For those who have bought insurance plans with critical year feature, it's time for a closer look at the policy disclaimers

By Lorna Tan
COMPANIES CORRESPONDENT

THE insurance agent was so reassuring as he urged me to sign on the dotted line. 'You won't have to pay premiums after the first 15 years,' he said.

That was seven years ago. It seemed a good deal - it provided 'critical year' coverage, meaning in my case that I would pay premiums for 15 years and enjoy free coverage after that for as long as I chose not to surrender the policy.

The limited period of premium payments would tie in nicely with my projected cash flow, I remember thinking then. I might opt for semi-retirement by then, and any chance of reducing financial commitments would be helpful. Without further thought, I bought two plans. As it turned out, the rosy picture fell apart.

Last year, as I was going through my papers, I pulled out the policies and realised, to my dismay, that I had missed reading a disclaimer in the sales illustrations that says the critical year is not guaranteed.

Given the current poor investment climate, it appears that I will have to continue paying premiums on my policies beyond the initial 15 years.

The critical year is the point at which a policy has built up enough cash value to fund future premium payments - which was supposed to be 15 years in my case - plus an annual interest cost.

And I recall that the agent did not even mention this salient point during our meetings.

But, as it turns out, my own tribulations regarding this coverage are only the tip of the iceberg.

Yesterday, The Straits Times reported the plight of three AIA policyholders who bought life plans with the critical year feature from the insurance giant 14 years ago.

They were promised in writing by the agent they dealt with that they would enjoy free insurance coverage once they had paid their monthly premiums for 13 years.

Unlike in my case, there was no disclaimer about how this was not guaranteed. And they were also promised fixed sums of money depending on when they chose to surrender their policies.

It was only early last year that they realised the monthly premiums were still being deducted and were advised by AIA to continue paying premiums for a few years.

Yesterday, in a reply to ST, AIA said it will refund the additional premiums the trio paid beyond the critical year and that they will now enjoy free insurance coverage. But it was unable to confirm if it would honour the fixed cash payouts.

AIA's decision to 'honour their critical year' came after it said earlier that the 13-year period was not cast in stone, but a mere projection.

The trio are not alone. Market sources say there are likely to be tens of thousands of AIA policyholders who could be in the same predicament and believe that AIA is already swamped with hundreds of complaints from enraged policyholders on the issue.

How did this happen?

First, one must understand how insurers make money - by taking premiums from policyholders and investing the funds.

In participating policies such as whole life plans, insurers put some of these earnings from investments back into a policy's cash value through dividends which build up the plan's value over time.

But many policyholders do not realise that the critical year is not guaranteed because it is based on the assumption that interest rates that determine the dividends are constant and accrue annually - when, in reality, they fluctuate.

Said one of the disgruntled trio of AIA policyholders, Mr Yeo Kong Boon: 'We agree that these were the terms initially and I bought the policy based on these terms. We believed what the agent told us.'

Many insurance firms are finding it difficult to make good on illustrations that they made to clients who bought policies during the boom years of the 1980s, now that the boom times are well over and returns from investments have been dismal.

While some insurers such as NTUC Income were careful not to actively market the critical year feature in the past, observers say that some AIA agents were 'aggressively' using that element in their sales pitches back then.

To be told that one needs to pay only a limited number of premium payments and have free insurance coverage is certainly an attractive sales pitch to the uninitiated. It is appealing, as most people baulk at the prospect of a long stretch of premium payments.

And in some cases, as with the three AIA policyholders, the pitch carried the weight of authority by being stated on letters bearing the company letterhead.

Furthermore, there was no clause in the agent's letter or in the policy agreement pointing out the rather vital fact that the critical year was not guaranteed.

That insurers in general must have realised that something was amiss is shown by the fact that by the 1990s, they were more careful with such agreements and the way agents made representations. Disclaimers on sales illustrations were added to clarify that dividend rates are 'not guaranteed' and 'the critical year may be more or less than that illustrated'.

In my case, I am to be faulted for not reading through the terms carefully, but in the case of the trio, such a disclaimer was not stated anywhere in the representations and policies received by them.

This is not a situation that is peculiar to AIA or to Singapore. In the US, the critical year feature became known as the 'vanishing premium phenomenon'.

When interest rates began to slide, insurers which sold plans with the critical year option in the 1980s faced million-dollar suits in the 1990s. Complaints were lodged by policyholders who were stunned when their critical year was deferred. Probes into deceptive sales practices were carried out.

Last year, the Monetary Authority of Singapore - prompted by rising complaints from the public - sent letters to insurers asking how the critical year feature is explained to policyholders. This led to the Life Insurance Association's decision - that came into effect last July - that life insurers can neither market nor illustrate the critical year feature in new policies.

For those who purchased their insurance plans believing that their premium payments were for a fixed period of time, the problem is a time bomb waiting to explode.

Just imagine if a hapless policyholder gets to retirement age and finds out he still has to cough up premiums payments for years to come, when he had thought that coverage would be free by then.

To be fair, the life insurance industry has, over the past two years, stepped up measures to upgrade agents' professionalism and training, and raise the transparency of the sales processes.

No doubt it is a case of better late than never - but one wonders why this is an area that the authorities did not look into more carefully until only recently.

The reality is that not much attention was paid to how the products were marketed or represented to the public by the 18,000 agents back in the 1980s.

And now the industry is reaping the bitter harvest.

As for hapless policyholders, the last thing they need is to blow their budget by having to fork out for extra premiums, all because of a sales pitch that promised more than could be delivered.