More complaints from those who take out loans to buy life insurance

Complaints have been steadily increasing about premium financing – taking out a bank loan to buy a life insurance policy – in tandem with rising interest rates.

The number of such cases began creeping up in 2023 and has continued to tick higher, said Ms Eunice Chua, chief executive of the Financial Industry Disputes Resolution Centre (Fidrec).

Fidrec helps consumers resolve disputes with licensed financial institutions, including banks, life insurers and advisers, through mediation or adjudication.

A person who borrows to buy a universal life policy or a whole life plan pays less cash upfront but has to meet the interest payments on the loan, which might be monthly, every six months or yearly.

These loans are usually offered by banks when the premiums are large, such as for a single premium policy that requires an individual to pay a lump sum upfront.

The bank holds the policy as collateral and in the event of the person’s death or terminal illness, it claims what it is owed before returning the balance of the insurance payout to the policyholder’s estate, said Mr Eddy Cheong, chief executive of insurance advisory firm Havend. 

Ms Chua said the cases Fidrec sees usually have a high loan component – for some, it is more than 70 per cent of the premium – and that many of these policies were sold when interest rates were low.

The rates are not fixed on such loans so policyholders face higher monthly instalments when interest rates rise.

“They feel that they were sold the policy on the basis that it would give them a stable income during their retirement. In the end, there’s no income, and they end up having to pay money,” Ms Chua said.

She added that some loans are commonly structured in such a way that the principal amount is not paid down, and the policyholder only pays interest all the way until his death.

“Complainants have come to Fidrec saying, ‘If I knew that by taking out this loan, I would have to pay until I die, I would not have taken it’,” she noted.

The principal in such cases is only paid back upon death or if the customer surrenders the policy.

Ms Chua noted that for some of these policies, the policyholder would be more than 100 years old before the surrender value could cover all the interest payments and loan principal.

Havend’s Mr Cheong said people with liquid assets of more than US$100,000 (S$130,000) but less than US$1 million are those most likely to be caught in this debt conundrum.

They may not have as many financial resources as wealthier folk and so may face difficulties redeeming their premium loan if interest rates become unfavourable, he added.

Mr Cheong noted that premium loans were originally used to finance universal life policies of substantial premium outlays, typically around US$1 million. People with liquid assets of more than US$1 million used these policies as a legacy planning tool to bequeath sizeable sums to loved ones. 

However, the size of this kind of universal life policy has become smaller over the years, so more people can afford to buy such plans, he said.

“I suspect that people who can afford to buy the policy may not have the means to pay off the loan,” he added.

Premium financing complaints fall under the umbrella of market conduct-related claims, defined by Fidrec as any kind of misconduct, such as misrepresentation, mis-selling, giving inappropriate advice, or inadequate disclosure of key material information or risks.

Fidrec handled 261 market conduct-related claims in the first half of 2024, including claims related to premium financing. This puts it on track to exceed the 266 claims it dealt with in 2023.

Claim numbers have been steadily increasing since 2021, but remain below the pre-Covid-19 levels of 377 in 2019.

Because the insurance policy is bundled together with a loan, consumers may not understand the full financial obligations, Ms Chua said.

“You have to service the loan until you die, but you are not earning any income. If the interest payable goes higher than the investment benefit, that is where the problem arises,” she added.

Financial institutions must advise customers more comprehensively and consider their needs, she said.

The adviser should not just recommend products assuming positive scenarios, but consider negative ones as well. And before recommending that a client take out a loan for the policy, the adviser should consider whether he is capable of servicing that loan under the negative scenario, Ms Chua noted.

She said that it all boils downs to advisers supporting consumers to make informed choices.

Havend’s Mr Cheong advises policyholders to ensure they have the money to pay the lump-sum premium in full so that they can pay off the loan when necessary and avoid the impact of high interest rates.

He added that they should be aware of foreign exchange risks as “the loan borrowed is usually in foreign currency”, such as the United States dollar.

If the US dollar appreciates against the Singapore dollar, the policyholder’s loan amount in Singdollar terms goes up, and he has a bigger loan burden.

For example, if a policyholder takes out a U$$700,000 premium loan, the principal in Singdollar terms is around $910,000 at the current exchange rate of US$1 to S$1.298. If the US dollar appreciates to S$1.40, the loan amount will go up to $980,000.

Ultimately, Fidrec’s Ms Chua said consumers should read and understand the insurance policy before making a decision.

When taking out a loan, consider how long the loan is for, whether interest rates can change, and whether your payments go to the principal amount or only interest, she added.

The policy document has a lot of pages, she noted, but customers should, at the very least, read and understand the product summary and benefit illustration.

She advises people to ask themselves: What is the payment term? What is the premium amount? Can the premium amount change or go up over time?

“If you take responsibility and make sure you read and understand the policy, it can make a big difference. You can avoid all these problems from happening,” Ms Chua said.

Source: Straits Times © SPH Media Limited. Permission required for reproduction.

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