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Saving Plans :- What you might not have heard ? – Part 1

Posted in Personal Finance

Recently I read an article about how saving plans were not what they seem and have “ripped” off many innocent people of their hard earned money. This jogged my mind a little as I have purchased a few saving plans of my own and even recommended them to friends. Am I part of an elaborate scam? I decided to do some digging. I found out that fundamentally regardless what product it is, there will be critics and there will be advocates. Most likely if it profits someone they will support it, otherwise chances are they will criticize it. Don’t believe me? Just ask a top salesperson in any insurance company what they think about their company’s saving plan then ask a top unit trust salesperson which is better, investing in unit trust or getting a saving plan? You are bound to get two differing views on the same product.

Nonetheless the purpose of this article is not to debate whether you should get a saving plan or not. But rather let’s first look at reasons why saving plans are getting a bad rep. Then in part 2 let us consider some of the benefits that saving plans really bring to the table.

Whether you already have a saving plan or planning to get one, I sincerely hope that this information will be useful for you to do a review.
So why are saving plans getting a bad rep? Here are my top reasons:

  • The sales script! Most saving plans are sold using sales script that compares it to fixed deposits and then exaggerating how much better it is than fixed deposits. The aim is obviously simple; to transfer the funds of the client from the fixed deposits to the saving plan and in the process some to the pockets of the agent. What is so devious about the script is that it capitalizes on the greed of the prospect, that they forget all about the risk involved if they terminate the plan early. To make it more deceptive, the returns from saving plans are often not represented in % but in ringgit values which changes over the years. This makes a straight forward comparison deceptive to prospects. Even if they are expressed in %, chances are it’s not based on the amount saved but rather on the sum assured. This catches many off guard when they are promised a high return. How do you know if have been a victim experienced this script? Did the person suggesting you a saving plan use terms like FD transfer program? Or did he start off with how low interest rates in banks are then illustrating how insanely great the returns would be in a saving plan? If he did then chances are you experienced – the script! Remember the script targets greed.
  • The sales person! Sad to say no some are selling saving plans to gain a quick buck, other are simply ignorant and following orders. Nonetheless they give the industry a bad name. Not surprising there are many cases of fraud linked to saving plans due to this. Their gimmick is simple. Get you in first, and then worry about it later. Hence they tend to over promise and not worry about the consequences. To make a stronger case they will cite that they have a number of high profile clients to gain credibility. The typical duration of a saving plan is at least 5 years. Commissions for saving plans are highest around the first to third year. If they over promised, most likely that is how long they will be around. Signs to watch out for: – were you promised and annual return of approx 10%-30%? Were you told that you can get X amount for X number of years and at the end of it you are guaranteed all of your capital back with interest? If you have, might be time to get a third opinion.
  • Misrepresentation of saving plans! If you have purchased a saving plan make sure that the plan you have bought is indeed a saving plan. Better safe than sorry. Remember the Latin phrase “caveat emptor” – let the buyer beware! I have seen cases where clients were under the impression that they were saving in a saving plan but what they actually have is a life plan or an investment linked plan. Whether this is a bad case of miscommunication or untrustworthy sales person I let you decide. Here is how a traditional saving plan works: – You save for X number of years, then the plan matures and you cash out. A portion of the returns are also guaranteed in a saving plan. If the person has to save indefinitely then it’s not a saving plan – it’s a life plan. Over the years people have also began to sell investment linked plans as saving plans. These plans most likely is linked so some fund and marketed with fancy terminology such lock in period, lock in price etc which makes it seem like its offering some guarantee. My question is this: – if someone is buying investment link products for returns instead of protection, obviously he can accept the risk associated with it, why doesn’t he just engage a broker and buy the investment straight? Would be cheaper I reckon.

Critics with an agenda! Once I told a friend, a financial advisor that I have invested in a saving plan for my future. He continued to chastise me on what a silly decision to I have made. According to him I was sold by some smooth talking agent to part with my money and better returns could be found elsewhere. I defended by saying I know that the returns were not spectacular but it’s better than placing it in fixed deposit and I get a little protection as well. He remarked that I should have bought term insurance which is cheaper and invested the balance with him! Sounds familiar to anyone of you? That’s only half the story. While term insurance is indeed cheaper it does not cover critical illness without additional riders. Secondly when a financial advisor asks someone to give up the saving plan guess where the money is going? He will probably suggest a fund to invest in. If the fund performs well, everyone is happy. If it doesn’t who stands to lose? The financial advisor is getting paid either way. Bottom line is this I have heard many people going broke making bad investments, haven’t heard anyone going broke saving yet.

Continue reading Saving Plans :- What you might not have heard ? – Part 2. to find out the other side of the coin. How can saving plans really benefit the policy holder

Article contributed by a good friend, Jerry Low. For more information, feel free to mail him at: wenghigh@gmail.com

 

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