In banks and insurance industries today, almost half of the sales turnover came from selling investment linked insurance products. These are almost always linked to investment funds. Most of the public how would like to invest on investment funds are either persuaded to buy such products or do not have the knowledge to choose what’s really suitable for them. Today, I would like to briefly explain about the basic structures of such kind of products.
The first thing you need to know is the operating structure and the coordination between insurance companies and fund managers. When you pay your monthly installment to the insurance company, the company sends the money to the fund managers. Some of these mutual funds platforms offer multiple funds for you to switch from, from 10 to over 300 funds. You can allocate your payment to several different funds, and buy specific unit of funds. Then if the fund did well increase their prices, your existing units become more valuable and you become better off.
However, you also need to understand the cost structure of these investment linked products before you can decide whether they are really suitable for you. Firstly, why do these products gain great market shares in a comparably short period of time? It is because of the effort and time spent by our brilliant salespersons. A well trained salesperson can sell the most ridiculous product to the weirdest man in the world. Trust me, I’ve met them personally. So what drives them to do it so hard? Yes, you guessed it right. Money. These investment linked products always provide the salespersons with enormous amount of commission. As high as 50% of your first year payment could possibly entirely goes to the pockets of the person who handed you the pen for signature. What I can say is there is nothing you can do about it in a capitalism society.
The second cost is the fee for the insurance company. It is usually calculated as a percentage of your account value. The percentage is not large on first sight as well as the amount initially. However, as the account value grows, the amount of money paid out to the insurance company from your investment is enormous. And that’s why they are so wealthy.
The final man cost is given to the fund manager. Fund manager is the person who manages your capital. They invest the money on stocks or other assets depending on their policy. Usually, each fund has some particular characteristics like area focused or industry focus to give customers the desired options.
So now you know. You can go ahead and decide whether to answer the call from your ‘personal financial planner’ next time. God bless.
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