I REFER to Mr Su Kim Teck's Forum Online letter, 'Investment-linked products beneficial in the long term' (Oct 5).

Few policyholders are aware of the high front-end charge levied on an investment-linked policy.

Insurance companies use the following ways to hide this high cost.

Instead of telling the policyholder that they are deducting, say, $2,000 from their premiums to pay commission, they state that they are 'allocating' a certain percentage of the premium towards investment. Many non-savvy policyholders may not understand the significance of this statement.

In some cases, they state that nearly 100 per cent of the premium is allocated for investments, but hide the fact that a large surrender charge will be paid for a policy that is terminated within the initial years.

During this period, there is a large annual charge that is deducted from the policy, mainly to cover the high commission paid to the agent.

Mr Su was also incorrect when he stated that the total amount allocated towards investment could be more than the premiums paid over the duration of the policy.

In such cases, there is usually an additional 5 per cent charge levied on each premium invested. The net amount invested will show a large gap, due to the high commission that must be hidden from the policyholder.

Mr Su also stated that an investment- linked policy provides valuable insurance cover. The policyholder can buy cover at a low cost with a separate term insurance policy that can be extended to cover critical illnesses. The charge for the insurance cover mentioned in Mr Su's letter is rather high.

I hope life insurance companies will be more transparent in their charges. They should realise that current charges are too high and should stop hiding them from customers. Instead, they should find ways to reduce charges, so the life insurance policy can offer better value to customers.

Tan Kin Lian

This article was first published in The Straits Times.