Thursday, September 06, 2007

High distribution cost


Wonder if all insurance company sell low cost, will the insurance company survive the business environment?

Is the distribution cost paying the agent commision only? What about the CEO's pay where does it come from?

So it is not fair to always lament on the commission earn by agents. What the agent earns is only part of it, distribution cost goes to pay more than agent commission.

I wonder if Mr Tan will comment on this or allow this to be posted.


Products that are simple and meet the real needs of the consumers can be sold with a low distribution cost. It can have a reasonable margin for all parties to earn a reasonable income.

Unfortunately, many products are designed to be complicated, costly to administer, costly to market, and give poor value to customers.

The insurance agent can easily sell these high cost products to naive customers, and earn a high commission from the sales. The managers and CEO can also earn high salaries from the high profit margin.

After the product is sold, the customer is locked in for 20 to 30 years, and can only terminate the contract at a great loss. If they keep the contract, they get a poor return from their years of savings.

I hope that businesses will be ethical and will market products that are fair and give good value to customers.

Be fair in your views

One anonymous visitor to my blog has expressed strong views against insurance agents. Some of the comments are quite rude. I have to block them.

There are some agents who are driven by commission to act against the interest of the customers.

There are many other agents who act ethically and offer the best advice to their customers. They play a useful role to help the ordinary people to save and protect their families.

Please be fair and considerate in expressing your views.

Encourage more people to use public transport

The roads in Singapore are getting congested. The Government plans to extend the Electronic Road Pricing (ERP) to more roads, extend the chargeable hours and increase the charges. These measures will reduce the congestion on the road.

The Minister for Transport said that building more roads does not help to solve the congestion problem. It encourages more people to use cars and will lead to more congestion at a later date.

I agree.

Read my views in this article which was published in Straits Times one week ago.

Insure against real needs

Some customers bought more insurance than they really need. They were over-sold by insurance agents who are keen to make the commission.

Here are some tips:

1. Buy insurance for the risks that you need to cover. Do not buy insurance for risks that you can shoulder on your own.

2. Buy low cost insurance. Do not bundle it with savings. Invest your savings separately.

3. Do not over-insure. Do not take several medical insurance policies. You are paying too much premium for no value. You are allowed to claim up to the amount that you spent only.

4. Find an honest adviser who help you to pay less on your insurance, and find the lowest cost.

I shall be making a separate posting to talk about the risks that you really need to insure, and the risks that you do not need to insure (i.e you can take on your own).

Life Insurance sales in France

In France, there are virtually no life insurance agents left. All the life insurance sales are carried out by the banks or by salaried employees.

The upfront sales charge is 1% or less for single premium products. The annual fee deducted from the investment fund is 0.5% for equities and 0.1% for fixed income.

These charge are very low. Life insurance gives good value to the customers.

Previously, the sales were done by life insurance agents earning a high rate of commission. When the agents were forced to disclose the high commission to the customer, resulting in no cash value for the first two years, the customers refused to buy the products.

In Singapore, the high charges are disclosed to the customers. But the customers are not aware that they have the alternative to "buy term and invest the difference". They pay the high sales charges and, when they learned about these charges later, they regret their decisions.

Over selling by insurance agents

I was told that some young people bought too much life insurance. They bought policies for themselves, for their children, to save for their eduation, for their medical expenses, etc.

The total insurance premium that they have to pay takes away half of their salary. They face some financial difficulty in managing their expenses.

I was asked by their counsellor, on what are their options. If they terminate some of the policies, they would have to suffer a loss. But, if they continue, they find it difficult to cope.

Here is my frank view. The insurance adviser has over-sold and gave bad advice to the customer. The customer can make a complaint to the authorities for the bad advice, and ask for a refund of the premiums that they have paid.

I hope that the adviser is made responsible for the bad advice that has been given. Do not let them get away with it.

Keep your living policy

Dear Mr Tan

I really enjoy reading your blog. You have certainly opened up my mind especially with respect to insurance.

I have a NTUC Living policy for a sum assured of $35K. I have been paying it for 13 yrs now. The bonus is about $14K. The surrender value is $9K now.

Does it means that if I die now or come down with critical illness, I will only get the sum assured + bonues (ie $35K + $14K = $49K). I'm paying a total annual premium of $723.

On the other hand, if I buy a $50K term now, I only pay about $120 per yr. So for the same payout, I will be paying much less ($120 vs $723). It just seems too good to be true to terminate my current living policy, pay less premium and yet get the same coverage.

Thank you for your time Mr Tan, it really brings a new perspective on financial planning.


This is correct. You are covered for $49,000 in the event of a claim.

I suggest that you keep your living policy and take the term insurance as well, if you can afford both premuim. The living policy covers 30 dread disease and have a cash value at any time that you terminate it. The cash value increases each year.

The term policy is cheaper, but it does not have any cash value. It covers you for a specific term, i.e. 10 or 20 years. After the term, the cover ceases.

Wednesday, September 05, 2007

Career prospects for an actuary

A reader of my blog asked about the career prospects for an actuary. Here are some facts given by someone who recently qualified as an actuary.

1. It takes about 7-8 years to qualify from start
2. Most actuaries work in insurance or consulting, but actual practice is not as mathematically challenging as most people think. Programming, common-sense and business considerations are needed to be successful..
3. Starting salary for fresh grads are about $2,000 to $2,500, but can grow fast depending on passes in the actuarial examinations. Work experience is also valuable in insurance/consulting firms.
4. The demand for qualified actuaries is growing in the region. There is less demand in Singapore, as the insurance market here is small.
5. You can get more information from
6. Actuaries can work in other finance areas geared towards mathematics eg quantitative finance, investment, financial engineering. They generally earn more but their work is more stressful.

People are living longer

I made a research into trend in death rates in Singapore during the 10 years from 1996 and 2006.

The death rates for each age group, falls by about 4% per year. For example, for males age 55 to 59, the death rate dropped from 17.9 per in 1996 to 11.3 in 2006.

If this trend continues, we will see some interesting situations:

1. Based on the current death rates, a male age 65 can expect to live another 17.8 years. If the rates continue to fall, the life expectancy increases to 27.3 years, i.e. 10 years more.

2. If the age-specific death rates continue to fall by 4% per year, a baby born today can expect to live to an average of 116 years. Wow!

What does this mean? It is important to have a life annuity. You will live longer than you expect!

Note. Some people think that it is not possible for death rates to continue to fall by 4% per year. It will reach a certain point and stop declining after that.

Tuesday, September 04, 2007

Legacy of Goh Choo San

Goh Choo San was a Singaporean, well known in the dance circles in America and was the resident chereographer of the Washington Ballet prior to his death in 1987.

The Singapore Dance Theatre is making a special performance showing the dance pieces of Goh Choo San, to commerate the 20th anniversary of his death. This will be performed at the Esplanade Theatre on Saturday, 8 pm.

If you have a free evening, come and watch this performance. Tickets are available at a modest price of less than $70.

Investment in a degree or continuing education

One Polytechnic graduate has asked me on August 30th whether it is worth his while in investing in a part time business degree? I have given my answers to his question.

Dr. Lee Kum Tatt, who has considerable experience especially in S & T manpower development, has volunteered to share his personal experiences. He intends to write some articles in his blog on this important subject of education and manpower development. Read about his experiences and views on this subject in his blog.

Buying a HDB resale flat

Hi Mr Tan,

I need your advice on acquiring a HDB resale flat. I am considering the following options:

1) A 5-rm HDB flat in Bishan, cosing $400k. I qualify for a HDB concessionary rate of 2.6%.

2) A 4-rm flat in Bishan, costing $300K. The catch: I need to get a bank loan with floating interest rate of 4-6%.

In your opinion, which is a better decision?


I hope that the following figures will be useful for you to make a decision.

Loan Repayable Interest Annual
over rate repayment
$400,000 30 years 2.6% $19,367
$300,000 30 years 4% $17,349
$300,000 30 years 5% $19,515
$300,000 30 years 6% $21,794

If you have to pay a floating interest rate at 5%, the annual repayment for a $300,000 loan is $19,515. This is almost the same as the repayment for a larger loan of $400,000 at a subsidised interest rate of 2.6%.

It may be better for you to take the 5 room flat for $400,000 at the subsidised rate. Bear in mind that the interest rate of 2.6% is subject to revision.

Commission payable on life insurance product

Hi Mr Tan,

May I ask how does an insurance agent from a tied company earn? Do they have a fixed income + variable commission? How do they work? How does an independent financial advisor earn monthly?


The insurance agent earns entirely on commission. For most regular premium product, they earn about 100% of the annual premium (over the first few years) and their agency manager earns about 50% of the premium.

If you invest $200 a month, or $2,400 a year, you can expect about $3,600 to be taken away from your savings to pay the commission of the agent and the manager. In my view, this is too high.

The actual commission depends on the type of product and the term of premium payment.

The insurance company pays a total to the independent financial adviser a total that comprises the two levels of commission plus the cost of recruiting and training the agent.

In the case of NTUC Income, the total cost is about 40% lower than the market.

This are just my guess. I think that the figures are about right.

Investing CPF savings

Mr Tan,

Any advice on investing CPF savings?


1. Transfer the maximum amount to the special account, to earn a higher interest rate of 4 percent.

2. Keep a modest amount of your ordinary account to meet a few monthly installments of your property. Invest the remainder in a low cost, diversified equity fund, as explained in this FAQ. You are likely to earn a higher return on this fund, compared to the interest charged on your housing loan.

3. Talk to a financial adviser, to make sure that the figures are up-to-date, and correct.

Investing after a market correction

Dear Mr Tan,

Your posting on your blog 2 weeks ago just before the market plunged to below STI 3000 mentioned that the index may not drop to 2700. You also mentioned that Warren Buffet had started nibbling on some stocks.

I have never bought stocks during a correction but did so only because I wanted to emulate your disciplined approach to investments. I took courage and bought some blue chips at good prices. I am an investor and not a trader.

The market has somewhat recovered, although volume is rather thin. In your opinion, would you continue to buy stocks at this point or would you wait for the market to correct further? I notice corrections of 20% of the STI occur infrequently.


You did well. Congratulations.

I think that it is all right to continue accumulating from here. I shall be doing it myself. Let us hope that we are both right!



I hear from sources that the REVOSAVE was actually designed during Mr Tan's term as CEO.

Perhaps Mr Tan can tell us why it was not introduced to be sold during his time and after he retired, it was promoted as a good flexible hybrid plan?


The source is totally incorrect. I do not design any product which (in my opinion) is complicated, has a high cost, and gives poor value to the customer.

However, I think that the Revosave is better than a similar product which is sold very well in the market. It does give a choice to the consumer.

Commission payable to the agent

Dear Mr Tan,

The illustration shows the Total Distribution cost, which comprises of several items.

I have been trying to get my sales person (a.k.a. financial planner) to disclose to me the commission rate that is paid to him, but it seems that his managers are unwilling to disclose such information to me.

Based on your past experience in the insurance field, is it common industry practice to only provide Total Distribution Cost in the benefit illustration?

I have also found this phrase from a website which mentioned the following:

" By law, insurance companies must reveal all costs and charges associated with the product you are buying. This includes, specifically, the distribution costs which include any commission the insurance company will pay to your adviser. These details are shown in the benefits illustration of your product."

Would you suggest that I consult MAS on this matter, since the website mentioned the phrase "by law", although so far I have not seen the details of their commission structure?

Again, thank you very much for your kind attention. My wife and I feel very much empowered by the insights you have shared in your blog.


I think that it is a good idea for you to consult MAS on this matter. Another organisation that you can address the matter, when it comes to a dispute, is FIDReC.

Suitable products


Today, endowment and whole life products are poor performers because of low interest rate and high distribution costs and they are bad vehicles to use for investment and for accumulation for any long term goals. Over long term both these kinds of products can only return 3% to 4% which barely beat inflation. Wealth is never created this way.

For low and middle income, higher rate of return is necessary to make your hard earned money work harder otherwise 20 years down the road whatever you accumulated has the same purchasing power as it was 20 years ago.There is no improvement in real term.Your risk averseness must change. There is a necessity to take risk to get out of the poverty trap when you have the capacity.

That is the reason why you are often urged to look for good adviser to help you and not insurance salesman. An adviser who is skillful in investment can help to design a portfolio that eliminates risk over time and yet gives a decent return for you, at least 6% to 8%.

What Mr. Tan is advising is in good faith. After all he spent more than 30 years in this business and he knows what he is talking about.

Time has changed. What was good is not good today anymore. I hope Mr. Tan's well meaning advice will be heeded.


In my view, both of the following products are suitable, for different groups of people:

1. Low cost, diversified investment fund with the potential to earn 6% to 8% over the long term.

2. Endowment plan, e.g. from NTUC Income, that gives a return of 4% p.a. (non-guaranteed) over 20 to 30 years.

I prefer option 1, but recognise that option 2 may also be suitable for certain groups of people.

Reverse mortgage

Dear Mr Tan,

A few years ago, I took a reverse mortgage from NTUC Income and draw out $1,200 a month. The value of my property has appreciated since. Who keeps the gain on the property? Is it NTUC Income?


Under a reverse mortgage, you are still the owner of the property. The reverse mortgage is a loan that accumulates interest.

If you decide to sell the property (which is not at a much higher value), you keep the entire amount of the property (after repaying the loan and accumulated interest on the reverse mortgage). All the property gains goes to you, as the owner.

It is a good scheme!

Monday, September 03, 2007

Whole life and endowment policies sold by NTUC Income

Dear Mr Tan

I read your blog form some time. You now advise consumers to avoid the insurance products with high charges, such as endowment and whole life plans.

During the years that you were in NTUC, your agents actively sold these products. Were these products costly for customers?


The commissions paid to the agents on the life insurance products from NTUC Income were about 40% lower than the market.

The premiums were lower, the cash values were higher, and the return on maturity were about 10% to 15% better than similar products in the market.

Most of the products marketed by NTUC Income in the past gave reasonably good value to the consumers. They were much better than similar products offered by other insurance companies.

The conditions have changed today. I now recommend consumers to invest in low cost, diversified investment funds that give a better long term return. Read my FAQ in

High cost products


Examples of high cost products are limited premium critical illness plans, repackaged endowment like REVOSAVE, whole life plans and regular ILPs like ID2 and other s from other insurance companies, high expense ratio ILPs.

They have high distribution cost with part of it which goes to agents as commission. Because of high cost the return is affected.


Since the critical year saga the insurance companies were rolling out products with limited premium on the premise that customers do not like to pay for life.

The question one should beg is "is it to the benefit of the customers"? The answer is yes and no. Yes, it benefits the high earners and the rich without their compromising their needs for high coverage. The rich never have this problem of servicing the premium.

For the poor it makes it even worse for them. Before this they were already struggling with the premium for a normal wholelife. Now the premium is even more menacing for them. Lapsing seems inevitable, just a matter of time. Why then insurance salesmen still recommend limited premium to the average income customers?

I am sure if they have done fact finding limited premium would never been recommended. As I have said insurance salesman is a salesperson. He sells with one objective, ie. to close the sale.

Does the agent bother whether the customer continues the premium for the next 20 years? He has collected the huge commission and if the customer should lapse he can sell him another one with high commission, an opportunity to make a sale.That is good strategy.

So what should be done to this type of insurance salesmen?

Suggestion: CPF to provide investment funds


It would supplement the compulsory annuity if we can some control of the use of CPF fund. Currently, the control isn't good, it still gives almost free rein to the members. The capping of the usage for various purposes needs further tweaking. Example, for housing. The 120% limit is not good enough because people are buying houses bigger than they need and over stretch their fund. This leaves little or nothing for other areas like accumulation for retirement.

Members still need to grow their fund because the minimum sum for annuity just provides subsistence living.

Another area needs tweaking is using the fund for investment. As you have noticed from all reports of CPF investment very few members made profit and if they did it was just above 2.5%. If this is so, members may as well leave their fund in the CPF to grow at 2.5% without the unnecessary risk they have been taking.

I propose that CPF make it compulsory for members who wish to invest to invest directly into some life cycle funds run by CPF or approved by CPF, otherwise leave it in CPF. This is to prevent abuses, mismanagement and losses in the hands of insurance sales agents who have no idea about investing but sales. With this in place, I believe members can earn as high as 6% to 8% rate of return, easily.

Cut out all intermediaries (agents, advisers, stock brokers etc) and go direct. The saving of cost will add to the return. It has proven again and again the intermediaries have done nothing but damages.


I agree with this proposal, to a large extent. They are similar to my suggestion that was published in the Business Times. Read here

How to get better advice


I think some kind of legal precedents will help to tidy up the industry. A body to advise on legal suits against roque insurance agents like CASE (Consumer Association) at affordable fee should be set up.

Once policyholders get litigious and know their rights and where to turn to for advise, this will then make insurance agents not to play play. Their recommendations must be able to withstand close scrutiny by third party review.

However customers must be educated on financial awareness. It is not about insurance only but about many areas of their personal finances. They have to know that all their needs are always competing for attention and the right and qualified adviser can help them to sort it out and not an insurance salesman.

Insurance agents are trained to sell, push and peddle products. They don't know about financial planning. Most are looking for get rich quick scheme and insurance selling offers them this opportunity. So unless the industry is cleaned up of these unscrupulous and unethical and cheats insurance salesmen we will continue to risk engaging one. A unified effort is needed.

To start with, only engage advisers with accredited tertiary qualifications like CFP, CFA, CPA, MFP or Master of science in wealth management.


I agree with most of the views.

High net worth people can engage advisers with tertiary qualifications. They can benefit from savings in tax through estate and tax planning.

Ordinary people should be educated about the simple facts of investments and encouraged to buy simple, low cost products available in the market. They do not need to pay high commission to advisers who do not add value to their financial planning.

Licencing of financial advisers


Dear Mr Tan,

In your opinion, is there a need for MAS to license insurance agents? For those IFAs operating in a licensed financial firm, why do they need a license individually to practice?

I feel that MAS is trying to distinguish these 2 groups of advisers but doing it slowly over time. I do hope the licensing requirements (including renewals) do help to weed out unethical advisers.

Also, i feel that there is a conflict of interest in the insurance companies trying to enforce compliance issues on their representatives and watching their bottomline.

I share your vision where advisers operate in a fee-based model and salaried advisers. Free of commissions and conflict of interests.


My view is:

* There is a need for MAS to licence insurance agents, and not leave it to the insurance company. Currently, MAS licence independent financial advisers only.

* There should be clear standards of products and practices that are fair for consumers. Currently, some financial products are designed to make a lot of commission for the distributor and the product issuer (i.e. the insurance company or investment bank), and give poor value to consumers (who are not knowledgeable).

* There should be stronger enforcement of the practices, to make sure that the financial advisers and act in the interest of the consumers (which is their duty anyway).

* We need standards similar to the medical and legal professions.

Save energy

When I was in Japan last week, I learned about their energy saving movement. Their offices are encouraged to set the thermostat at 28 degrees Centigrade. The outside temperate is above 30 degrees.

The male employees are encouraged to wear short sleeve shirts, called "Cool Biz". They do not wear tie and jacket.

The Japan Ministry of the Environment calculated that the annual saving in energy per household from 1 degree of efficiency (from cooling and heating) is 84.6 kilowatt.

The offices in Singapore are quite wasteful in the use of energy. Many offices are cooled down to as low as 22 degrees. The employees have to wear jackets to keep warm. Knowledgeable people tells me that 25 to 26 degrees is the right temperate.

The cost of 1 kilowatt hour is $0.20. If offices and households in Singapore can be more energy saving by 2 degrees, the annual saving could be (just a rough guess), 2 million household X 2 degrees X 84.6 kilowatt X $0.20 = $34 million. (I hope that the experts can verify my figure).

It is not only just saving of $34 million. We have to do our part to prevent global warming and climate change.

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