Tan Kin Lian's Blog: Simple Financial Planning

Friday, September 12, 2008

Simple Financial Planning

I wish to give this advice to any person on your financial planning:

> buy a 20 year term assurance for 5 to 10 years of your income
> ask the insurance company to quote the rate for your comparison
> do not talk to an insurance agent
> do not invest in any whole life, endowment or investment linked policy
> make monthly savings (of 15% of your earnings) in a bank
> when the saving reach $3,000, buy 1,000 units of STI ETF.

Read these FAQs:
Financial planning for the young
http://www.tankinlian.com/faq/fptips.html
Personal insurance:
http://www.tankinlian.com/faq/choice.html
Buy Term Insurance directly:
http://www.tankinlian.com/faq/termd.html

If you talk to an insurance agent, be prepared for the agent to "convince" you to buy a critical illness policy or a term to 100 years (which is a whole life policy by another name). Say good-bye to more than $1,000 of your savings (as it will be used to pay commission to the agent.

10 comments:

zhummmeng said...: Not only that. When you are engaging an adviser make sure you engage one with the right credentials, CFP or CFA and one who is honest. Once you are sure that he or she has these 2 traits the battle is half won.
Next is whether the adviser provides an analysis of your needs
before recommendation of the solutions, the products.The process must be in this order.
Always remember that term is the BEST. Don't let this 'everybody has different need" reasoning or you need 'for whole life' fool you when they recommend you whole life products or cash refund products. They are dumb..
Another point to pay attention is if you see the adviser with MDRT or COT or TOT logos or marks on their name card , it serves you well to terminate the meeting. Those are telltale marks of cheats , unscrupulous and unethical practices. In all likelihood the salesman will push and traffic whole life or products with high commission.These salesmen cannot qualify for those mdrt or tot awards if they sell you terms but you know terms are good for you.
So, just run as as fast if you should meet one with those marks.
Remember those marks are based on commission earned and not how many people they have successfully helped with their finances.
Last but not least avoid roadshows.
If you have been to koyok or snake oil side shows, these roadshows are like them, they are out to trick and con you into buying rubbish. It is unlikely that your needs will ever be met in koyok style selling.It is akin to scam or daylight robbery, albeit 'legal'.; September 12, 2008 11:08 PM
zhummmeng said...: A trainer from a well known insurance company shared with me that some MDRT agents went to the extent of pleading with the cleints to help them acheive mdrt by lying that they needed a little more to achieve it.The truth is they needed a lot more but by pleading and lying with as many cleints they managed to reach.
You can see how low these agents stooped to sell insurance. Of course there are stories of female agents going beyond the usual strategies by using flesh exhibition and meat trading.
The case of begging cleints for business is actually taught as a good emotional strategy to sell insurance by some agencies. In fact it has been proven to be a successful modus operandi.
You can see to achieve mdrt or cot involves both unethical and immoral
and illegal practices.
These people are in the 'noble' profession but they are not noble in their ways.
Of course without the unwitting cooperation of the customers malpractices would not have happened. Most customers are too trusting, some try to be too smart or smug, some think they know more than the agents, some do self medication and many other types.
But all of them they do not know that they are idiots and suckers.
If the insurance agents after spending so many years in the trade
still have problem understanding their job and role and unqualified what makes you think that customers know something or everything.Because of this attitude it makes them perfect and easy preys for the unscrupulous agents. All the agents have to do is to pander to whatever the customers WANT and WISH and make some money out of it. No need to do analysis , no need to meet needs, the customers are smart, they know what they "need".
So qualfiying for the mdrt is not that difficult if you are willing to do the unethical things, right?; September 13, 2008 12:25 PM
aniki said...: wat is STI ETF?; September 14, 2008 12:59 AM
Vincent said...: Hmm.. Is Unit Trust not in your recommended list? I found for the young to commit consistently $3000 at one time is quite difficult in this volatile time.; September 14, 2008 1:32 AM
Break Free said...: I personally feel that it is very irresponsible of Mr Tan to:

1) flatly advise against speaking to an insurance agent - I admit not all insurance agents are good, but not all laymen are good in planning for themselves too.

2) flatly advise against investing in any whole life, endowment or ILP - Different people have different needs and risk appetite. As a figure highly respected in the insurance industry, Mr Tan should be more careful in publishing such advices that aims to be one-size-fits-all.

3) NTUC Income is an insurance company where premiums include the loading component which the company earns. The company needs to pay her staff salary so the business can operate. It is irresponsible to imply that buying a whole life policy would mean saying good-bye to "more than $1,000 of your savings".

For your information, I am no longer in the industry, but I am just stunned to see such irresponsible post coming from Mr Tan.; September 14, 2008 4:22 AM
Tan Kin Lian said...: The amount taken by the insurance company to pay commission, salaries and profit is much more than $1,000.

If you accumulate your premiums at 5.25% and the total amount is $300,000 at the end of 30 years, the amount that is taken away is about 45% of the total of $135,000.

This is stated in the Benefit Illustration.

The commssion paid to the agent represents about 30% to 50% of this total deduction. It may be $1,000 at the start, but the accumulated amount (including lost interest) at the end of 30 years is several times more.

An agent does not need to be paid a few thousand dollars to sell a whole life or investment linked policy, but they are.

The best advice that can be given to a consumer is "buy term insurance" and invest your savings in a low cost investment fund. Most agents will never give this type of "best advice".; September 14, 2008 10:36 AM
zhummmeng said...: Mr. KL,
I have mentioned many times this problem. People who were in the industry and or many years of expereince in the industry think they know about life insurance. I disagree and in your case you have betrayed yourself by uttering a refrain often used by insurance agents when they try to justify selling wholelife and endowment. The refrain is "people have different needs and risk appetite"
Yes, people have different needs and wholelife CANNOT MEET the different needs and it is NOT as low risk as you think.Because of space constraint otherwise I will demonstrate how much lower risk regular investing is than the whole life and endowment which is doomed either as a protection or as a saving vehicle.
There is no way for a product to meet a lot of needs and to meet these needs efficeintly and effectively.They become diluted in term of benefits. Whoelife is first expensive and it takes alot of consumers' resources at the expense of their other needs.Inefficient because WL takes too much in the early years when risk is low. It is better served by term.And if you are thinking about keeping to old age argument, it is an obsolete argument. Study about life insurance and check the MAS website for some statistics on this.Life insurance is a gamble and the insurers are gambling against the consumers. The insurers have advantages because they have certain facts about consumers and they know their chances of winning against the consumers is high provided certain things don't happen and insurers have safe guards in place against them , sometimes disguised as supplementary benefits. Consumers don't know. it is cheating.
Today many people are still grossly under insured. What is the major cause? MAS knows it and do the insurers care?
You are wrong to say that Mr. Tan is promoting 'one size fits all' . On the contrary the insurance agents are selling WL as a one size fits all product. In fact Mr. Tan is promoting a more flexible approach to personal finance by separating risk management from wealth accumulation so that consumers have better control and get better results.
Another point I like to emphasise is 95% of the insurance agents out there are NOT qualified and they either willfully and wilefully commit unethical practices or sincerely and INCOMPETENTLY commit malpractices.
Not some agents are black sheep but 95% are if you include those who are always sincerely wrong in their recommendations. In fact this group can be the worse group because the damage is far more extensive and disastrous.
The industry has changed so fast that you missed noticing it.; September 14, 2008 1:59 PM
Tan Kin Lian said...: Hi Vincent,

A young person should be investing for 10 or 20 years. The level of the STI ETF today is attractive, as it is 30% below its peak.

It will recover and give a good return, when the global economy stabilises in 1 or 2 years time.

It does not matter that, in the short term, the market may go down further. Be patient. Wait. The investor will make a good return.; September 14, 2008 3:07 PM
ucypmas said...: KL,

You are right that not all agents are bad, selfish, conniving, manipulative etc. Just 95% of them are. So the odds are your average layman will do better (in doing nothing) than to see an agent for his financial needs.

As for your term "different people have different needs and risk appetites", it is a general term often used by sellers of whole life etc to obfuscate and confuse consumers. I cannot see how a whole life policy which takes 13/14/15 years just to break even, has any capability to cater for "different needs and risk appetites".

The first rule of investing is not to lose any money. Going to see a MDRT financial planner for your "different needs and risk appetites" is a surefire way to be two-years down on your investment returns.

Mr Tan is absolutely right in saying that a large part of the initial investment are wiped out through distribution costs. It also deprives a policy holder from the returns in being invested in the initial years.

Let me say this again - the underlying costs of these life insurance products are excessive and their returns are terrible.

Those planning to take up policies would do well to reflect on the primary objective on having insurance - it is to protect yourself and your family in the UNTIL the need for such protection has passed. So treat it like an expense; pay the premiums, get the most coverage and move on to save up for your retirement through other means.; September 14, 2008 10:55 PM
Khiat Han Hwee Adrian said...: Don't quite agree with few points:

1) buy a 20 year term assurance for 5 to 10 years of your income
* There is no one size fits all coverage. Its quite misleading to advice people to buy an insurance coverage solely based on multiple factor of income. It should be based on actual needs. Proper fact-finding analysis must be conducted.

2) do not talk to an insurance agent
* If you talk to an adviser in the bank or direct distribution channel of insurance companies, you cannot be guaranteed of getting a good deal as well. These advisers are tied to quotas and they may be more daring to sell plans that are unsuitable for you.

3) be prepared for the agent to "convince" you to buy a critical illness policy
* Critical Illnesses such as Cancer and Heart diseases are getting more common. You may not be able to work for several years if diagnosed with it. It is an important coverage. Getting a Term coverage until your expected retirement age like 60 or 65 is not an unreasonable premium to pay.; September 16, 2008 2:58 AM