Saturday, September 01, 2007

Unethical practices

When I give financial planning talks to the general public, I get approached by many people who ask my advise on the insurance policies that they have bought.

Here are the common faults of insurance agents:

1. Over-selling. Selling more life insurance than is needed, e.g. too much critical illness coverage.

2. Unsuitable products. The agent sell products that earn a high commission, but do not serve the important needs of the customer.

3. Fail to explain the product. Many customers are not clear about the product that they have bought.

4. Unrealistic projections. For example, stop paying premiums on reaching the critical year.

Clearly, the high commission that is paid to the agent is responsible for these unethical practices.

The blame is not entirely on the agent. The insurance company that design the products and "motivate" the agents to sell aggressively and meet high sales target are also responsible.

Some agents act professionally and look after the interest of their clients. I hope that all agents can fall in this category - but this may be just wishful thinking.

Friday, August 31, 2007

Several living policies


I presently have a few living policies paying about $2,000 yearly for each policy. Should I terminate them and convert them to term insurance policies?


You have probably over-invested in the living policy. It has high charges and give a low return, as a large part of the premium goes towards the critical illness coverage.

You should have more of your savings to earn a high return for your retirement. You can buy decreasing term insurance for your protection. A sum insured of $50,000 is probably adequate to provide for critical illness.

Saving for a child's education


What is an education policy? I was told by my agent that I should buy a living policy for my child instead of an education policy as it serves the same function and have life coverage. Your advice?


An education policy is for the parent to save for the expenses of sending a child to university. As this is quite expensive, the parent has to save in advance for many years.

It is better to invest in a low cost investment plan, and get the best return on your savings. A living policy is not appropriate. It has high expenses and gives a poor return.

Read this FAQ.

Equity or Currency Link Insturments

Dear Mr Tan,

I like to know your views about equity and current linked investments that are issued by the banks. There are for a period of 2 to 4 weeks. They estimate a return from 4 to 15%.

For example, Product X with a spot price $3.60 is offered with a strike price of $3.40. If, after 4 weeks, the securities is above 3.40 your get 13.7% yield. If the security falls below $3.40 you will get the securities and of course suffer a paper loss.

What do you think of this type of instruments and are worthed investing in?


This is a structured financial product. My views of this type of product, in general, are described in the following FAQ.

Generally, I advise people to avoid any product that they do not understand. It is difficult to calculate the probability of a negative event, and the potential amount of the loss. So, you should avoid this type of product.

I believe that the issuing bank takes away a large margin for their profits. They will leave you with a low return and a high risk.

Compulsory Annuity

Dear Mr Tan,

I refer to the government proposed compulsory annuity for those below 50 years and payable after 85 years.

How will this be fair to those who are currently in poor health which will
impact their longevity? What is the criteria for poor health, if such people can be exempted from the scheme?

Although in theory and policy it looks good, is it practical and fair to implement and administer such a scheme which is across the board?


I do not have the solution to your particular situation. Anyway, the compulsory scheme will only take effect in 15 years time. It may be too early to declare that a particular person is in poor health.

Money market Fund

Q1. Money market fund (pertaining to Flexi cash) is a type of unit trust. If I buy at 100 units at an offer price of $1.10, my total investment is $1,100. If I decide to sell it at a bid price is $1.09, my proceeds will be $1,090. So I have make a loss of capital of $10. That means a person have to time his withdrawal to make sure that his capital is preserved.

Reply: It is possible, but unlikely, for the money market fund to drop in value. Even if it does drop (due to a rise in interest rate), the drop is temporary and it will recover its value in a few days or weeks time.

Q2. Can the bid price drops for a money market fund? So does that mean that one should buy when the offer price is low?

Reply: If you look at the price over the past few months, you will find it it increases by 0.1 cents very 5 to 15 days. If you time it, you may save a few days of interest.

Q3. In Singapore, the money market fund is packaged as unit trust. The value of the unit is determine by the bid/offer price?

Reply: You are right.

Hedge Fund Managers

In good times, when the bubble was growing, hedge fund managers made tens of millions of dollars. They invested the funds in sub-prime mortgages and collaterialised debt obligations. They were able to show a good return on a growing bubble.

When the crunch comes, who takes the loss? The investors. The hedge fund managers were not required to pay back the tens of millions of dollars that they earned.

Lesson: Do not invest in hedge funds.

Impartial advice

There is a useful role for financial advisers (and insurance advisers) in giving impartial advice to customers. They should be paid a fee for the time spent.

Many people told me that they are willing to pay a fee of $200 for financial advice. The fee of $500 or more that is currently charged by some advisers is too high for most customers.

It is possible for the adviser to reduce the fee to $200, if they are not required to spend too much time with the client. The client can be asked to read a FAQ (frequently asked question) on financial matters before they see the adviser. It will be possible for the adviser to do a good job within 2 hours.

My ideas are set out in this paper.

Look for low cost products

Dear Mr Tan,

There are many investment products in the market. But, it seems that the life insurance product (ie endowment policy) has the biggest upfront cost to the consumer. Even the ILP has 19 months of upfront cost, according to Dr Money's website. Why are the charges so high?


Many years ago, the governments in most countries wanted to encourage people to buy life insurance to provide protection to the family. They offered an attractive incentive - the life insurance premium can be deducted from taxable income.

Life insurance companies paid high commissions to agents to sell this product. The high cost is offset by the tax savings. The product still give good value to the consumer.

The situation changed, when most governments withdraw the tax savings. Without the tax savings, the high commission makes the product unattractive for consumers. Many insurance companies contined to sell these "poor value" products, instead of changing their product and marketing strategy.

Some companies adopt a different approach. They sell term insurance to provide the low cost protection. The consumer can invest their money in other investment funds. Some of these funds have low cost and give good value to the consumer. (But, there are high cost investment funds - which should also be avoided).

Lesson: Look for low cost insurance products (e.g. term insurance) and low cost invsetment funds (e.g. indexed funds). Avoid high cost products

Thursday, August 30, 2007

Pay back for a part time degree

Hi Mr. Tan,

I am 25 years old. I graduated from a local polytechnic 5 years ago. I am now considering to take a part time business degree. For the time, effort and money that I will be putting in, is it worth it?


I am not familiar with this matter. I can only give you two conflicting views.

1. My friend, who did some research of many part time degrees, told me that many Singaporeans pursue these part time degrees (including business MBA) at great expense. On completion, they are not able to earn a higher salary that justify their investment.

2. There was a report that for each year of education, the salary increases by a significant percentage (maybe 10% or more). This suggests that the education effort has a payback.

I guess that the answer depends on the quality of the university education. If it is from a good university, you may have its payback. If not, you will probably not get the payback.

I suggest that you talk to a few friends or other people who have taken the same route before. They may be able to give you some useful views as well.

You can look at this website to check the quality of the degree that you intend to pursue.

All the best in your decision.

Low cost products for ordinary people

I met the chief executive of a Canadian insurance company who has over 20 years of experience in the life and non-life market.

He said that the financial planning needs of most people are quite straight forward. They can be met by simple savings and insurance (protection) product.

The advice of a financial planner is needed only for the high income earners who have to carry out estate or tax planning. This does not apply to many ordinary people.

There is no need for complicated and costly products that give a poor return to the consumers.

Wednesday, August 29, 2007

Kabuki Performance in Tokyo

I attended a kabuki performance in Tokyo. This is the first experience of kabuki, although I have visited Japan on more than ten occasions during the past 25 years.

Kabuki is written in 3 chinese characters which mean, "song, dance and skill".

Kabuki is a play with a story line. It is performed entirely in Japanese dialogue. We can rent a receiving device which translate the dialogue into English through a earphone.

All the actors are males. They play the parts of both males and females.

It is an enjoyable performance.

Cool Biz Wear for Summer

I am now in Tokyo to attend the 50th anniversary celebration of a Japanese cooperative society.

It is now summer in Japan. The temperature is above 30 degrees C. To save on energy, the offices are cooled down to 28 degrees.

The office wear during summer is "Cool Biz". For males, this is half sleeve shirts, without tie or jacket.

For the celebrations, they have decided to keep to the "Cool Biz" attire.

This effort is promoted by the Ministry of the Environment in Japan. It is aimed at reducing energy cost and protecting the environment.

The Japanese are serious in tackling important issues and approach them in a practical way.

Lesson: Singapore can save a lot on energy cost, if we keep the temperate at 28 degrees throughout the year. If this is too hot, perhaps we can reduce it to 26 degrees.

Tuesday, August 28, 2007

Investing in properties

Here are my views about investing in properties at the present time.

If you are eligible for a new HDB flat, it is an attractive investment. You may qualify for some Government grant as well.

I know of someone who bought a 5 room HDB flat next to Redhill MRT station for $380,000 (including renovation) recently. A private property in the same locality would cost $1 million.

The new HDB flats are built to a high standard. They are almost as good as a private property.

I hesitate to invest in private property at the current high price. It may not be sustainable over the next few years. It reminds me of the situation in 1996.

Top up special account of family members

I read that it will soon be possible to top up the CPF special account of family members and siblings. This can be done before or after they reach age 55.

This is an excellent idea. The money in their special accounts can earn an attractive interest rate, and also ensure that they have an adequate income for their future.

More details will be announced in Parliament soon.

STI Exchange Traded Fund

The minimum investment is 100 units of the STI Exchange Traded
Fund. The current price is about $34.00 per unit. The minimum amount is $3,400. The brokerage is 0.25% of the amount invested.

If you wish to invest in this counter, go through your stockbroker.

Sufficient for 100 years

Some people thought that I must be very rich to have sufficient money to last 100 years. This is not really the case. It depends on how much you need to live comfortably.

If you have a house that is fully paid for, and your children are working, you will find $1,000 a month to be sufficient for 1 person or $1,500 for a couple.

If you can earn 4% per annum, a capital sum of $450,000 can give $1,500 a month forever. The money will not run out. It can last for more than 100 years.

A capital sum of $300,000 can provide $1,000 a month forever.

The problem is: $1,500 may drop in value year by year, due to inflation.

Here is how you can deal with inflation. You have a larger capital sum of, say $900,000. If you can earn 4% a year, you can draw out $1,500 a month, and this amount can increase yearly at the rate of about 2% per annum. This should be sufficient to keep pace with inflation, and preserve the real value of your monthly income.

This is how the participating annuity plan works. It pays a smaller sum (compared to a non-participating plan) and pays a bonus each year to keep up with inflation.

You can earn an average of more than 4% per annum, if you invest in a large, well diversified low cost fund that is mainly invested in equities. Read this FAQ.

In summary:

1. You only need a capital sum of $900,000 to provide a monthly income forever.
2. This allows you to draw a monthly sum of $1,500 increasing by 2% yearly,

Monday, August 27, 2007

How to buy term insurance

If you wish to buy term insurance, you have to call the insurance company directly. You can try NTUC Income, Aviva and AXA.

Give them your age, the sum insured and the number of years of coverage. I suggest that you take a 20 or 30 year term. Ask for a quote on level and decreasing term.

Compare the premium rates. Ask the insurance company to explain their coverage. Ask for a FAQ.

You can also qet a quote from their website.

It is all right to approach an adviser. But, you have to be alert that the adviser does not steer you to take an expensive policy (for which they can earn a higher commission).

As the adviser does not earn much from selling the term insurance policy, you should try to handle the transaction over the telephone.

Talk on Managing Your Finance

I gave a talk on Managing Your Finance for young teachers. Here are some of the questions asked by them.

1. Please explain the products - bonds, equities, blue chips

2. Any advice on investing CPF savings?

3. How much is the fee of an independent financial adviser? Any tips on selecting a good adviser?

4. If I buy term insurance directly, do I still need to pay commission?

5. What are the risks of investing in properties at this time?

6. I have invested in a fund which is losing money year after year. Is it better to withdraw from this fund (cut loss) and invest in another fund?

7. What is an education policy? I was told by my agent that I should buy a living policy for my child instead of an education policy as it serves the same function and have life coverage.

8. Do you advise us to buy critical illness policy? Does the medical benefits for teachers cover critical illness?

9. How can I buy the STI Trakker fund? Is it a good buy at this time?

10. I am 51 years old. Is it too expensive to buy term insurance now?

11. I am on a pension scheme. Should I buy insurance?

12. Why are there no encouragement for older government servants to enjoy the fruits of their labour, instead of work, work. Older teachers like to continue to stay for the long term ,but most cannot cope with the stress .Why should there be so much stress for older teachers who have already worked for 30 yers? They have already stressed a lot when they were young.

13. I presently have a few living policies paying about $2,000 yearly for each policy. Should I terminate them and convert them to term insurance policies?

14. I want to buy a medical insurance to cover H&S for my daughter (20 years old). What kind of insurance should I buy for her. Is Medishield insurance good enough? What insurance plan would your recommend? she is a NUS undergraduate.

15. STI Trakker fund is not liquid. To buy or sell it is a hassle. Why do you recommend it?

16. What are some institutions I should start investing with? POSB? DBS? NTUC Income? others?

17. My son had a heart operation when he was 5 months old. He is now 7 years old and is well and healthy. However, I was not able to get any insurance for him. Any advice?

18. Do you think that the sub-prime turmoil is approaching its end?

19. Currently, I intend to buy an insurance plan. I asked for 2 quotations. Both are similar in terms. Monthly premium $120 for 20/ 30 years. Covers death, total permanent disability ,terminal illness. Return of $99,000 after 20/30 years. Is this a good plan?

20. What is the minimum amount that can be invested in the STI Trakker fund?

21. What do you think of land investment like Canada land Investment by Walton?

12. What do you think of Eldershield policy for medical coverage? Can you comment on the Eldershield Plus that is coming?

I shall answer them in separate postings.

Some tips on medical Insurance

1. The Shield plans requires me to pay the deductible and to pay a share of the balance of the hospital bill. Some insurers offer a rider to cover these items, but it has to be paid in cash. Should I buy the rider?

For most people who are in good health, there is no need to take the rider. If you have to be hospitalised, you can pay these items from your Medisave account. This amount is not large, and can be self-insured.

If you insure these items, you have to pay a premium that covers the expected claim, expenses and a profit margin.

2. My employer now provides medical insurance to me. Should I buy a Shield plan to provide continuity of cover after I retire from work?

Many people take a Shield plan to provide continuity of cover. They pay a premium under the Shield plan, but they are not likely to make a claim under this play, as the hospital bill is likely to be paid by the employer.

It is advisable to take the Medisheild plan for this continuity of cover, as it has th elowest cost. There is no need to pay a high premium for a plan that you are not likely to use when you are covered by the employer.

If you do not take a Shield plan now, you can still apply for a Shield plan later when you retire from work. At that time, you will be accepted, if you are in good health. If not, you can still buy insurance by paying a higher premium.

Some people are willing to save on the premium for the Shield plan and apply for insurance only when it is needed. They can save on the premium in the meantime.

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