A Consumer Council market survey on Investment-Linked Assurance Schemes (ILAS) has uncovered a wide array of fees and charges and substantial variances in their levels of charges.
This finding was based on the information on 22 ILAS products collected in the survey from 8 insurers last month.
The attention of consumers contemplating to purchase ILAS was, therefore, drawn to the fee structure and calculations of these products as many may not be fully aware or understand.
In the first seven months of this year, the Consumer Council received 29 ILAS-related complaints, an increase of 9 cases or 45% over the corresponding period last year. The complaints mainly concerned sales practices and price disputes.
ILAS products are being marketed widely by insurers, but do they truly offer the benefits of flexibility and the best of both worlds on investment returns and insurance protection?
Essentially, ILAS are long-term investment cum life insurance products. Early redemption is subject to very heavy surrender charges. ILAS may also involve significant upfront charges. As such, ILAS is ideally more suitable for the purpose of investment and estate planning. It is not suitable for consumers who have short or medium term liquidity need.
In general, the choice of ILAS depends largely on one's own needs and objectives. If, for instance, insurance protection rather than investment returns is a significant objective, one may wish to consider other insurance options, such as term life insurance.
Consumers should beware that investment returns are not guaranteed in ILAS products. Apart from some plans which offer a fixed amount of death benefit. The policy value or the death benefits of ILAS are linked to performance of the underlying funds subject to investment risks and market fluctuations; if a fund does not perform well the value of the policy will be adversely affected.
Covered in the Council's survey were 22 ILAS with the targeted premium payment terms ranging from 5 years to whole life (or 100-year-old) of the insured. Generally, the longer the targeted premium payment term, the lower the minimum regular premium (ranging from HK$150 to HK$8,000 per month).
In the survey, it was uncovered that different ILAS plans levied a host of different fees and charges with wide variation in the levels of these charges.
Embedded in the ILAS plans were such fees and charges as: insurance charges, administrative charges, early surrender charges, withdrawal charges or investment management charges, etc., which consumers should carefully consider before purchasing such products.
The levels of fees and charges also varied significantly from insurer to insurer. For example, administrative charges to support management cost of insurers could vary from US$50 to US$90, or the annual rate of 0.5% to 9% of the premium or policy account value.
In the case of the initial charges/premium charges, to pay for the sale and marketing expenses of the schemes and costs of the insurance plans, the survey found 6 out of the 22 ILAS plans to impose such initial charges/premium charges. Based generally on a certain percentage of the regular premium, the premium charges in the first year of the premium term could be as much as between 26% and 100% of the regular premium, the percentage generally decreases over time.
The majority (17) of the ILAS plans were found to impose surrender charges which are applicable up to the first 10 years of the premium payment term in the event of early redemption or withdrawal.
In the worst scenario, the highest charge could reach up to 100% of the surrender or withdrawal sum in the first year of the premium payment term. In other words, a total loss, and consumers do not even get back their principal invested.
For fund management charges, they varied over a vast range from 0.2% to 3% per annum of the net asset value of the underlying funds.
Effective end of June this year, a number of new consumer protection measures was introduced to enhance the disclosure on sale of ILAS products, including the disclosure of commission receivable by insurance intermediaries.
Bank staff are required to make compulsory pre-sale disclosure in writing of monetary and non-monetary benefits receivable by the bank from the ILAS issuer in selling the ILAS product. On the other hand, insurance agents or brokers are required to disclose their remuneration clearly if asked by clients.
All insurers surveyed have replied positively on compliance of the new measure. One of the insurers which distributes its ILAS through insurance intermediaries undertook to disclose the information, on its initiative, without asking from customers.
Consumers are also advised to take advantage of the cooling-off period to review the terms and conditions of their ILAS. The 21-day cooling-off period gives a consumer the right to cancel the ILAS policy and obtain a refund of the insurance premium paid (less a market value adjustment where applicable).
For more guidance - and information on the 22 ILAS products in the survey, consumers are advised to consult the report in this (September) issue of CHOICE.
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