Tan Kin Lian's Blog: Need for financial discipline

Saturday, September 22, 2007

Need for financial discipline

Dear Mr Tan,

You advocate the strategy of buy term and invest the rest in your blog.

While I personally practise this as well, I wish to add a word of caution as well.

This strategy is not suitable for everyone. People who are spendthrifts may not be able to execute this strategy well. People who are naturally risk-adverse (to the point they avoid risk) are not suited too.

Another group who is more 'greedy' should not use this strategy as well. This is because they will not win in the emotional game of investment. It is likely their investment portfolio will be overly focused and carry too much unsystematic risks.

I hope you can add this word of caution in your blog and spur some discussion on this topic.

My worry is that people may just read your blog and make a decision without a deeper assessment of whether they can execute buy term and invest the rest well.

MY REPLY:

Thank you. Let me see how to encourage people to exercise more financial discipline.

A life insurance policy (such as whole life or endowment) is supposed to force people to have the financial discipline. But, it has not worked well.

If the policyholder is not able to continue paying the premium, the policy will lapse, and they will lose part or all of their savings. A high percentage of policies does not reach the maturity date, causing loss to the policyholders.

In my view, the solution is:

* educate the consumer
* design products with low upfront load and low expense ratio
* offer terms that are fair to consumers.

The Central Provident Fund fits into this criteria.

10 comments:

Anonymous said...: I agree that discipline is very important in any investment, whether investing directly in stocks or setting aside money on a regular basis or in an insurance product.
In traditional insurance whole life and endowment the rate of lapses is very high. Only a small percentage keep to maturity. This is wasteful.

Why people are not disciplined when it comes to investment or sticking to their plan? There are number of reasons?
1. There is no plan. The plan is wishy washy and not important.They don't believe in their plan.
2.There are a lot of challenges and temptations along the way that can derail the plan.
3. There is no emergency plan which
is the MOTHER of all plans. If you have this plan I guarantee (up to
99.99% )that all the other plans will work.Your discipline is guaranteed too.; September 22, 2007 1:26 PM
Anonymous said...: Mr Tan,

The comments appears to be posted by an insurance agent. They keep arguing about buying a life insurance policy, so that they can earn their commission.

I think that it is better to save and invest on my own. I can have the flexibility and do not lose out when I cannot pay the premium.; September 22, 2007 2:10 PM
Anonymous said...: The discipline in personal finance is probably the most important factor in accumulating wealth, be in investing oneself or using other financial instruments. Without it, it doesn't matter what tool is being deployed.

The same goes for timeless truths like time discipline and food/exercise discipline.; September 22, 2007 6:34 PM
Anonymous said...: To help in the discipline the premium or the regular investment amount must be realistic and within the means of the investor. If the committment is going to be long the financial health of the person must be checked first.
Many insurance agents don't do this and as a result many lapse thier policy or abort their plan.
The adviser plays a role here in helping the client to succeed and unlike the one off sale by insurance agents.
Choosing an adviser and having the adviser to be part of your plan is important.; September 22, 2007 7:31 PM
Unknown said...: Buying an insurance policy is already a long term commitment..If one is not ready to commit to a discipline payment routine then why have thoughts of buying a policy in the 1st place? The amount that one is able to pay lies upon decision taken by the payee. The agent is jus there to act as a guide to let you choose e various products out there in e market.; September 22, 2007 10:57 PM
Anonymous said...: I noticed recently that there may be one more possible reason why people lapse their policies. Not because they are imprudent or insolvent but has it occured that it is to the advantage of the insurance company that people lapse their policies? For example, if an insurance company only focuses on sales service and not the maintenance service, customers get fed up with the lack of service during the tenure of the policies and lapse their policies out of frustration. How many such cases were there? Can these figures be tabulated? for example, when a policyholder give up the policy, can he write down as unsatisfactory service as a reason for giving up the policies? If so, then I think the authorities should highlight the number of such cases against each insurer so the public can be well advised.; September 23, 2007 1:25 AM
Anonymous said...: Often when people bought insurance it wasn't because they needed the insurance but because they were talked into buying it by glib tongued salesman.If you had been talked into buying insurance,chances were that it was done quickly and without much time to think about it.Very often you had no idea what you bought although the policy might be a living policy and you knew it had something to do with illness but you didn't know how it worked.
But if it had been done the proper way,like before the product was recommended there was an analysis and you had a good grasp of the process, there is likelihood of commitment. It is not uncommon when you ask somebody if he or she has a critical illness cover the answer is yes but the sum is likely to be low.Obviously it was sold as a product. It is really illogical the insurance agent sold such a small cover.It was definitely product selling and the agent was just going for the commission. Lapsation likely to happen.; September 23, 2007 10:52 PM
Anonymous said...: Mr. Tan,

Is it wise to take loan from policies with cash value so that the policies can pay for itself without lapse and we can free the monthly payment for other investment?; September 24, 2007 11:10 AM
Anonymous said...: The insurance companies love you taking a loan against your policy.It is a guaranteed loan.No default.It is good return for the companies. The return to the companies can range from 5.5% to 8%.(this is your cost of your borrowing and profit for the company).If you don't repay the loan,it is compounded and the company will love you even more. Come on, loan is the best investment for the company. I don't think their other investments return such a good rate.
If you take a loan to pay the premium. This is the silliest thing
Your return on your policy is about 2.5% and you borrow at 5.5% to refinance your policy? Don't you see the math?
If you want to stop paying, convert to paid up with protection sum reduced.You will still be covered for life. This is the best option.
How old are you? Maybe this is the time to reduce your protection and focus on accumulation.; September 26, 2007 12:38 AM
Thomas Phua's Blog said...: How to make money grow?

1. Insurance Plans - No good, high cost, high commission to agent, so no good.

2. Structure Deposit - As bad

3. Stocks and Shares - Risky

4. Large well diversified fund - again begrudge the expense ratio and commission

5. Save in the bank - safest, but some say stupid

.....the list can go on.

So what is the best way to safe and grow our money, any advice?; September 26, 2007 8:41 AM