Saturday, July 14, 2007

Insurance company should set a good example

I had an interesting conversation with an adviser from a large life insurance company. Here are his comments about his company's business practice:

* their top management is measured by head office, mainly on new business

* a significant part of the new business comes from getting their customers to terminate their existing policy, and buy a new policy

* this is bad for the customer, as they lose on the heavy charges

* but it is good for the company's profits and the agent's commission.

The adviser felt bad about this practice and was not willing to take advantage of his customers. He is not active in sales now.

I commend this adviser for his ethical approach. It is important for the insurance company to set a good example, so that the advisers can emulate it.

Private medical practice

Someone said, " The consumer (patient) goes to the doctor with total trust, submits to the various procedures recommended and seldom questions the fees that are being charged".

As private medical practice is so lucrative, it is difficult to keep good doctors in the public sector.

What is the underlying problem?

* we allow medical practice to be a business
* we leave to the free market
* the consumers are at a disadvantage
* the doctors have a conflict of interest

What is a better solution?

* medicine should be a profession (not a business)
* doctors should operate on a code of ethics (i.e. look after the patient's interest)
* consumers need access to impartial, independent advice
* some suitable body (the government?) should monitor the conduct of doctors
* the interest of consumers should be better protected

My remark applies to many other services, including the marketing of financial services.

Difficult to find a good law minister?

Today paper had an editorial about the difficulty of finding a good law minister in Singapore. The underlying problems, and possible solutions, are explained in detail in the article.

My view?

The root cause is our system of selecting ministers. They have to be selected from among the elected members of parliament. This reduces the pool of potential candidates considerably. (We follow the British system).

What is the alternative?

We can consider the American system. The citizens elect their members of Congress (ie Parliament) and a President.

The President picks his ministers (i.e secretary of the various departments) from the entire population. The nominated perons have to be approved by the Congress.

Many other countries also follow the American system. It gives a wider choice of suitable people.



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Singapore system - good, bad and ugly

My friend has been invited to speak on several occasions at international conferences. His topic? The Singapore system - good, bad and ugly.

I asked him:

* what is good about the Singapore system?
* what is bad?

He shared his views with me. (But, I do not wish to quote him, without his permission.)

Here are my views about what is good with the Singapore system:

* low corruption
* meritocracy
* economic development
* efficiency
* stable and good government.

What is bad about the Singapore system?

I shall share my views in a few days time!

Cycling on pedestrain walks

There is some debate on whether cyclists should be allowed to ride on pedestrain walks.

Let us look at the underlying problems:

* there is insufficient bicycle paths
* cyclists cannot ride on the roads (as it is dangerous)
* so, they ride on pedestrain paths (which is harmful to pedestrains).

Can bicycle be used for local transport?

* it is not practical, due to our weather
* there is a need for storage space at MRT or bus stops

The solution?

* have low cost, feeder service for local transport.

Fuel economy

Here is the key points of a survey report of car owners, as reported in the newspaper.

* Only 1% of Singaporeans bother to learn about fuel economy of their car, ie how many kilos can be driven for 1 litre of petrol. This is among the lowest in the countries surveyed.

* Only 25% of Singaporeans bother about the impact of cars on the environment, compared to 60% in the other countries.

Lesson: After paying so much for the upfront cost of owning a car, Singaporeans are more concerned about the convenience of using the car. They do not bother about fuel economy. Maybe it does not make much difference, after paying for the ERP charges?

Adviser gave misleading information

My friend and I visited an insurance booth at an exhibition. The insurance adviser promoted "buy term and invest the difference" (Good!).

They have good marketing materials. The adviser showed the performance of the different funds, and how they fit into the different risk profile. (Good!)

My friend asked about the cost of the funds. The brochure showed an upfront cost of 3% and an annual fee of slightly less than 1%. (Good!)

My friend asked, "What about the distribution cost?" The adviser pretended to be ignorant, and pointed to the investing cost shown in the brochure (ie 3% and 1%).

I asked, "what percentage of the regular premium is allocated for investment?"

The adviser reluctantly brought up another thick booklet (also nicely printed), turned to a page. It showed that 20% was invested in the first year, and other percentages were invested the next few years. The total deduction is more than 150% for the initial years. It is a costly product.

Lesson: It is quite sad that insurance companies design costly products and train their advisers to hide the fact. Indeed, the adviser give a misleading impression and show only part of the total cost.

Who is the blame? The insurance company? The adviser? The marketing system? The regulators?

Friday, July 13, 2007

Consumer information - from Australia

I found the website of the Online magazine produced by the Australian consumer association. It is impressive. Take a look at it.

Reduce offer for Excess and Loss of Use

Hi Mr Tan

I see from your blog that you are answering reader's doubt on insurance issue. I like to get your advice on a case involving our company lorry.

Our lorry was travelling straight along Rochor Road. a car suddenly turn left from the extreme lane and hit our lorry's door.

Both vehicles are insured with X. The own damage claim (before GST) was settled.

There is a claim for loss damages and expenses. X gave us a release form to accept this as a full and final settlement, and we did.

X's lawyer later called for a mediation meeting between the drivers, and offered a lower sum to close the case.

We follow up with X's claims officer and were told when lawyer is involved, we can make a counter offer, but to insist on the full sum may mean incurring expenses to hire our own lawyer.

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REPLY:

The items that you are claiming fall under the category of "third party claim". You are making a third party claim against the other party on the basis that they are entirely at fault.

If there is no dispute on the fault, then the insurer should pay for this claim in full, and not try to negotiate a lower sum.

I suggest that you talk to the lawyer and ask for the reason for the reduced offer. You can also approach your insurer for their advice and assistance. They should render this assistance as part of their customer service.

If your insurer does not provide good service, you should look for a new insurer on your next renewal.

You also have the right to make a complaint against your insurer. The body to receive your claimant is the FiDREC (Financial Industry Dispute Resolution Center). Here is their website.

Profession or business?

Law, medicine and education were the hallmarks of the professions.

The professionals act honestly in the interest of their client, are trusted by them, and receive a good income for their expertise. However, they do not receive the exceptional profits of businesses.

In recent years (especially in the developed countries), many of these professions are being converted into businesses. As a business, they aim to make a big profit - the bigger the better.

Business pressures may force these professionals to cut corners and (in order to survive), they may resort to "cheating" the clients.

I hope that the professions continue to be practised on ethics, fairness and high standards. They should not be turned into businesses.

CASE to start a blog?

POSTING IN MY BLOG (BY WILLIAM)

As a consumer, I detest this opt-out scheme and also telemarketers who somehow have your mobile number making sales pitch at you.

Hmm.. Mr Tan, maybe you should consider running for President of CASE. I think you are quite suitable for that position. :) Or maybe CASE should start a blog to communicate with their intended audience, the consumers, on decisions that affect their everyday life.

This is my 1st post here but I must say I have enjoyed reading your posts.

On an unrelated topic, it goes to show that Passion wins over $$. You are not paid to blog but you blog because you want to share your passion of insurance and finance.

Hmmm..Wait.. I think you can even run for President next time round. ;) Jazz up our Presidential election a little.

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REPLY:

Thank you for your nice words.

I don't think that I am suitable as President of CASE or President of Singapore. They are too many people who dislike me.

I have been using some materials from the Consumer Magazine (produced by CASE) for my blog. I simplifed the materials, so that the key message comes across. For those who are interested in the magazine, you can pay a subscription to CASE.

Renewal fee on credit cards

Many consumers have several credit cards. We enjoy the waiver of the annual fee on the credit card for the initial few years.

We may not be aware about the expiry of this waiver period. They will renew it automatically and charge an annual fee (which can be quite hefty).

What can we do?

I suggest that you should check the expiry date with the credit card company and put a reminder in your diary or PDA. Prior to the expiry date, you should decide if you wish to renew it. If not, you can tell the bank.

Alternatively, you can write a letter to tell the bank that you do not wish to continue the card on its expiry.

I hope that the authority should require the issuing bank to get specific approval from the customer for introducing an annual fee on the expiry of the initial period. We should encourage fair business practice.

Questionable marketing practice

I read a news report about the following marketing practice:

* the bank sends a letter to offer you a credit line
* if you do not want it, you have to tell the bank
* if you do not opt out, the bank offers it to you
* the charge is waived for the first year
* in subsequent years, the bank automatically add the charge to your account
* it is quite a hassle to remove this unwanted facility

I hope that the authority can act strongly to stop this practice. Here are some of the difficulties faced by the consumer:

* the product brochure sent by the bank is complicated (not easy for consumer to understand)
* the terms may be unfair to the consumer (as it is written on a one-sided basis)
* the consumer may overlook the charge on this statement (for something that is not needed).

I hope that businesses can be runned ethically to serve consumers, and not to make profit at the expense of consumers.

Tribute to Dr Goh Keng Swee

THIS WAS FIRST POSTED SIX MONTHS AGO. AS THERE ARE LETTERS IN THE NEWSPAPER ABOUT THE CONTRIBUTION OF DR GOH KENG SEE, I AM RE-POSTING THIS BLOG.

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I wish to pay tribute to one great man, whose vision led to the formation of NTUC Income. He is Dr Goh Keng Swee, finance minister of Singapore in 1970.

After NTUC Income was formed, he served as chairman of the board of trustees for 10 years and provided the strategic direction that led to our success. I met Dr Goh when I joined NTUC Income in 1977 and worked under him for two years.

Dr Goh also served in various capacities in the government, including education minister, defence minister and deputy prime minister. He retired from government service about 15 years ago.

Dr Goh is now over 90 years old. He has not been well for some time. I wish to say a big "thank you" to Dr Goh, on behalf of nearly two million policyholders and their families.

Get good value products from an adviser

A few visitors commented that insurance agents sell products that give them the highest commission. These products many not meet the needs of their clients.

When I was CEO of NTUC Income, I made sure that all the products are designed to meet the following:

* have modest loadings for commission
* offer good value to the customers

The insurance agents (advisers) from NTUC Income are able to recommend suitable products to their clients, with the knowledge that the products give good value and provide a reasonable level of earnings for their sales effort. They earn more, by increasing their sales productivity.

I am happy to recommend the insurance advisers and products from NTUC Income to the general public. I know that the consumers will get a good deal.

If you visit this website, you can compare the front-end load of the endowment and investment-linked products between NTUC Income and the other insurance companies.

A small number of consumers are savvy and can make their investments without the help of an adviser. They do not need to take my advice anyway. My tips are for the general consumers.

Thursday, July 12, 2007

Voiding of warranty on car

COMMENT POSTED IN MY BLOG

I wonder how distributor workshop void warranty if car is not repaired in their workshop after an accident. Can warranty on engine be voided when repair is only on bumper? Wonder if any motorist's warranty has been penalised this way so far.

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REPLY:

The distributor state in their warranty, that the warranty is voided if any repair is done by a third party workshop.

I believe that the distributor will not be able to get away with voiding the warranty, when minor repairs are carried out at third party workshop which did not affect the parts of the vehicle that are covered by the warranty.

Although the distributor "threatens" to void the warranty, I believe that they have not done so for minor repairs. They have to act fairly and take care of their customer relations.

Insurance as a mutual arrangement to pool risk

Many people think of insurance as a legal contract. You enter into a contract with an insurance company. You pay a premium under the contract. The insurance company promises to pay you the specified payments under certain defined conditions. As the contract wordings are usually not clear, a dispute could arise quite often.

In the "old days", insurance was usually operated as a mutual arrangement. A large number of people join the pool. They agree to contribute towards the pool to compensate the members who suffered the defined losses. Usually, all the members are covered under the same benefits, which are generally understood through practice over the years.

The mutual arrangement is usually run as a non-profit. There are many advantages of the mutual arrangement (rather than a commercial contract) to take care of pooling of risks.

In some countries, the mutual arrangement is still strong. In most other countries, insurance are now being operated as "for profit" organisations.

Invest in a low cost fund

When you buy term insurance, you still have to invest the difference in a suitable fund.

Look for a fund with low upfront fees and annual fees.

This website shows you the fees charged by various insurance companies on their investment-linked products. Most of the fees are far too high.

Ballet Under The Stars

Singapore Dance Theatre
Ballet Under the Stars

20 to 22 July
Fort Canning Green

Gates open from 5.00pm for picnic
Schools Performances from 6.30pm.
Main Performances from 7.30pm.

Renowned as one of Singapore’s most popular outdoor arts event, Ballet Under The Stars (BUTS) enters its 12th year and has attracted a diverse crowd with its casual, outdoor picnic setting. The informal setting has attracted families, gatherings and company outings to BUTS.

With its wide outreach, BUTS offers the perfect grounds to meet SDT’s objective of reaching out to the general public. SDT is offering schools a platform to showcase their works, thus gaining invaluable experience and exposure.

Find out more.

Wednesday, July 11, 2007

Buy a low cost product

Hi Mr Tan,

Why do you advocate "buy term and invest the difference" and, at the same time, advise people to buy life insurance products? Are you contradicting yourself?

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REPLY:

There are two separate markets:

1. Those who are financially savvy can "buy term and invest the difference". They know how to select the right fund that have low cost.

2. For most ordinary people, they will find it more convenient to invest in a endowment or whole life policy. I advise them to buy a low cost policy (ie with a low margin for commission), rather than a high cost policy.

Lesson: Buy a low cost product.

Liquidate 50% of your investments

Dear Mr Tan,

I have invested quite a bit in all the funds of Ntuc Income, mostly in Growth and Balanced Fund. All are showing positive gains.

If the market gain another 10%, I plan to liquidate all and wait out for the next down cycle, if it happens.

What is your advice?

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REPLY:

I suggest that you keep the investment in the Growth fund (as you invested at a low price). If you really wish to realise some cash, perhaps you can liquidate 50% and keep the remaining 50% in Growth Fund. This is what I did for my own investments.

Higher interest rate in the future?

We have gone through several years of low interest rate. This has produced the following:

* high stock prices
* high property prices
* high bond prices

Interest rate is expected to increase globally, due to inflation. When it happens, you can expect the following:

* drop in asset prices (stock, property, bonds)
* higher interest on bank deposits and money market funds

Lesson: do not lock your investments in high asset prices, if possible. Have some money in short term deposits, so that you can benefit from the increase in interest rate (if and when it happens).

Generic drugs

Extracted from Consumer Magazine

The discover of a new drug is given a patent for 20 years. After expiry, other manufacturers can make the same drug under a different brand name. If you know the generic name of the drug, you can buy the generic brand (instead of the original brand) at a lower cost.


Generic name Proprietary name General use
Paracetamol Panadol pain and fever
Diclofenac sodium Voltaren pain and swelling
Mefenamic acid Ponstan "
Chlorphenamine Piriton runny nose, rashes, itch, allergy
Loratadine Clarityne "
Cetirizine Zyrtec "
Cimetidine Tagamet gastric, heartburn, stomach ulcer
Omeprazole Losec "
Glocosamine Viartril-S joint supplement
Amoxicillin Augmentin antibiotic
Isotretinoin Roaccutane acne
Atenolol Tenormin high blood pressure
Prazosin Minipress "
Nifedipine Adalat LA high blood pressure, angina
Frusemide Lasix diuretic
Simvastatin Zocor cholesterol

Different types of Fat (in food)

Summary of article "The FAT Truth" in Consumer Magazine.

Fat helps the body to absorb vitamin A, D, E and K. Fat provides essential fatty acids to control blood clot and inflammation.

Monounsaturated fats: found in vegetable oils (olive, peanut, avocdo, canola) and nuts (cashew, almond, peanuts). Lower LDL (bad cholesterol).

Polyunsaturated fats: found in vegetable oils (corn, sunflower, soybeans, safflower) and nuts (walnut). Lower LDL (bad cholesterol) and HDL (good cholesterol).

Omega 3 fats: found in fish (salmon,tuna, mackerel, sardine, trout). Reduce blood clotting and lower risk of blockage, heart attack, stroke.

Trans fat: food manufacturers use a process to turn liquid fat into trans fat, to increase the shelf life of food. Increase LDL and lower HDL.

Best type of fat: monounsaturatedm, omega 3.
Worse type: trans fat.

High distribution cost

Larry Haverkamp wrote an article entitled "Not Everyone Needs Life Insurance" in the Consumer Magazine, a publication of the Consumer Association.

He has this joke: "High distribution costs are needed to compensate agents for the difficult job of selling insurance with high distribution costs". (This is a vicious cycle).

My view: It is possible to sell life insurance with lower distribution cost, and reduce the premium for consumers. This will lead to more sales for the agents.

Structured products in a bear market?

Dear Mr Tan,

I have read your negative comments on structured products. Are these products suitable in a bear market? It offers protection against losses, and the chance to make a gain.

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REPLY:

If you do not wish to take risk in a bear market, you should invest in government bonds and earn about 3% per year. You can get 15% in 5 years.

If you invest in a structured product, you will get less than 15%, because the expenses to design and market the product can take away about 10% of the capital. This will leave you with a net gain of 5%. As you are speculating on this product, your real gain can be from 0% to perhaps 20% (but the chance of getting a high gain is small).

I am not aware of any situation (including a bear market) where a costly structured product gives value to the investor.

Computing a claim on a hospital bill

Hi Mr Tan,

What is the deductible under a medical insurance plan? Why are there so many items deducted from my hospital bill? The amount that I can claim is only a part of the full bill?

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REPLY:

The amount that can be claimed may (depending on your insurance plan), be subject to the following limits:

* limit based on the specific item, such as surgery fees or each day of stay in hospital

* deductible, i.e. the first part of the bill that is paid by you (before you can claim on the difference)

* co-insurance, i.e. the portion of the bill (in excess of the deductible) that you have to bear.

Most Shield plans have a deductible (the amount depends on the class of ward) and a co-insurance of 10% or 15%. These requirements are required by the Ministry of Health and is intended to require the consumer to share in part of the bill (so that they can play a part to minimise the hospital bill).

This is how a hospital bill is calculated, to arrive at the claimable amount.

1. First, the individual items are scrutinised to remove any excess over the specific limit (e.g. for surgery or hospital services) or items that are not covered
2. Next, the deductible is taken away
3. Finally, the co-insurance is taken away from the rest of the bill

Here is an example:

Hospital bill: $6,500
Non claimable items: $500
Deductible: $1,000
Co-insurance: 10%
Claimable amount (before co-insurance) = $6,500 - $500 - $1,000 = $5,000
Claimable amount (after co-insurance) = $5,000 less 10% = $4,500

Many consumers find it the calculation to be too complicated. I agree with this view. It will be better for the claim to be simplified.

Tuesday, July 10, 2007

Guaranteed renewable health insurance

Dear Mr Tan,

If I buy a health insurance policy, and I made a few claims, can the insurance company refuse to renew my policy at the end of the year?

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REPLY:

If the policy is a yearly renewable policy, the insurance company can refuse to renew your policy at the end of the period of insurance (ie one year), if you have made a few claims and is suffering from a chronic illness.

If you have a policy which guarantees renewal (regardless of your health condition), than the insurance company has to honour this promise. On renewal, you will not be loaded due to your health condition, but you may have to pay a higher premium based on your age.

Most of the shield plans in the market have this guaranteed renewability feature. However, the premium rate is higher than a policy does not provide this guarantee (i.e. insurance company can refuse to renew it).

For peace of mind, you should buy a policy that is "guaranteed renewable" up to a certain age, or for a lifetime.

Poor return on capital guaranteed products

Dear Mr Tan

It seems that most of the capital guaranteed product has given a poor return to their investors. Why is this the case?

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REPLY:

Due to the low interest rate, a risk free product earns about 3% per annum. To give a capital guarantee, the product issuer (ie bank) has to invest about 85% of the capital to provide the principal at the end of 5 years.

Of the remaining 15%, the marketing expenses and fees taken by the banks probably amount to 10%. This leaves only 5% to be invested in options or stock indices to give the return.

There is very little return that you can expect from an investment of about 5%. Sometimes, the option expired without any return. Sometimes, it gives a modest return, maybe 10% or 15% in total for 5 year. The chance of getting a high return (more than 15%) is small.

Give good value to customers

I have decided to remove the name of the bank that issued or marketed a specific structured product that has proved to be unsatisfactory for their customers. I do not give any negative connotation to the reputation of the banks. (So far, they have not taken up any issue with me on this matter.)

I wish to highlight the bad experience, so that the public can be educated about the unsatisfactory features of most structured products. I want to educate them to invest in straight forward financial products.

I hope that the financial institutions (ie banks and insurance companies) will also learn from the experience and offer good value products to their customers.

Interest rate linked structured deposit

Dear Mr. Tan,

I learn a lot of finance knowledge from your website. I wish to share my experience on the following structured product:

Name of product: Interest Rate-Linked Structured Deposit (10yrs-2yrs SWAP rate >0.8 based)
Amount invested: SGD 20000
Period of investment: 5 years
What is your return on maturity? Only 3.2% for the first year, then zero return for the following years.

Why was this product unsatisfactory?

The salesman told me that at least get 3.2% yearly. (Originally, we wanted to open a fixed deposit at about 2%). He said that the bank will return the principal between 2 – 3 years. When we asked to withdraw after 6 months, they told me there is a penalty above 1%.

When I asked on how to check the swap rate daily, they asked us to call their hotline. We had to wait a long time to get a reply.

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REPLY:

Thank you for sharing your experience. It is better to invest in a straight forward fixed deposit, rather than a complicated product.

Cars under warranty

COMMENT POSTED IN MY BLOG:

My friend was involved in an accident of no fault of hers for her "under warranty car". Her insurance doesn't list her car's authorised dealer as a supported workshop. In the end the repair was not well done and she had to return to the workshop for small fixes. So I think checking the list of motor workshop the insurance covers is important too!

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REPLY:

It is the duty of the insurance company to arrange the repair to an appropriate standard. An unsatisfactory repair of this nature is not common, and may happen with any workshop (including the authorised distributor's workshop).

Many authorised distributor sub-contract the work to a third party workshop anyway, even though they charge high repair cost (of two to three times of the market rate).

To ensure that the premium rates are kept at an affordable rate, we should not allow the distributor to use their warranty clause to charge high repair cost.

Front end charge for regular premium ILP

A visitor to my blog commented that he had to pay 20 months in front end charge on a ILP policy. I do not advocate ILP with such high front end charges.

There are ILPs with lower charges in the market. You can see a listing from Dr Money's website.

The sophisticated investor can adopt the "do it yourself" approach and avoid all front end charge. For the majority who are not so familiar with investment, you can find an ILP product with modest charges, and enjoy the benefit of an adviser.

You can also deal directly with the insurance company. NTUC Income has a business center.

How the world has changed in a decade!

Although a decade seems short, so much can happen.

Just 10 years ago it was still possible to imagine a world without Internet access. Just six years ago, it was possible to visit the World Trade Center in New York or board a plane without removing your shoes.

Increase in air fares

I travelled a few times this year and made by own booking through the internet. Recently, I found that the price of the air tickets had gone up, and that the planes are more full.

The increase in air fares is due to two reasons:

* cost of fuel has increased (leading to higher fuel surcharges)
* the airlines had increased their fares due to high demand and lower capacity

The delay in the delivery of air buses had led to a shortage of planes. As travel increased, the planes are getting more passengers. This has given the chance for the airlines to increase their fares.

Lesson: I have decided to reduce my travel this year, due to the high prices. I will do my business by telephone through Skype.

Find the right motor insurance

Dear Mr Tan

I own a car and is compulsory to buy motor insurance. Who should I buy the insurance from? Who offers the best rates?

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REPLY:

You have the following options:

1. get your insurance agent to find out who offers the best rate on each year's renewal
2. search for the best rate by yourself
3. find a low cost insurer, and stay with them for many years

Many people adopt method 1. The disadvantage is that the agent may find you an insurer that pays them the highest commission. However, if you have a trustworthy agent who can look after your interest, this method is suitable for you.

It is quite troublesome for you to adopt method 2. Apart from finding the lowest rate, you have the trouble of submitting a new application to switch the insurance company. You are also not familiar with their claim practice and service quality.

It is best to adopt method 3. A low cost insurer has the following characteristics:

* sell insurance to you directly (and save on the 15% commission payable to the agent)
* have an effective system to manage the claims (and avoid paying high repair charges)

Usually, the low cost insurer will ask you to allow them to handle the repair of the vehicle. This gives them the ability to avoid paying for inflated charges. By managing the claims well, their can continue to offer competitive rates and benefit all their customers.

A well managed insurer will have have transparent practice on their handling of the claims (to ensure a high quality of repair and customer service). You can read their practice FAQ.

NTUC Income fits into this description. You can contact their business center or see an insurance agent.

Monday, July 09, 2007

Avoid high front end charge

Hi Mr Tan,

Thanks for sharing your insights in this blog. Your views are valuable for a young man.

I'll wish to seek your thoughts in recommending ILPs to your visitors. For one, I think that they are expensive. I bought one whole life ILP this year, and it has a distribution cost of 20 months premium paid over 3 years.

Should I opt out of the policy due to the high cost? Moreover, the funds to choose from are very limited as compared to what's available on the market.

I'm doing my own investing for my retirement fund, and will think that with persevered learning, I will gain more doing my own investing (ie buy term and invest the rest of my savings).

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REPLY:

I agree that a front end charge of 20 months is far too high. I do not recommend any high cost product.

A similar plan from NTUC Income had a front end charge of about 6 months. This is used to pay commission to the adviser, so that they can advise the client over the years.

If you are knowledgeable about selecting the right fund and does not need an adviser, it is better for you to invest in a unit trust and avoid the front end charge entirely.

For your existing ILP policy, if you have just taken the policy recently, it is better to terminate the policy and save on paying the balance of the front end charge.

Read these FAQs

Financial Planning for the Young
Do I need an Insurance Adviser?

High expense to treat a premature baby

I know of a recent case. A baby was born premature. The cost of treating the baby in a private hospital is estimated to be $60,000 to $90,000. It is a lot of money.

There is insurance to cover this incident, but the cost is likely to be $500 to $800. Many people feel that they do not need this insurance, until something happens. Then, it becomes a big burden.

I recall that the risk of a premature baby is probably 1%. In some cases, the cost is modest. But, for severe cases, the cost could be as high as indicated above.

Lesson: Buy insurance to cover this risk. Treat it as part of the total cost of having a baby. Add it to the gynaecologist fee and delivery charges.

Cost of insurance

Dear Mr Tan,

How much will it cost, if I insure for $100,000 under a term insurance, and I do not need to have any savings in the policy?

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REPLY:

If you buy a term insurance for $100,000 for 20 years, you pay a monthly premium of $5 to $18, depending on your entry age and gender. The premium is lower for a person who starts at a younger age. It is also lower for females.

If you buy a decreasing term insurance, where the sum assured reduces yearly over the term, you get a reduction of between 20% to 40% of the premium.

If you wish to insure for accident only (to cover death and permanent disability), you have to pay a premium of about $7 a month.

You can find out more from this FAQ.

You can shop around and ask for a quote from several insurance companies. You may be able to find a lower premium rate than what was indicated in my FAQ. Always be ready to compare.

Talks and Interviews

If you wish to know more about my ideas, especially during the time that I was with NTUC Income, you can read the following articles. They are short and easy to read.

Buy term and invest the difference

COMMENTS POSTED IN MY BLOG:

Take the advice of Mr. Tan by recommending term plans and invest the rest. This is the way to ensure your clients are adequately covered.

Whole life plan deprives your client of adequate protection.This is what is happening in Singapore. Many deceaseds" family are in financial difficulties because their bread winners didn't leave enough. They left their money with insurance agents.Check with the single parent society and they will you the stories.

The insurance agents have a role to play but their interest often comes first. They are greedy, incompetent, dishonest and unethical; this results in many not properly and adequately covered.

That is why AXA, the world's largest insurer, decided to sell ONLY term plans and investment products. That is their belief that it is the only way to address under coverage and also to remove the conflict of interest.

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REPLY:

"Buy term and invest the difference" is suitable for the well educated and financially savvy.

For those who are not so familiar with investments, a low cost traditional product may also be suitable. They will benefit from a low cost product, rather than a high cost product.

Express your views fairly

My blog is written mainly to give tips to consumers on financial products. If you find my views to be useful, you can visit my blog regularly. Do tell your friends to come to my blog.

You are also welcomed to send questions to me (kinlian@gmail.com). I shall try to answer them. If suitable, I shall post the issue in my blog, so that other readers can also learn about it.

If you have a different view, you can send them to me. I shall post your view to give a different angle. Please express your views fairly.

There are a few people who have a different agenda. They indulge in personal attacks against me or other people. I have deleted their postings. If they dislike my views, there is no need for them to visit my blog.

Life cycle Fund

Hi Mr Tan,

Can you explain the concept of a life cycle fund? Who is it suitable for? It it high or low risk profile? How do I select the right fund?

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REPLY:

A life cycle fund has a target maturity date. You normally choose a date when you are expected to retire from work, say when you are around 65. If you are now 30 years old, you can choose a life cycle fund that has a target maturity date in about 35 years time, say 2040.

During the earlier years, the fund is largely invested in equities. This has a higher risk profile, but is expected to give a better return. As the fund approaches its target maturity date, a higher proportion is invested in bonds, to reduce the risk profile of the fund.

I have seen a few life cycle funds, managed by Vanguard and Fidelity in the USA, where the proportion of bonds increase to about 60% (not 100%) on the target maturity date.

I am not sure if the found is liquidated when it reaches its target maturity date. I think that it can still continue beyond that date. There is no need to liquidate it.

Many people like the life cycle fund. It saves them the trouble of managing the porportion to be invested in equities and bonds. They prefer to leave it to the fund manager, knowing that it will reduce the risk profile as the fund approaches the maturity date.

The Madness of Crowds

Source: Investopaedia (edited)

Charles Mackay wrote a book entitled "Extraordinary Popular Delusions and the Madness of Crowds".

It tells the story of several market bubbles, starting from the tulip bubble in 17th-century Holland.

All the bubbles have a similar story: an bull market in some commodity, currency or equity leads the general public to believe the trend cannot end. The optimism leads the public to overextend itself in acquiring the object of the mania. Lenders fall over each other to feed the fire.

Eventually, fear arises as investors start to think that the market is not as strong as they assumed. Inevitably, the market collapses, as that fear turns to panic selling, creating a vicious spiral that brings the market to a point lower than it was before the mania started. After that, it will take many years to recover.

The key to this phenomena lies in the nature of the crowd: the way in which a collection of usually calm, rational individuals can be overwhelmed by emotion when it appears their peers are behaving in a certain universal manner. The fear of missing an opportunity for profits is a more enduring motivator than the fear of losing one's life savings. At its fundamental level, this fear of being left out drives the overwhelming power of the crowd.

Another motivating force is our tendency to look for leadership, based on the crowd's opinion (as we think that the majority must be right) or a few key individuals who seem to be driving the crowd's behavior by virtue of their uncanny ability to predict the future.

In times of uncertainty, we look to strong leaders to guide our behavior and provide examples to follow. The market guru is an example of someone who stand as all-knowing leader of the crowd. The fa├žade is the first to crumble when the tides of mania eventually turn.

Sunday, July 08, 2007

Expense ratio on long term savings

If you invest regularly for many years, to accumulate savings for your retirement, the amount that you can get on maturity depends on:

* the yield of the underlying assets of the fund (insurance fund or unit trust)
* the charges that are taken away from the earnings

If you invest in a well diversified fund of equities and bonds, you can expect an average return of 5% per annum (during a low interest rate environment).

You have the following options:

* invest in a low-cost unit trust with an expense ratio of 1%
* invest in a low-cost endowment plan with a expense ratio of 1.5%
* invest in a high-cost endowment plan with an expense ratio of 2.5%

An endowment plan has a higher ratio, compared to a unit trust, as it has to provide for the death benefit. I estimate it to be an additional 0.5%.

The difference in expense ratio between a low cost endowment and a high cost endowment is the commission that is paid to the agent. Most endowment plans in the market pays high commission to the agent. I estimate that it will add an additional 1% to the expense ratio.

This is what you can get, by saving $2,000 yearly for 30 years:

Plan Expense Net Maturity
margin yield amount
Unit trust 1.0% 4.0% $136,200
Low cost Endowment 1.5% 3.5% $105,000
High cost Endowment 2.5% 2.5% $ 89,000


For a 30 year investment, the difference in the maturity amount is 18% (ie $105,000 compared to $89,000).

Lesson: If you to invest for the long term, look for a unit trust or endowment plan that have a low expense ratio, so that you can earn a better maturity amount.

Structured Investments

DBS Bank has a good webpage. It shows the structured investments marketed by them over the past years, and are still current. You can find out quite easily the current indicative price of these investments.

The structured investments are listed under the following categories:

Credit linked notes - 5 tranches
Currency linked deposits - 4 tranches
Equity linked deposits - 19 tranches
Index linked deposits - 47 tranches
Interest rate deposits - 76 tranches
Total: 141 tranches

Based on the prices posted in this website, it seems that most of the investments are below par, ie less than 100% in prices. In the worst case, the drop is more than 30%, if the investor cash out now.

There are just a few tranches under "indexed linked deposits" which show an apprecation of up to 24% for the period (about 4 years) that the investments were held. The annual return is about 5-6%.

It seems that most of the structured products performed poorly, and gave a poor return.

Buy from NTUC Income

Dear Mr Tan,

If I like to buy insurance from NTUC Income, who do you recommend? Can I buy directly and enjoy a discount?

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REPLY:

You can approach any of the advisers who are listed in the right panel of my blog. They maintain their own blogs. They are:

Thomas Phua
Alvin Soong
John Low
Glen Toh

You can also call the NTUC Income business center, if you wish to buy directly.

My approach towards insurance

Mr Tan,

If annuity is so good, how much of it did you buy? Also, how much of regular-premium ILP did you buy? It'll be good to see an insurance expert walking the talk.

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REPLY:

When I was younger, I bought regular premium policies to provide the insurance protection and accumulate some savings. I also bought insurance for my children. I must have more than 10 policies at one stage. I bought the policies from NTUC Income, as the sales charges are modest (and not excessive).

I now have many investment linked policies, invested in the combined fund and the money market fund. They are also with NTUC Income. They are mostly invested with single premiums.

I advise young people to buy a regular premium ILP plan from NTUC Income - as the sales charges are lower than similar plans from the market. You can also buy directly from their business center, and enjoy some incentive.

For those who are able to buy unit trusts directly through the internet, you can do so directly, and save on the adviser fee. But, you have to be careful about the fund that you invest in. Make sure that you are not hit with higher annual fees.

As I have more than sufficient savings, I do not need to participate in the pooling of longevity risks in a life annuity. My savings, which is in the combined fund, will last more than my remaining lifespan. So, I do not have any life annuity at this time. (But, I may change my mind at a later date).

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