Life insurance and surrender values

There seems to be keen interest created by The Sunday Times FT with regard to life insurance products and their returns. This is timely as many companies are competing vigorously to get a share of the pie in the insurance market. The main issue one writer had brought up was the very low surrender value when a policy was terminated prematurely. Life insurance is not “Buy first and complain later” product -- but in fact a product that should be bought with needs in mind after understanding some technicality, how it works.

The recent grievances are clear examples of public ignorance in insurance and relying too much on advice of agents who are not trained well. Mr. M.Z.M. Nazim has raised a “right issue” in a wrong manner. No one should lose money by buying a policy. Life policies are principally designed to protect people; extend financial assistance to their bereaved families at their hour of need and accumulate saving for them, and in no way for them to be deprived of their contribution. But they do some times, as he claims. Why? The issue is how the companies and agents do the presentation in the market. This matter needs to be addressed. Are sales done by telling half the truth? Or is it done by continuous advertisement in the media by highlighting only the beneficial part of the policies and exaggerating the claims that had been honoured but not explaining the true story of claims not paid? The fault is not with the product. It is preposterous to blame the industry and the products as it is the people who are responsible for manipulating them. There are always valid reasons why the surrender value is less than the total premiums paid when level premium policies are terminated before the contracted period.

Surrender Value; the surrender value is the value you receive when a policy is terminated prematurely.

Whatever the reason, except for permanent disability and death, the amount received would be less than what was paid, if the surrender was done before the break even point.

How much less the surrender value would be, is a mater that depends on the type of the policy, sum assured, time period the premiums were paid, and the riders that were attached to it. The break even point is the point when you get your money back without a loss. It is a very technical and too theoretical area for a layperson to understand. The only way to answer this technical question is by explaining the technicality of how it works using the TEXT book. This is so for all level premium policies such as endowment and whole life, that is commonly sold in Sri Lanka market.

The more important part is not for the client to understand the technicality of how it works but to know the right facts, that at some point of the policy period, the surrender value is less than what he had paid as premiums. He must also know that point in advance. He then knows in advance at least when to surrender the policy, if he really needs to do so. When a person is unable to continue the premium payments, there are other options to choose other than surrendering the policy. In level premium policies, the premiums are the same until the policy is matured. But the life insurance premium varies with the age. Older the age higher the premium has to be.

The premium paid at an early stage is transferred to a reserve fund, so the client can continue to receive the protection when he gets older for the same yearly premium. It is a mechanism that works out to get the level premium throughout the policy period which is advantageous. The disadvantage is less surrender value at the early stage of the policy. This is too much for an ordinary person to understand but to know when his break even point is an easy task, provided if it is disclosed to him by the agent. The area to be questioned is not the surrender value, but to ascertain whether the agents are trained to explain the actual facts or they do spell half of the truth to get the sales through and at the same time are the companies doing enough to educate the agents to be more professional at the market place.

If the representatives are not truthful, who should shoulder the responsibility? So it is very important to draw a line as to who are liable and how they should be made liable for being untruthful to the clients. It is baseless to harp on the surrender value without looking into these pitfalls. Mr. Nazim and all of us must get together to put the system right by arresting the real problem objectively. The right thing is for the companies to be monitored and agents to be trained properly. It is a legal contract so it must be sold by right professionals with proper knowledge in insurance. The consumer too needs to be educated. Misrepresentation should be punishable by law.

What is important is how companies train agents to explain the correct facts to the potential buyers and make them understand the complexities of the policies and their return. It is the responsibility of the people who take care of the industry to make sure that the public are not taken for granted. I am not a theoretician or a text book addict but a professional agent who has achieved MDRT status and had been selling insurance for the last 20 years and also developed many insurance professionals for one of the best insurance companies in the world, and presently work in a very compliance environment to develop agents to be more professional as financial planners. I understand the importance of regulation; but which are to be regulated; who are to be regulated, how well to regulate needs to be carefully filtered out. At first, we must identify the problem, arrest it, alert the right people and support the regulation to govern it. Then only we can find the right solution.

Anyway, we must thank Mr. Nazim for bringing up this topic to the public attention which ultimately benefits everyone who buy polices in good faith but at times become victims cause of their own ignorance and the manipulation in the market.

Business Editor’s note – Mr Nazim has stepped on many toes in his original article and attracted a howl of protests from the industry over the issue of surrender values. One of the issues that the industry needs to address is that when selling a policy (before an agreement is entered into), the potential client must be provided all the information by the sales person and that includes the surrender value and how much one would get if he or she withdraws after three months, 3 years of before the policy lapses. All information must be provided to the customer, an issue that is solely lacking in the private sector in general given the number of complaints we receive.

In fact industry professionals themselves have had problems. One senior manager at an insurance company told us that when his policy lapsed – no one at the company informed or advised him and he had to bring it to their notice.

Another insurance professional said he was a victim of a big claim due to him owing to misrepresentation (approximately Rs. 4 million) in Sri Lanka by a top company.

Meanwhile in response to the howl of protests over his article, Nazim says, “my advice to the general public is strongly emphasized and my request to the IBSL with regard to enactment and enforcement of stringent legislation also stands uncompromising.”