires.

"I didn't know that I may get back less than $236,000, which I believed was guaranteed," says Madam Han.

The policy documents state that it is not a savings account and that the actual benefits are not guaranteed.

There is still the question of how Madam Han ended up buying this plan.

After paying for two years, she now faces financial difficulty in paying future premiums. UOB has informed her that the annual premiums could be reduced, but she would have to forgo the excess premiums that were paid in the first two years.

This means that if she pays a reduced annual premium of, say, $20,000 for the remaining three years, she will forgo the excess $40,000 that was paid in the first two years.

Madam Han has complained to UOB and wants to surrender the policy and recover her premiums.

A UOB spokesman told The Straits Times: "We will be arranging a meeting with Madam Han to clarify and address the matter with her."

Madam Han has four children, aged 20 to 27. Two of them have not completed their formal education.

A version of this article appeared in the print edition of The Straits Times on October 05, 2015, with the headline 'Insurance premium higher than her pay'. Print Edition | Subscribe