Saturday, February 23, 2008

Motor Car Insurance

Dear Mr. Tan,

What are the types of insurance that I can buy to insure my motor car? What is the difference in the premium payable? What is excess and no-claim discount?


You have three options to insure your car:

1) comprehensive
2) third party, fire and theft (TPFT)
3) third party only (TPO)

There are three main types of losses covered by a motor insurance policy:

a) damage to your car caused by accidents
b) loss of your car due to fire and theft
c) liability to third party for an accident caused by you.

The comprehensive policy covers (a), (b) and (c). The TPFT policy covers (b) and (c) only. The TPO policy covers (c) only.

Most owners insure their cars under comprehensive cover. If the car is old and has small market value, they may insure under TPFT or TPO cover.

The premium payable on a car depends on a few factors. The premium for TPFT and TPO covers are about 65% and 50% of the comprehensive premium.

The "excess" is the amount that you have to co-pay for any claim. The insurance company will pay the amount that is above the "excess".

The owner enjoys a no-claim discount if there is no claim during the year. The discount starts at 10% after one year, and increases by another 10% for each subsequent year, until it reaches 50%. If there is a claim, the discount is reduced by 30% or goes back to 0%.

For more details:

Educating the public

Dear Mr. Tan,

I see that you are educating the public on the pluses and negatives about the various insurance subjects and stock market situation.

Hopefully with the more educated and wider public attention, public would start cancelling their policies and redirect their savings else where, like I did. This will put pressure on the insurance companies to come clean.

Early repayment of housing loan

Hi Mr. Tan
I am a regular visitor to your blog.I have a private housing loan with a bank. I can make a partial or full payment after 3 years. I am considering the following options at the end of 3 years:

(a) Do a partial payment and continue to pay the same monthly payment from CPF OA
(b) Do a full payment using cash and CPF OA
(c) Do a full payment from CPF OA
What is your advice?

What is the interest rate on your loan at the end of 3 years, based on their current board rate?
What is the balance of your loan at the end of 3 years?
What is the amount of monthly repayment?
What is the rate of return on your cash savings?

You need these figures to calculate the options that work best for you.

Tax Benefits in Life Insurance Products

Dear Mr. Tan,
You mentioned that the high cost in life insurance products reduces the yield and gives a poor return to the consumer. Does this situation apply to the developed countries as well? If so, why are the consumers there, who are more sophisticated, still buying the high cost life insurance policies?

You will find countries in three broad categories:

1) In some countries such as USA, Australia and France, there are tax benefits in buying certain types of life insurance products. These tax benefits offset the high cost of the products and still give an attractive return to the consumer.

2) In some countries such as Malaysia, the regulator set certain limits on the marketing costs. This ensure that the products give reasonably fair value to the consumers.

3) In countries such as Singapore, the marketing cost is too high and there is virtually no tax benefit to offset it. It is better to buy Term insurance and invest the remainder in a low cost investment fund.

Refund of premium

Dear Mr. Kin Lian Tan,
I have a Living policy. I decided to terminate it, but the premium I paid until April 30. I have contacted the insurance company, but it seems that it is impossible to get back unused premium. Is it fair?

They will pay you a cash value, which is lower than the premiums that you have paid. The difference goes to pay the expenses, commission, mortality charges and profit margin.

You can compare the cash value against the projected amount that was shown to you at the time that you bought the policy. You should get back the guaranteed cash value and some or all of the non-guaranteed value.

There is no refund for any unexpired portion of the current year's premium.

Keep your money in CPF Special Account

Mr. Tan
I have some money in my CPF Special Account and wish to invest it. Previously I have invested in Company X's Selector II in China for 7 years. After 7 years, I did not make any money compare to 4% interest in CPF.

I would like to hear your advice in investing the special account as my ordinary account is kept for my housing loan.


Keep your money in the special account. It pays interest at 4% (plus bonus at 1% on the first $40,000) and is risk free.

You should take risk only for your personal savings or the ordinary account, where the opportunity cost is 1% or 2.5% only.

Financial contagion

Dear Mr. Tan KL,
As you are well aware of the on-going credit crunch in the USA with credit defaults rising, subPrime losses mounting, big financial institutions being forced to write off billions of dollars from their balance sheets.

Do you see this as a growing contagion? Will it spread to Asia? Will financial institutions in Asia such as NTUC Income (which I believe currently has a "A" rating) suffer from such contagion ?

The experts do not know. I do not know either. I think that the Fed chairman also does not know. He said that the losses have probably been recognised, but still no one knows.

Keep your existing policy

Dear Mr. Tan,
Four years ago, I bougt a 25 year saving plan as follows:
Sum assured: $10,000
No. of years of Premiums Payable :25
Monthly Premium: $70
Maturity Benefits: $16,581
Projected rate of return: 4.75%

I am considering to terminate my savings plan insurance. I wish to buy Term insurance and invest the savings in bonds or unit trust. What is your advice?

My advice is for you to keep this policy. My reasons are:
1. It is quite small
2. You have probably incurred the upfront expenses already
3. The projected return of 4.75% is quite attractive.

You will need additional insurance within the next few years, as your current sum assured is quite low. When you are ready to invest more, you can buy Term insurance and invest the difference in a diversified, low cost fund, such as the STI ETF.

Read this FAQ:

Friday, February 22, 2008

Term insurance covers critical illness

Hi Mr. Tan,

Does NTUC have a term insurance that covers critical illness? Two years ago, I bought I-term. I checked with the NTUC consultant and he says that NTUC do not have term insurance for critical illness, thus I ended buying the Living policy...

You can buy a Living Benefit which is like a Term insurance that covers critical illness. It comes as part of the Family Policy.

More details here:

Singapore in the year 2010

Savings for your child

Dear Mr. Tan,
I have two boys. Since birth, I have been depositing their ang baos into their saving accounts. I was wondering if there are any better way of growing their money (in a long term) so that they can use it for their education in future.


I hope that, in the near future, there will be low cost investment funds. If you are investing for the long term, the risk is reduced considerably and you will get a much higher return.

For the time being, it appears that the saving account is the best way to keep the savings.

Read this FAQ:

Commission on high cost policies

Dear Mr. Tan,
How much does a life insurance agent earn by selling the so-called "high cost" life insurance policies, such as whole life or critical illness?

It is better to look at the total cost to the customer, as there are three layers which earn commission on the life insurance policies that is sold to the customer. For most whole life or critical illness policy, the total commission paid is 160% of the annual premium.

If you pay $300 a month towards a life insurance policy, the total commission that is deducted from your policy is 160% of $3,600 or a total of $5,760. About two-third of this amount goes to the agent that sells the policy to you. The remaining one third goes to the upper two layers. This amount is taken away over the first three years of the policy.

Some insurance companies operate at lower cost. The commission that is taken away from your policy is less than 160%.

Insurance agents need to make a living

Dear Mr. Tan,
If life insurance agents sell only term insurance, how can they make a living? The commission is very small.

Many insurance agents make a living by earning a earning a commission of $30 to $50 by selling a general insurance policy. They are able to earn an adequate income by selling a few policies a day. In their case, the customers buy from their office. They earn commission on the renewal of the policy.

It is possible for life insurance agents to make a living by selling low cost insurance, such as term, medical and accident insurance. They have to change their business model, to be similar to general insurance.

When a life insurance agent sells term insurance, the customer is likely to ask for a large protection, e.g. $300,000 and pay a premium of $300 a year. The commission can be quite adequate.

Critical illness

Dear Mr. Tan,
What is a fair premium to pay for critical illness insurance?


The claim rate is less than 0.3% a year for people between 35 to 60 years. To insure $100,000, the pure cost should be $300. If you add the administrative cost, a fair premium should be $450 a year.

Many people have to pay more than $2,000 a year under a critical illness policy. This is too much, as compared to the true cost of the risk.

Although some of the premium is used as savings to accumulate a cash value, the return from this saving is quite poor. A large part of the saving is used to pay expenses of the insurance company, including the commission to the agent.

For a child or baby, the risk of suffering a critical illness is very much lower.

Read this FAQ:

Insuring a child for critical illness

Dear Mr. Tan,

An insurance agent said that it is necessary to insure a child against critical illness, as the cost of treating leukemia could be more than $20,000 and it is not covered under a Shield policy. What is your advice?


The chance of a serious illness of this nature is extremely small, maybe less than 1 in 10,000. To insure this risk and other similar risks, the pure cost should be less than $2 a month (my guess only, as I do not have the data). The critical illness policy that you to pay a premium of $100 per month. Is it worth paying so much?

Although a Shield plan does not pay the full cost of the treatment for leukemia, it does cover a large part of the cost.

Advice: Do not over-pay on the cost of insurance. Make sure that you pay a fair premium. You need to save money for your future use also.

Thursday, February 21, 2008

Selecting a policy to terminate

Dear Mr. Tan Kin Lian

1) I have bought three critical illness policies at different times, more than 10 years ago. Now I wish to cancel one of the policies. Can you tell me which should I surrender – the one I bought the earliest or the latest?

2) How much of sum insured for critical illness is considered sufficient for me?


I suggest that you ask the insurance company to quote the following to you, for each policy.

a) What is the cash value now
b) What is the estimated cash value in 5 years time
c) What is the premium payable for the next 5 years.

You will be able to make a better decision, after the above figures are available. You can read this FAQ to decide on the amount of insurance that you should have.

Wednesday, February 20, 2008

Critical illness coverage for a baby

Dear Mr. Tan,
Is it possible to buy term insurance with critical illness coverage for my newborn baby? Or must I sign up for a whole life policy to have critical illness coverage?

I am looking to cover him up to age 65. I will also be getting for him Enhanced Incomeshield (Preferred) Plan. I feel that critical illness coverage is essential even with a Shield Plan as the Shield Plan only covers hospitalisation and surgical expenses but not living expenses, which could place a heavy burden on an affected person's family if the affected person is unable to find permanent employment for an extended time. Please advise.


My view is that it is not necessary to buy Term insurance or critical illness coverage for a baby or a child.

If you feel that this is necessary, you should be able to find an insurance agent to sell the coverage for you. The agent is likely to convince you to buy a whole life policy.

Read this FAQ:

Need a bank loan for a retail business

Hello Mr Tan

I am running a retail business in a shopping centre? In recent months, I am facing some financial issue to running the retail operation. I tried to ask the bank for a SME loan of $X. The bank rejected my application as I am low in funds with the bank. I am confused by the rejection, as I needed the loan because I am low in funds. Why is it that nobody can help? I am willing to pay interest to the bank but they refuse me. Please advise me what to do.


This problem is outside of my expertise. I do not know how I can help. Perhaps, if the business is doing poorly, it is better to close it down, before it incurs further losses.

If the business has the prospect of being profitable, you should be able to interest investors or to convince the bank to provide a loan.

Achiever Policy

Dear Mr. Tan

Presently I am paying $x a month premium for a coverage of $Y. I am thinking of terminating the policy but there is a penalty if i cash out now. What is your advice on this? Do I wait till the 6th year whereby there will be no penalty to terminate the policy?


You can ask the insurance company to tell you the following:
a. what is the cash value of the policy now?
b. what is the amount of penalty on terminating the policy now?
c. what is the total premiums paid up to now?
d. what is the future premiums payable in the future, until the end of the 5th year?
e. what are the charges deducted from the premium payable until the end of the 5th year?
f. what is the expected cash value at the end of the 5th year, assuming that the investments earn a gross return of 5% per annum

With the above information, it may be easier for you to make a proper decision.

Lesson: Get the relevant figures to make the correct the correct decision.
Dear Mr. Tan,
I find your blog very interesting. I to seek your advice. Presently my income is mainly in USD which has been sliding downwards. Should I convert to Singapore dollars. What is your best course of action to prevent further exchange losses?


It is difficult to predict the movement of currencies. If your cost of living is mainly in SGD, perhaps you should discuss with your employer to pay you in SGD, or to have some way of adjusting for the cost of living in Singapore?

Regarding your investment in USD, you can see if this FAQ is helpful to you?
Mr. Tan,
I was about to sign up a long term saving plan & ILP with an insurance company when I saw your article in Mypaper. I read your blog and found it to be really helpful. The concept of 'buy Term & invest the rest' is really impressive and make a lot of senses.

I have always been told by insurance agents to spend 15 - 20% of income for insurance. I plan to stop some of my insurance plans and change it to Term. Can you recommend a good insurance agent?

I come across many agents who always ask me to buy life & ILP. Is NTUC income different from them ?


I believe that most agents, including those from NTUC, will try to sell ILP and life products, as they earn higher commisison.

I suggest that you visit the business center of NTUC Income and talk to the salaried consultants. I hope that they will be different, as they are not paid a commission on the sale.

Wrong address won 4D first prize

I ordered flowers to be sent to three friends for Lunar New Year. Here is a message from my flower shop.

hi Mr Tan,
Thanks for the payment. By the way, there is a mistake with Mrs Y's address (7 instead of 3). When our delivery man found out the mistake, he went to buy 4D (Singapore Sweep Draw on 6 Feb - day of delivery) using all the numbers of the 3 addresses - 3730

Mr H, 3 xxxxxxxxxxx
Mrs Y 7 (you gave us 3) xxxxxxxxx
Dr K 30 xxxxxxxxx

The first prize was 3330 - the wrong address you wrote!
What a story...

Jetstar to Kuala Lumpur

I took Jetstar to Kuala Lumpur. I paid half of the usual price. As this service started recently, many people are still not aware about it. The plane was half full, so it was comfortable.

Jetstar lands at KL International Airport. The KLIA Express train to Kuala Lumpur takes 20 minutes and cost MYR35. It is quite convenient.

The CEO of Jetstar Asia once told me that Jetstar is not a budget airline. It is a low fare airline. I agree. It is good value for money.

High cost Investment Linked Policy

Dear Mr. Tan,

I already have an ILP for the last 3 years. However, an adviser friend told me to cancel it and use the money instead to buy term and to invest the rest in unit trusts that would yield more returns in the long term.

I have already paid $3600 to date and my current cash value is at $900 for the ILP. Do you think I should just cancel the ILP and heed her advice?


You should compare the charges of the ILP and the unit trust going forward. You probably have incurred most of the upfront charges for the ILP, so the difference between the two options in the future is likely to be small.

You can read this FAQ to understand the charges:

Tuesday, February 19, 2008

Travelling to Kuala Lumpur and Bahrain

I shall be in Kuala Lumpur for the next three days. Early next week, I shall be in Bahrain for 4 days. During these periods, my blog may have fewer postings.

Near target of 1,000 visitors

I had 974 visitors yesterday. This is just a few short of my target of 1,000 visitors. I have most visitors on Mondays, as it is after the weekend, and there is a small column in MyPaper taken from my blog.

I hope to have an average of 1,000 visitors a day. Currently, the average is still less than 800 visitors.

Do pass the word around, to get more people to visit my blog.

Timing the market

It is difficult to time the market. Will the market drop further? It is possible. But no one knows. If it does drop further, when is a good time to invest?

Some people advice that it is better to wait for the market to drop to the bottom and wait for the rebound. But it is still difficult to catch the right time, as the market may drop again after the rebound.

Other people advice that it is better to wait for 6 to 12 months to see wait until the credit crisis is over.

My personal view is:

1. It is difficult to time the market.
2. The stockmarket has corrected to an attractive value
3. It is all right for a long term investor to start investing
4. Due to the uncertainty, the investment can be made in tranches over the next six months

I am adopting the above approach for my personal investment (of which about 50% is still in cash).

Warren Buffet is making strategic purchases at this time, as they represent good value.

All the best for your investments.

Monday, February 18, 2008

Expense ratio of investment funds

From MAS website:

Expense Ratio (%) = (Total operating expenses * 100)/Average Net Asset Value

Operating expenses refers to all costs charged to the fund during the reporting period.
These would ordinarily include, but are not limited to:
• Management fee;
• Trustee fee;
• Administration fee;
• Accounting and Valuation fees;
• Custodian, sub-custodian and depository fees;
• Registrar fees;
• Legal and professional fees;
• Printing and distribution fees;
• Audit fee;
• Amortised expenses;
• Performance fee
• GST on expenses.

The following expenses may be excluded from the computation of the expense ratio:
• Interest expense;
• Brokerage and other transaction costs associated with the purchase and sales of investments (such as registrar charges and remittance fees);
• Foreign exchange gains and losses of the fund, whether realised orunrealised;
• Tax deducted at source or arising on income received, including withholding tax;
• Front end loads, back end loads and other costs arising on the purchase or sale of a foreign unit trust or mutual fund, including any costs arising where a Singapore feeder fund invests into an off-shore parent-fund. Such expenseswould generally be capitalised into the cost of the investment and will subsequently be reflected as a diminution in net asset value when the investment is first marked to market after purchase;
• Dividends and other distributions paid to unit-holders.

Investing in REITS

Dear Mr. Tan,
How do I invest in REITS? Is it a fund or a stock or ETF? How to choose a good REITS to invest?

A REIT is a stock that you can buy through the Exchange from a broker. My stockbroker has recommended some stocks to me, and I have listed them in my blog. You should make your own analysis.

Calculating the yield

Dear Mr Tan:

I am a faithful reader of your blog and enjoy the advices which you gave to the public. I wish to ask about the calculation of yield. I use the following formula:

$150 a month month for 21 years, total=$ 37800
Cash value = $ 61000
Yield for 21 years = (61000-37800) /37800 *100% = 61.4%
Yield per year =61.4/21= 2.9%
Is my calculation correct ?

The yield is calculated using a compound interest formula.
I use a financial calculator and input the following figures:
Annual savings: $1,800 (in advance)
Duration 21 years
Value on maturity: $61,000
The calculator gives me a yield of 4.5%.

If you take a regular saving of $1,800 a year and add interest at 4.5% on the increasing balance yearly, you will arrive at $61.000 at the end of 21 years.

Tip: Buy a financial calculator for $50.

ETF and Unit Trust

Mr. Tan,
What is the difference between a unit trust, mutual fund and a ETF?

A unit trust is the same as a mutual fund. They are the names used in UK and USA respectively for a fund that is traded daily based on its net asset value. If you wish to buy or sell units, the price will be determined at the end of the day.

An ETF is a fund that is traded on the stock exchange. You buy or sell shares in the fund, like any other share. It is based on the price struck between the buyers and sellers on the exchange. This price should reflect the net asset value of the fund, but it also depends on the liquidity.

Some investors have complained about the low liquidity of the STI ETF. This is a disadvantage of ETF, for long term investors. I believe that this disadvantage is being addressed within the next few months.

Some investors think that it is an advantage to be able to trade the ETF based on its prevailing price at any time. In my view, a fund should be invested for the longer term, and the daily NAV value is a better feature.

For intra-day trading, it is better to choose an individual, highly liquid stock.

Decline in interest rate

Dear Mr. Tan,
Aviva has decided to redeem the BIGe account and return the money to the investors CPF account. Where can I invest to earn a decent return, that can offset the high rate of inflation?

If you keep money in the bank, you earn interest at 1% to 1.5%. This is lower than the rate of inflation. Your other options are:

1. Buy equities (shares) to earn a long term yield of 6% to 8%
2. Invest in foreign currencies to earn a higher interest rate
3. Invest in REITS, which gives a good dividend yield

If you are investing for the long term, say 10 years or more, you do not have to worry about the current uncertainty. It will clear off in 6 to 12 months.

You have the option to wait before investing in equities. During this time, you will earn a low rate of interest. You have to accept it as the cost of being risk adverse. But you must be ready to move in, when the market turns.


Where will you like to place your life time savings?

1. With a company that you can trust?
2. With a company that is professionally runned with the aim to make most profit?

If you buy a life insurance policy, you have incurred a large upfront cost. You are stuck with the policy for many years, usually with a poor return. A large part of the gain goes to pay the insurance agent who sells the policy to you, and to make profit for the insurance company.

Here are the tips for consumers:

1. Invest in a financial product that have low upfront cost, such as a unit trust
2. Buy your insurance protection separately, e.g. through a Term or accident insurance policy
3. If you buy an endowment or whole life policy, choose a company that operates on low cost and is worthy of your trust.

Sunday, February 17, 2008


What do science-trained researchers do? Read Dr Lee Kum Tatt's blog:

Regular replacement of policy

Someone told this story in a speech. When he started work, he bought a life insurance policy from a large company.

The agent saw him every few years, and convinced him to switch to a new policy. The agent said that the new policy was "better". This was done a few times over the years.

Later, he realised that the agent took advantage of him. Every time that he changed his insurance policy, he lost on the past savings and cash value. Although he had paid his premiums for 20 years, his cash value is low.

Where did this happen? It happened in Singapore. And it happened to a well eduated person!

Financial crisis every 10 years?

Read this article in CNN

It seems that a crisis occurs every 10 years in USA:
1989-90 Savings and Loans crisis
1998 - Long Term Credit Management
2008 - Subprime

Marketing to residents living nearby

Dear Mr. Tan,

I have set up a retail shop. I wish to look for the names and telephone numbers of people living in my area. I wish to carry out target marketing to get them to come to my shop. Is there a telephone book that is sorted by address?


You can buy a CD that contain the name and telephone number of people living in a specific area, sorted by address. More details can be found at:

Wish you all the best in your marketing.

Greed makes monkey of men


Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys at $10 each. The villagers, seeing that there were many monkeys around, went into the forest and started catching them. The man very gentlemanly bought thousands of monkeys at $10 each, but as supply started to diminish, the villagers slowed down and eventually stopped their efforts.

The man then announced that he would now buy at $20. This renewed the energy and efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further, and people started going back to their farms.

The offer was then increased to $25 each, but the supply of monkeys became so little that it was a almost a miracle to even spot a monkey, let alone catch one.

The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would transact on his behalf.

In the absence of the man, the assistant assembled the villagers and told them : " Look at all these monkeys in the big cages that the man has collected. I will sell them to you at $35 each, and when the man returns from the city, you can in turn sell them to him at $50 each. Deal or no deal ? "

The excited villagers, smelling a quick-profit killer opportunity, immediately rounded up all their savings and bought all the monkeys. Then they never saw the man nor his assistant again, and there were just monkeys everywhere!

Now you have a better understanding of how "greed"makes monkey of men?

Financial product with a guaranteed return

Dear Mr. Tan,
What are your views about life insurance products that give a guaranteed return?

Life insurance companies sell products that offer a guaranteed return. They may appear to be attractive to a risk adverse investor, but they generally give poor value to the consumer.

If interest rate goes up, due to inflation, the life insurance company makes a big profit. The consumer gets back the savings in depreciated dollars.

If insurance rate goes down, the life insurance company makes a loss. To avoid this loss, they get the insurance agent to convince the customer to switch to a new product (which usually contains some frills). The customer is not aware that the new product offers a poorer return. In addition, he has to suffer the upfront cost of the new product.

I have seen this unethical practice over the years, in several countries. Here is an example of the potential impact of a change of interest rate.

1. Take the case of a 30 year endowment policy with a guaranteed return of 4% per annum. An annual premium of $5,000 will produce a guaranteed maturity amount of $280,000.

2. If the actual interest rate earned by the fund over 30 years is 6% per annum, the premiums paid will accumulate to $395,000. The insurance company pays out the guaranteed amount of $280,000 and makes a profit of $115,000.

3. If the actual interest rate earned by the fund over 30 years is 2% per annum, the premiums will accumlate to $203,000. The insurance company should suffer a loss of $77,000. The insurance company can avoid this loss by getting the insurance agent to make the customer switch to a new product.

Lesson: If you are making regular savings in the future, it is better to invest in a transparent product, such as a low cost unit trust, and keep the return for yourself. Do not give the return away by buying a guaranted return.

If you have bought a guaranteed product, do not allow the agent or employee of the company to talk you into switching to a new product.

Blog Archive