Saturday, February 16, 2008

Subprime Crisis

A hilarious way of understanding the subprime crisis:

Invest in the Combined Fund

Hello Mr Tan

1) I read a lot about the NTUC low cost funds on your blog. Recently, I invested through SRS as follows:-

50% in Growth Fund
50% in Singapore Equities Fund

I decided on this allocation as the stock market is at a low. What is your opinion of this allocation?

Reply: It is okay.

(2) I am not sure about how the fund works. When you say that investors can expect a higher return (say, 5%) over a long period of say, 10 - 20 years, are you referring to the difference between the offer price I pay now, versus the bid price if I should sell at that time?

Reply: This is calculated based on bid to bid price. If you deduct the bid-offer spread, it will reduce the yield by about 3%. If you invest over 10 years, the yield will be reduced by 0.3% (i.e. 3% spread over 10 years). If you invest in the STI ETF, you incur a upfront cost of only 0.3% (instead of 3%).

(3) The Combined Fund is invested as follows, Equities 70%, bonds 30%). Does NTUC Income adjust these allocations based on their experience and how the market is performing, or do I have to monitor myself and do my own switching or balancing? My concern is that I may not know the market well enough to decide on the better allocation.

Reply: NTUC Income keeps the fund invested in the above proportion and does not change the allocation. It is best that you keep invested in the fund, and do not try to make switching beween the funds.

Make regular savings in a low cost fund

Dear Mr, Tan,
I read your blog everyday as I find there is always something new to learn from the questions posed by your readers. I am interested to buy Term insurance with a critical rider.

My financial advisor has advised me that I should get a whole life policy with critical rider as once my Term policy has expired after 30 years, I could still get a critical illness and by then I would have to bear all the treatments myself. Thus a whole life policy makes sense in this case. He further argued that if I would have accumulated enough savings by then but would I want to use my hard earned money to be spent on treatment or be protected for life.

I prefer to take a Shield plan to cover critical illness, and I could invest the difference in plans to get a higher return. Overall this is more cost effective. Could you

The insurance adviser want people to buy a whole life policy, as he or she can earn a much higher commission.

My advice is to buy a 30 year Decreasing Term insurance policy and invest the difference. After 30 years, you will have more than sufficient savings for your retirement, medical and other needs (but you must have the discipline to set aside the regular savings). Read this FAQ:

Intimidating letter from lawyer

Dear Mr. Tan,
Three months ago, I was involved in an accident with a taxi. I was making a legal U-turn but was hit by the taxi in the opposite direction. It is just a minor accident with a slight band on our bumpers.

I just receid a letter from a lawyer acting on behalf of the taxi driver. Three weeks ago, I received a call from my car insurance company asking me if I can agree to the claims from the taxi driver. I agreed.

In the lawyer's letter, they requested a copy of my IC, insurance schedule and confirmation that I was the driver. The letter was issued based on the presumption in law that the driver was not me. Can I know why this course of action? I have no problem providing them the needed info.

It is all right to reply to the lawyer and confirm the identity of the driver. You are not required to send photocopy of NRIC. You can tell them about the identity of your insurance company and ask them the third party lawyer to make the claim directly with them.

If you feel the lawyer is acting in an intimidating way, you can complain to the Law Society.

Friday, February 15, 2008

Identify the poisoned wine


A king has 1000 bottles of wine. An assasin tried to poison the wine. The king's guards caught the assasin after he poisoned only one bottle, but they did not know which bottle was poisoned.

It is known however that the poison is so powerful that even a tiny bit of the poisoned wine will kill, and it is known also that the poison will only kill after 24 hours. The king order you, his advisor, to get some of the criminals in the dungeon to test the wines for him. The king expects to find out the result the next day, essentially 24 hours after the testers drink the wine.

Now the simplest way is if 1000 criminals were available, just get them to each drink a little bit from each of the 1000 bottles. Hence, the poisoned bottle will be identified when one particular tester, out of the thousand testers, dies the following day. However, only 10 criminals is imprisoned in the dungeon on that particular day!

Is there a way to identify the poisoned bottle by the following day using only 10 testers? What is the method?"

Selecting a unit trust

hi Mr. Tan
I understand that ETF has an expiry time limit. I have to track the index before actually trading in it. Do you know which unit trust that tracks only STI which is suitable for long term investment?

I am keen to invest STI index, as the charges are much lower compared to unit trust. Can you advise on suitable funds for a time horizon of 20-30 years, with consistent return above 10%?


The STI ETF is a fund. It does not have any expiry date. I do not have any information about the funds that you are looking for. You can talk to a financial adviser.


Dear Mr. Tan,

I will be age 40 this year and CPF Board will soon mail me the brochures on ElderShield. You mentionedthat we should use Medisave sparingly because it is our hard-earned money and it is meant for ourfuture medical expenses.

Should I consider ElderShield; knowing a female at age 40 has to pay at least $5444 (ie $217.76 x 25 years) to get a lifetime coverage with max payout of $28800 (i.e. $400 x 72 months)?
Should I use cash instead to pay for this plan, if it is allowed?


It is a good idea to use cash to pay for Eldershield, if it is allowed. This allows you to earn 4% plus 1% on the money that is kept in your special account

If you have adequate savings for your retirement needs, you can buy Eldershield. I expect that more than 30% will eventually make a claim. If your savings is not sufficient, you can skip Eldershield (as it is of lower priority).

Term insurance

Mr. Tan,
For a Term insurance, the yield is 0%. What is the benchmark to decide on a "good value" policy?

You should compare the cost of the Term insuance policy insuring the same amount and period. You can ask for a quotation of the premium by calling the insurance companies listed in this FAQ:

Mr. Tan,
I agree with you that Term insurance gives good value. But are you being responsible in asking people to buy Term insurance? What if the term matures and the policyholder still needs coverage? He may not be able to get the coverage because of poor health. Even if he is able to get coverage it will come at a higher cost.

You can buy a Term insurance to cover 30 years and pay a level premium. Most people need life insurance for 30 years to cover their working life. They do not need any more life insurance after they have accumulated sufficient savings and their children have grown up. It is more important for you to have adequate insurance in the earlier years, when your children are still young. This is only possible through Term insurance. Read this FAQ:

Yield of an investment

Dear Mr. Tan,
How do I calculate the yield on an investment?

You can use a financial calculator.

For example, if you invest $1,000 yearly for 20 years and earn a yield of 5% per annum, you will get $34,719 at the end of 20 years.

If you enter the figures of $1,000, $34,719 and 25 years into the calculator, it will be able to compute the yield as 5%.

Rent out your HDB flat

If you are retired, and you need a regular income, you can rent our your HDB flat and earn an income and stay with your children or friend. Here are some tips:,4136,152790,00.html

More articles from Dr. Money

Impact of inflation on financial planning

Dear Mr. Tan,

With the high rate of inflation, I am not sure if my savings is sufficient for my future needs after I retire. How should I review my planning?


You can get some guidance on this matter from this FAQ:

Tuesday, February 12, 2008

Benchmark for Life Insurance Policy

Here is a guide to measure if your life insurance policy gives good value to you.

Calculate the yield on the policy, using your annual premium and the cash value at the end of the premium payment period.

If you get a yield of 4% or higher, the policy gives good value. If it is lower than 3.5%, the policy does not give good value (i.e. high cost).

Here is the reasoning:

1. If you invest for 20 years or longer, you can get a return of 5% or more.
2. The yield on your life insurance policy is due to the expenses and the mortality cover.
3. A significant part of the reduction in yield is used to pay marketing expenses.
4. The reduction should not exceed 1.5%

If you buy Term insurance and invest the difference, you can get a net yield of more than 4%.

Risk Management & Insurance, SMU

I now teach a course on risk management and insurance at the Singapore Management University. Some of the points posted in this blog are taken from the text book used for my course. It gives a good description of the key concepts in risk management.

Sharp drop in AIG shares

I read a Bloomberg report that AIG shares dropped by 30 percent since the change of CEO from Hank Greenberg.

The recent drop was due to the losses on credit default swaps issued by AIG. This protects the buyer from credit defaults, e.g. due to subprime mortgages.

AIG is the parent company of AIA in Singapore. It has a AA credit rating (previously AAA), but analysts expect the rating to be further downgraded.

More details:

Visit to Jakarta

I will be visiting Jakarta for the next four days. During this time, I may have difficulty in accessing the Internet and updating my blog.

On my last visit in mid January, some people in Jakarta were worried about any possible unrest when the former president Suharto passed away. He passed away shortly thereafter, but Indonesia had been peaceful. The only problem was the heavy flooding in Jakarta.

Best terms for a car loan

Dear Mr. Tan,

What should I look out for when buying a new car? How can we have a better deal like car insurance, car loan etc?--


Read this faq about motor insurance:

I suggest the following approach to get your car loan.

Ask your dealer what is being offered with the package. They usually include a car loan offered by their tied up bank.

Ask for the following:

What is the amount of the loan
What is the monthly replayment and the number of repayments
What are the additional charges (if any).

You can then call 3 other banks and ask them to offer their loan to you for the same amount of loan and number of repayments.

You can compile the differences between the offers as follows:

Amount of loan: $xx,xxxx
Nr of monthly replayments: xx repayments

Bank Amount of Additional
monthly repayment charges

X is the bank tied up with your motor car dealer. Usually, they offer the best terms (but not always).

When you have obtained the information, you can share with me.

Term insurance rates are fixed

Dear Mr. Tan,

Question 1: Term insurance are designed to disappear as we grow older. Term insurance rates are often non guaranteed, the rates will be reviewed on a annual or a 5-yearly basis. The premium increases as we grow older. Is this correct?

Reply: You can buy a Term insurance with the rate fixed for 30 years. Read this FAQ:

Question 2: In comparison with a limited payment (maybe 20 year) whole life insurance policy, the coverage may start small, and because of it's contractual base, premiums remains constant. And sum assured increases with age (due to addition of bonus). When death occurs, the life plan will pay the full sum.

Reply: The return from a limited payment whole life is poor. This is due to the high charges deducted to pay agent's commission, expenses and profit for the insurance company. Some examples are given in my blog.

It is better to invest your savings in a separate investment fund. Read this FAQ:

Monday, February 11, 2008

Claim settlement service

Here is an example of the claim settlement service provided by an insurance company.

If you drive a motorcar and was involved in an accident, you may receive a letter from the other party's lawyers making a large claim for damages from you. It will be quite troublesome for you to handle the claim, as you have to deal with the following uncertainties:

1. Which party is negligent and responsible for the accident?

2. How much is the fair amount of compensation? Is the repair cost a fair price or exaggerated?

If you buy insurance, the task of claim settlement is passed to the insurance company. They have lawyers and loss adjustors to handel the negotiation and settlement. They also pay the acmount of the claim.

It is useful to have insurance to take care of these matters.

Loss control measures

Here are some examples of valuaable advice on loss control that is given by insurance companies. As they have access to experts, the advice is useful to the insured policyholders.

1. If you wish to insure a factory, the insurance company sends a surveyor to look at the housekeeping and safety measures in the factory. The surveyor will make recommendations on reducing the probability and severity of losses. If you implement the recommendations, the insurance company will offer you a lower rate to insure your risks.

2. If you insure your life, the insurance company will advise you keep to a healthy weight and control your chronic conditions. The premium loadings will be reduced.

Useful functions of insurance

Insurance performs three useful functions:

a) Pooling of risks. Each policyholder pays a small premium into a pool, to be used to pay for the losses suffered by a some policyholders and the expenses of operating the pool.

b) Settlement of claims. The insurance company is experienced in handling the settlement of claims on behalf of the policyholders.

c) Loss control measures. The insurance company can advise the policyholders on measures to reduce the occurence of losses and their severity.

For these valuable functions, the policyholders are willing to pay a fair loading (of up to 35%) over the cost of claims to buy the insurance.

For example, if the average share of the claim per policyholder is $300, the policyholder is usually willing to pay $400 to buy the insurance. This allows $100 to be used to pay the expenses of operating the pool, including the useful services of claim settlement and loss control.

If the loading is more than 35% of the amount of claim, many people will find the insurance to be too costly and will prefer to be un-insured. This benchmark applies to motor, medical, fire and accident insurance.

In the case of life insurance, a different benchmark applies.

Legal doctrines in insurance

Moral hazard: behaviour of the policyholder, who becomes less willing to spend money to prevent or reduce losses, after obtaining insurance.

Adverse selection: when policyholders are better informed about expected claims and higher risk policyholders are more likely to buy insurance, compared to lower risk policyholders.

Deductible: the amount that the insured is required to pay for the initial portion of each loss, before a claim can be made on the remaining loss.

Policy limits: the maximum amount payable by the insurance policy on the loss. The excess cannot be claimed.

Exclusions: events that are not covered under the policy, such as war or natural disaster under a property insurance policy.

Indemnity contract: pays up to the actual amount of the loss, even though the sum insured may be higher. Applies to motor and medical expense insurance, but not to life and personal accident insurance.

Insurance-t0-value: if a property has been insured for less than its actual value, the policyholder is allowed only to claim for only a proportion of each loss, and has to bear the proportion that is under-insured.

Contract of adhesion: if the standard policy wording is vague, the court will intepret the wording in favour of the policyholder, as the insurance company is expected to be more familiar with the contract and is expected to write the terms more clearly.

Reasonable expectation: the contract will be interpreted according to the expctation of a reasonable person who is not trained in law.

Investment Tips for a Retiree

Hi Mr. Tan

There are many articles written about retirement planning and the investment strategy to achieve the retirement goals. However, they do not discuss the appropriate investment and draw-down strategy for retirees like myself – persons who is now faced with what to do with the money accumulated from years of saving.

I have spoke to many independent financial advisers and most of them asked me to allocate the savings into equity, balanced or bond funds according to your risk profile. Some would suggest putting part of the money into annuity.

However, given that all existing annuity plans only achieve between a return of between 3.5% to 4% returns p.a. and payment out from 62 year old, one would wonder if it is advisable to do that?

Also, in reality, bond fund is different from bonds and does not provide fixed coupons for retirees with money to live on. Moreover, judging from current market price bond funds is just as volatile as the equity funds.

You would be doing us a great service if you would write a series of articles giving practical advice on investment strategies and instruments that would benefits a retirees with various amount of saving, say $500k, $1m, $2m, investable income with a goals of 6% to 8% return?

Some of these questions retirees need answers are:

· How should I allocate my retirement funds into cash [no of mth expenses?] and the various investment instruments?
· What are the various financial instruments [UT, ETF, Annuity, property etc] for investing and where can I find them?
· Would investing in index EFT better than UT?
· What financial instrument gives better return than FD, saving account and having similar liquidity need to meet monthly expenses?
· Where else can you find articles discussing this aspect of investment planning for retirees.


Can you read the FAQs posted in my website,

In particular, the following FAQs:

Let me know if you find them to be easy to understand and helpful to answer your questions.

Personal Risks

Personal risks can be classified in six categories:

a) Earnings risk - unexpected decline in income due to death, sickness or unemployment
b) Medical expense risk - to recover from sickness
c) Liability risk - due to negligence, e.g. use of motor vehicle
d) Physical asset risk - loss of home, car or other property
e) Financial asset risk - decline in value of financial assets
f) Longevity risk - living too long and running out of savings

The first four types of risk can be insured. You should look for low cost insurance. This allows the remaining savings to be invested to provide for your retirement and other financial needs. You can buy life annuity to cover the risk of living too long.

Whole life, premium payable for 25 years

Dear Mr. Tan
I learned about your blog site after reading the Edge Weekly Paper. I was intrigued by your revelation on life insurance.

I have a $50,000 whole life insurance plan with annual premium of $1,000 payable for 25 years. After 25 years, I do not need to pay any more premium, but remain insured. The cash value at the end of 25 years is $30,900 (of which about two-thirds are guaranteed). Did I get a good deal?

I have already paid two years' premium. Should I continue the policy?


If you pay $1,000 a year for 25 years and get back a cash value of $30,900, the return is 1.6% p.a.

Alternatively, you can spend $100 a year on Term insurance and get a higher coverage. If you invest $900 a year for 25 years to earn 4.5% p.a. (not guaranteed, but quite conservative), you will get back $41,900; If you earn 4%, you will get back $39,000.

Read this FAQ:

If you write off the loss of 2 years premium (which you have already paid), the yield on $1,000 for 23 years with a return of $30,900 is 2.4%. It is still low, but probably all right. I suggest that you keep this policy.

Lesson: Avoid high cost life insurance, where a large part of your premium is taken away to pay charges. If you are already committed, it is better to keep the policy.

Sunday, February 10, 2008

Avoid high cost plans

Hi Mr Tan

I happen to visit your blog while gathering information about investment and insurance. It's a very informative blog. You have provided us a greater insight to insurance and investment.

I am now 26 years old. I met an an agent recently with the intention to buy a whole life and Term insurance. She recommended two plans. I found the premium to be rather high and there are a lot of uncertainties with respect to the critical illness coverage. (Other details deleted)


I usually advise people to buy Term insurance and invest the difference. You can read the following FAQs:

You should avoid whole life or endowment policies, as the charges are too high and the policies give a poor return.

Questions from a Young Person

Hi Mr. Tan,

1) I joined the workforce recently. I plan to start saving $100 a month. Can you recommend any cash value insurance, unit trust or bonds?

It is better to buy Term insurance and to invest your savings in a diversified, low cost fund. Read this FAQ:
You should avoid a cash value policy, as the cost is high and takes away too much of your savings.

2) I currently hold two life term insurance policy, i.e. the Dependent Protection policy and a Term policy bought while under National Service. Can a person claim under two or more life term insurance if a mishap occurs?

You can claim on all of your life insurance policies, including the two Term policy that you mentioned above. Life insurance is a valued policy and is not subject to the principle of indemnity (which applies to motor and medical insurance). The principle of indemnity limit your claims to the actual expenses that you have incurred.

3) Can a person invest in shares without a stock broker?

You have to buy shares through a stockbroker. The commission is low, i.e. 0.3% only.

Lost a camera in a taxi

Dear Mr. Tan,

I took a taxi to visit a pet lodging shop, on the way to the airport for an overseas holiday. I left my camera in the taxi. There are several treasured pictures of happy moments in the camera.

On my return to Singapore, I called several taxi operators to report the loss, as I forgot which taxi I took. I had to leave messages in many voice mail and speak to telephone operators who were indiffferent as they were so used to taking such calls. It was a tiring and hopeless exefcise for me.

I hope that, in the near future, there is a one-point contact number to report a loss and to receive genuine help.


I agree that call center service is generally quiet poor in Singapore, with a few exceptions (such as NTUC Income).

I will post your experience in my blog. However, to reach out to a bigger audience, you can write to the newspapers, like Straits Times and Today, or to the Land Transport Authority. I wish you all the best in the recovery of your camera.

Low cost index funds

Hi, Mr. Tan

I lament the fact that Singaporeans lack access to really low-cost funds like Vanguard's. Currently, for index fund fans, we only can buy the Infinity series and those cross-listed ETFs on the SGX. Do you know if Vanguard has any plans in the near time to market their products in Singapore?

I am not aware of any plans by Vanguard to introduce low cost indexed funds directly in Singapore. They probably find the market to be too small. I hope that other fund managers may start the low cost funds, within the next one or two years. This will be good for the market and for cost conscious investors.

Decline in US Dollar

Hi Mr Tan,

I'm a regular visitor of your blog and applaud your ongoing efforts on educating people on the benefits of index/passively-managed funds and Term insurance.

I read that only USD-denominated investments primarily vested in US assets are affected by the declining USD; but the impact is less so if the investments are not in US assets. Is this true please?

Reply: Many of the US companies have global operation. When the USD declines, their income from global operations, when translated back into USD, is higher. This compensates for the decline in USD, to a certain extent.

If the company have only US operations, the decline in USD may help to make foreign imports less competitive. But, the overall impact on the US operations, due to a decline in USD, is likely to be negative.

Economics Joke: Recession and depression

What is the difference between Recession and Depression?
Recession - when you neighbour loses his job.
Depression - when you lose your job.

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