You will be able to find what the policy costs to sell and what you lose by changing your mind.
Near the end of the call, Aisyah's adviser mentioned that the new savings plan could replace a small endowment policy her mother had bought for her when she was 18. "You'd be consolidating," he said. "Simpler." It sounded tidy. Before she agreed, Aisyah went back to the benefit illustration, looking for two numbers she'd skipped the first time: what the new policy cost to sell, and what she'd lose by changing her mind about either policy.
Both numbers are in the documents you already have. This lesson shows you where, and adds two more things to know before you sign: the free-look period, and what replacing a policy can cost.
The benefit illustration includes a column, usually headed total distribution cost, that shows how much of what you pay goes to selling the policy. It includes the commission paid to the adviser or their firm and the insurer's other distribution expenses. The figure is cumulative, so each year's entry shows the total up to that point.
It's worth reading without judging it on its own. Advice and distribution have a cost, and someone has to pay it. What the column tells you is how much, and when. On many policies, most of the distribution cost falls in the early years, which is one reason the surrender value is low at first.
In Aisyah's illustration, with figures made up for the example, the total distribution cost reached S$4,800 by year 20. Against S$60,000 of premiums, that's 8%. When she compared it with the surrender values from lesson 5.2, she could see that much of the gap in the early years was this cost being recovered.
Write down the figure and the page it's on. If you're comparing two policies, this is one of the numbers to set side by side.
Next to or near the main values, most illustrations for savings policies have a table showing the effect of deductions. It sets out what the policy would be worth if there were no charges at all, what it's projected to be worth after charges, and the difference between the two. The difference covers distribution costs and the insurer's other expenses and charges.
Aisyah's table showed, again with example figures, that at year 20 and at the higher illustrated rate, the value before deductions would have been S$86,000 and after deductions S$79,500. So deductions reduced the projected value by S$6,500 by year 20.
This table is useful because it turns charges into a single number over time. Two policies with similar headline values can have quite different deductions, and the table shows you which one is taking more.
A new life insurance policy comes with a free-look period: a short window after you receive the policy during which you can cancel it and get back your premiums, less certain costs. The costs that can be deducted, such as medical examination fees the insurer paid, are set out in the policy documents. For investment-linked policies, the refund can also reflect changes in the value of the units.
The length of the free-look period and how it's counted are stated in your policy documents. Find it the day the policy arrives. It's the cheapest moment to change your mind, because after it ends, stopping the policy means taking the surrender value.
Use the free-look period to do what you didn't have time for before signing: read the policy contract, check that it matches the product summary, and make sure you still want it.
Back to the suggestion that Aisyah replace her old endowment. Replacing an existing policy often costs money, even when the new one looks better. You may surrender the old policy at a value below what you've paid in. You start a new set of early-year distribution costs on the new one. If the new policy covers you for anything health-related, you may be older, and your health may have changed, so the terms could be worse or the cover could exclude conditions the old policy covered.
Advisers in Singapore are expected to explain the disadvantages of switching when they recommend it. Ask for the comparison in writing before you agree: the old policy's current surrender value, what you'd lose by stopping it now, and what you'd get from the new one, on guaranteed values and at both illustrated rates.
Aisyah asked. The written comparison showed that surrendering the old policy now would cost her a good part of what her mother had paid in, and that the old policy was close to the point where its surrender value would overtake its premiums. She decided to keep it and consider the new plan on its own merits.
Neither the distribution cost nor the free-look period is hidden, but neither is on the front page either. Distribution cost sits in the illustration's tables. The free-look period is in the product summary or policy contract, usually in a section on cancelling. Get used to looking for both whenever a policy is put in front of you.
Have one policy's documents open for the activity, and expect to page through more than one section before you're done.
Find the total distribution cost and the free-look period in one policy document and write both down with the page they appear on.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).