Many people grew up with the expectation of banks as “big, strong and friendly” institutions that will stand right by them to keep their savings secure and, in the case of fixed deposits, their principal guaranteed.
As such, banks typically enjoy a high level of trust with their customers. Young and old instinctively view banks as safe havens for savings. This translates to a sense of security when they have dealings with a bank.
It helps to know that financial institutions, including banks and their representatives here, are regulated by the Monetary Authority of Singapore and held to very high standards guided by principles of fairness, integrity and professionalism in their code of conduct and dealings with customers.
“There are also additional internal controls and guidelines within banks that ensure representatives conduct themselves ethically, fairly and professionally when discharging their duties. Customers also have direct recourse to banks if they feel they have been misrepresented in the engagement,” says Mr Brandon Lam, Singapore head of financial planning group at DBS Bank.
But while financial institutions strive to maintain a level of professionalism and transparency, their customers too should take responsibility and put in effort to make well-informed investment decisions.
It is common for banks to tie up with insurers to offer insurance products at the bank or a roadshow.
Here are things to consider before you commit to an insurance product at a bank.
1. ENDOWMENT PLANS ARE NOT SAVINGS ACCOUNTS
The banking product you thought you were buying might actually be an insurance product. Life insurance products, even those bought through a bank, have the same characteristics as those from an insurance company.
In some cases, it is partly to do with how they are pitched by the representative. Endowment plans are sometimes wrongly pitched as a savings product where the customer can earn higher interest.
Many consumers are unaware that if they choose to terminate the endowment plan in the first or second year, they may lose all the premiums already paid. With the exception of a few that have fully guaranteed benefits, endowment plans should be seen as investment products that carry risks.
The Financial Industry Disputes Resolution Centre (Fidrec) advises customers to ask specifically if they are able to get back their “savings” amount if they were to terminate the product. This would be one way to differentiate an insurance product from a savings account.
“If it is an insurance product which has a savings plan element, it is still deemed an insurance product. The premature termination of an insurance product may result in losses on the principal sum invested in the policy, and it may even have a zero surrender value if you terminate it within the first few years,” says Fidrec.
Mr Lam notes that endowment policies do typically offer a higher rate of returns than savings accounts through two components, guaranteed and non-guaranteed returns upon policy maturity.
Still, customers should be aware that while an endowment plan can be viewed as a form of disciplined savings plan to achieve a future financial goal, it is very different from a savings account.
“The main difference is the liquidity and the rate of returns. A savings account offers the liquidity and freedom to withdraw and deposit without incurring any penalty. Interest rates are also guaranteed,” Mr Lam says.
“This is different from an endowment plan where a fixed sum is committed periodically or as a lump sum at the start, and it typically does not allow withdrawals or drawdowns without incurring a penalty before maturity.”
2. UNDERSTAND YOUR INSURANCE NEEDS
Customers should understand their insurance needs before buying insurance at a bank.
Mr Lam urges customers to consider their financial objectives at the point of purchase: Is the insurance being purchased primarily for its protective coverage against death, critical illness or disability? Or is the main aim to set aside a fixed monthly sum to grow, to achieve a financial goal?
Due to the different financial needs of an individual, different types of products may be recommended based on their suitability with regard to the customer’s financial objectives, he says.
A good starting point for customers is to understand the policies they currently have. They should also speak to a financial adviser to identify the gaps in their existing coverage, before the appropriate products can be considered, says Mr Thomas Tan, head of wealth advisory and specialists at OCBC Bank.
This is because insurance plans, like endowments, require long-term commitment and the premature termination of such plans can result in losses for the customer.
Mr Lam points out that an important consideration for insurance plans is the affordability or ability to sustain premium payments without impact to one’s lifestyle and the effect of contingencies like loss of income or retrenchment.
Potential buyers should also consider their needs for protection at their current stage of life, the number of dependants they have, and the period and sum assured which the payouts should cover.
3. UNDERSTAND WHAT YOU BUY
When buying products, clients should read the product summary to ensure they understand the terms and features of insurance plans, such as the coverage, sum assured, yield, tenure and payment terms.
Speaking to a financial adviser and using a planner such as OCBC Life goals will help the customer to understand the types of policies and coverage best suited to them, said OCBC’s Mr Tan.
This would ensure that customers have adequate coverage or, in some cases, that they do not have coverage they do not need.
Fidrec recommends asking yourself about your financial goals, protection needs, affordability, risk appetite and so on. Ensure that you have contingency plans for daily and other foreseeable expenses before you commit yourself to an investment, including insurance purchases.
DBS’ Mr Lam says it is important to understand your needs and the plan’s affordability plus the workings of the product and if it suits you before committing to it.
“It seems like a lot of work but not that difficult once you get going. There are many resources out there that could help people get started. DBS has started an initiative called NAV – Your Financial GPS, which can help people navigate their finances to achieve their life goals,” he says.
4. UNDERSTAND THE INSURANCE DOCUMENTS
Do bear in mind a proper Financial Needs Analysis (FNA) should be conducted before any recommendations are given to customers. This allows the financial institution to have a thorough understanding of the clients’ preferences, including their risk appetite, investment objectives and financial situation, and facilitates them in recommending suitable solutions and products to meet their financial needs. So answer the questions posed in the FNA document truthfully and accurately.
In the same vein, before you sign any document when buying a financial product, read and understand what you are signing. For instance, projected returns in the Benefit Illustration document are often for illustration only, and are not guaranteed unless stated. All these documents will play an important part when there are disputes. Do not rely on verbal promises.
“Ask the officer if you don’t understand (or bring along someone who is literate in English). If you are not familiar with the language that the sales documents are written in, you should ask for a copy of those documents and ask a trusted friend or family member to go through the documents before you sign on them,” cautioned Fidrec.
5. DON’T BE SWAYED BY FREEBIES
Gifts and incentives dangled by banks may range from appliances like handheld massagers and airfryers to shopping vouchers to even entitlement to what may seem like “high” fixed deposit rates for a separate savings product.
For instance, Madam Betty Chin (not her real name), 62, was told by a bank that she could earn yearly interest of 13 per cent for three months for a separate cash deposit, together with the purchase of an endowment plan. However, she did not realise that the effective rate worked out to a lower 3.25 per cent for the three-month deposit.
She proceeded to close her one-year fixed deposit at another bank just to shift the funds over.
Fidrec said: “Do not buy an insurance product just because of the freebies offered. Also, don’t buy because of frivolous reasons – for example, you ‘trust’ the promoter because you may have seen him or her being interviewed on national TV or print media.”
6. COMPARE FIRST
Do not give in to the pressure of buying insurance on the spot, be it at a bank or a road show. Take your time and make it a habit to compare plans. It is prudent to check out the prices, features and payouts of various plans.
After all, there is a wide range of insurance products available and it is prudent to make an informed decision rather than regret a rash one.
“Do consider the Life Insurance Association of Singapore website, which provides information on insurance products. You can also go to CompareFirst.sg, a government portal that enables you to compare insurance products here, ” said Ms Chung Shaw Bee, head of deposits and wealth management for Singapore and the region, UOB.
7. COOLING-OFF PERIOD
Some investment and insurance products come with a cooling-off period for consumers to reconsider their purchase, such as a 14-day free-look period.
If you subsequently change your mind within that time, you should quickly inform the company, says Fidrec.