Benchmark premium rates for critical illness

A term insurance policy pays on death. A critical illness policy pays on the diagnosis of a critical illness or on death. The chance of making a claim on a critical illness policy is higher. A rule of thumb is that the premium payable for critical illness cover is 60% higher than for a death cover for a male. For a female, it is 140% higher.

Here are some specimen rates:

Insure $300,000 level for 25 years
Age      Male            Female
       Death    CI      Death  CI
25      456    711       295   726
30      729   1161       431  1083
35     1211   1966       676  1586
40     1984   3212      1127  2304

Financial Crisis

The current financial crisis in USA is similar to the Asian Financial Crisis, exactly ten years ago.

In the Asian financial crisis (1998), corporates borrowed on short term loans in USD to fund long term property and business projects. When the USD increased sharply, they could not repay their debts.

In the current financial crisis (2008), many special investment vehicles and hedge funds borrowed money on the short term to invest in other assets, such as equities, to earn the margin between their cost of borrowings and the higher return on risky asssets.

The defaults of subprime mortgages started the crisis. It spread beyond the subprime mortgages. When the short term borrowings of the SIV and hedge funds fall due, the lenders refused to refinancing the loans. The borrowers could not refinance their debts. They had to sell equities and other assets to repay the loans. This caused the collapse of the stock markets.

Lesson: It is very risky to borrow on short term to invest for the long term, or to invest on borrowed money (i.e. leveraging).

Car Free Cities

I hope that more cities in the fugure will be designed to be car free. Here is a website that describes the concept of a car free city:
http://www.carfree.com

In Singapore, we can apply this concept to the new towns that are being developed. All movements within the town will be by walking or public transport. People should be encouraged to live, work and study within the same town.

Here is my idea of how the future town should be developed:
http://www.tankinlian.com/articles/housing.html

With the high price of oil and the damage to the environment, this concept becomes more urgent in all cities around the world.

1,000 visitors

Over 1,000 visitors to my blog on Tuesday. It is the highest number for the past year. The average for the past week is 850.

Ask for three quotes

Dear Mr Tan,

I need to seek your advice. I am covered under a group policy basic term insurance. I want to increase my cover to $150K and take up a new critical illness term plan (until age 65). I declare that I am suffering from xxxx. The underwriter quoted a monthly premium of $x for the basic term and $y for the critical illness term. In your professional opinion, do you think that I should take up the new coverage? Is the premium fair?

REPLY
I suggest that you ask three insurance company to quote the premium on your coverage. You can make a better decision after you obtain the three quotes. Read this FAQ:
http://www.tankinlian.com/faq/termd.html

You can get the benchmark premium rate from this FAQ:
http://www.tankinlian.com/faq/benchmark.html

Keep invested in CPF

Hi Sir,
I chance upon your site and need your advice regarding my investment. By end of March, the Government will be freezing our CPF account.

I am thinking of investing my ordinary account and special account into bonds (50%) and in AIA Growth Fund (50%). Is it wise?

My friends told me that the economy is not doing well, so better not invest in anything. I really don't know. This is the first time I am investing. Really hope to hear from you soon. I need to reply my agent by 15th March.

REPLY

It is better to keep your money in the CPF to earn the guaranteed interest rate of 2.5% for ordinary account and 4% for special account plus the bonus of 1%. If you do not need the money in the ordinary account, you can transfer it to the special account to earn a higher rate of interest.

Do not invest in high cost products sold by an insurance agent, as it gives you a poor return, after deducting the charges. High quality bonds do not give you an adequate yield. Low quality bonds give a higher yield, but is risky.

Tolerance for mistakes

Hi Mr Tan,
I am an avid follower of your blog. I do notice that the entries you have written often draw responses, positive and negative, from the public. There were times when people wrote really nasty things about Income whenever Income makes mistakes here and there.

However, I hardly hear about the public complimenting about the extra mile that Income (or other insurance companies) do for their policy holders. Have we turned into a society where we respond with over-the-top reactions to mistakes, be it minor or major? Have we turned into a society where we cannot make room for mistakes? Must everything go strictly to what has been planned ahead? :(

Pardon me for sounding stereotypical. However, I do feel that society as a whole is becoming less tolerant towards people making mistakes. Patience seems to be in short supply these days and tempers flare too easily. It 'beggars belief' that society is opening up as a whole to welcome people from other parts of the world when minds are shrinking in size.

I apologise for this long email. However, I am not sure if I am the only one behaving in this way. Is it too much to ask for a little patience?

REPLY
Thank you for your useful observations. I agree with your thoughts.

Top up spouse account to qualify for CPF Life annuity

Hi Mr Tan I am a housewife. I need your advice on the following options:

Option A - Ask my husband to top up my cpf account minimum sum to be eligible for the CPF lifelong annuity. For $50,000 I can get an estimated $438 monthly at age 65 (under R65).

The CPF website stated that this is an estimation and the payout amount can be changed over times. However once opt in, we cannot opt out should the payout amount changes. This statement bothers me. I feel that the payout amount is not guaranteed but act as a trap to get people to join in by inflating the payout amount to make it attractive.

Option B - Use the cash $50,000 to buy into annuity with NTUC at age 50 and starts the payout at age 65 for lifetime. How much will I get lifelong monthly payout commencing at age 65?

REPLY:

It is better to buy the CPF Life annuity. The CPF uses a good interest rate to calculate the payouts. They also have low expense charge, and are able to give an attractive return to the annuitant.

The CPF is not able to guarantee the payout, as it depends on future interest rate. I believe that it will continue to be better than market rate. You do not have to worry that the payout is not guaranteed.

Your first prioirty is to buy the CPF Life annuity. If you still have additional savings, you can use it to buy the life annuity from NTUC Income. You can ask them to quote you the payout and compare it with the payouts offered by other insurance companies for a similar plan.

Give time to sort out the problem

Dear Mr. Tan
I log onto your blog everyday and learned a lot from your messages. Did you read the forum message "Delay after delay in Incomeshield claim" in ST on 12.03.08 and the online comments from readers?

I think I am not the only one to miss the good old days when you were the CEO of Income. Many of us bought policies because we had faith in you. It is possible that staff makes mistakes from time to time, but it is not fair if the customers have no recourse when their feedback is repeatedly ignored. Do you have any advice for people in similar situations?

REPLY

I believe that NTUC Income will find out the source of this problem, and will rectify it. Give them some time to sort it out.

Benchmark rates for critical illness

Dear Mr. Tan,
Do you have the benchmark rates for critical illness cover. Is there an option to buy a decreasing cover or an income benefit, just like term insurance?

REPLY
As a rough rule of thumb, the premium for critical illness is about 50% higher than for term insurance, but the actual difference depends on age and gender. I will be able to provide the benchmark rates in one or two weeks' time.

The premium for short term cover will be much lower than for whole life cover. It does not accumulate any cash value.

Investing in Stocks

Someone posted in my blog that his father has invested in stocks for many years, and have made losses. After investing for a lifetime, he has not yet recovered his invested capital.

This is possible. If the investor bought the wrong stocks, it is possible to lose the entire capital.

Here are my tips for investing in stocks:

1. Invest in a well diversified fund
2. The fund should preferably be bencharked against the market index (comprising of the quality stocks).
3. Choose a low cost fund.
4. Invest for the long term (so that good and bad years are averaged out).

If you adopt this formula, you will make a good return. This will be higher than investing in bonds or an insurance fund.

If you make a study of the market index over the past 30 years, you will find an average return of about 6% to 8%. The capital gain shown on the stock market index may give a lower return, but you have to add about 3% to cover the dividend yield.

Generally, it is good to invest in an insurance fund, as it is well diversified. The drawback is the high upfront and annual charges that is taken away from the yield of the fund. This reduces the yield considerably. If you can find an insurance fund that operates on low expenses, it is also a good option.

Whole Life

Dear Mr. Tan,
Is whole life a good plan?

REPLY
It depends on the pricing. If it has reasonable charges, it is a good plan.

Unfortunately, most of the plans in the market have high charges to pay agent's commission and advertising cost. They give poor value to the customer and lock the customer for many years. It take about 15 years to reach breakeven point.

For insurance proection, the best plan is a term insurance over 25 years. To reduce the cost, you can take a decreasing term or a income benefit plan.

Poll: amount of critical illness coverage

How much should a person insure for critical illness coverage?

22% - one year's salary
25% - two years' salary
53% - five years' salary

Poll: duration of critical illness insurance

Critical illness insurance is expensive at the older ages. How long should a person insure for critical illness?

9% - 20 years
35% - up to age 65
56% - for whole of life

Life insurance for your child

Before you take a life insurance or education policy for your child, read this FAQ:
http://www.tankinlian.com/faq/childlife.html

Critical illness premium subject to revision

The premium for critical illness is not guaranteed. The insurance company can increase the premium, based on future claim experience. It will apply to existing critical illness policies taken during the past few years. Policies taken before do not have the adjustment clause.

If the claim experience is good, the insurance company does not reduce the premium. If you take a participating policy, you may enjoy a higher rate of bonus. This depends on whether the insurance company keep its expenses low and shares its surplus fairly with its policyholders.

Critical Illness - how to insure

Critical illness insurance for whole lfie is expensive. A male at 30 has to pay a monthly premium of about $630 to buy whole life critical illness cover for $300,000 (about 5 year's salary).

If this person buys a 25 year decreasing critical illness cover, he pays a premium of about $37 a month.

If the remaining $593 is invested in a low cost fund to earn an average of 5% per annum, the savings will accumulate to $300,000 in 23 years (i.e. at the age of 53 years). There is no need to wait for critical illness to collect $300,000. The regular investment plan will produce this amount.

At the end of 35 years, when he reaches age 65, the regular investment plan is projected to reach $643,000. This will be much more than the critical illness cover of $300,000 plus any bonus that is added to this amount.

Lesson: Buy critical illness cover for one year's salary only, on a short term basis. Insure five year's salary on a 25 year decreasing term plan. Invest about 10% to 15% of your salary in a low cost investment fund.

Where to buy term insurance?

Dear Mr. Tan,
You have been recommening to "buy term". Where can I buy term insurance? How much is the premium for insuring $300,000? I spoke to a few agents who recommended against it. They said that it is better to buy whole life as it has a cash value.

REPLY
You have to buy term insurance directly from the insurance company. You can telephone a few insurance company as follows:
http://www.tankinlian.com/faq/termd.html

Here are the benchmark premium rates for three types of term insurance:
http://www.tankinlian.com/faq/benchmark.html

A good combination is:
- level term insurance for one year's salary
- income benefit for 20 years based on 70% of current salary

Distribution channels

Currently, IFA can only sell insurance policies from most of the insurance companies expect AIA, Great Eastern and Prudential. Why is this so?

The road shows from these three insurance companies and also NTUC Income are everywhere. Moreover, their sales pitch is very aggressive, more like salesmen than financial adviser.

Should MAS only allow only IFA with CFP and CPA qualifications to provide financial advice and sell policies from any insurance company? The other insurance companies can sell their insurance through direct means, such as internet and phone hotline?

REPLY

The three companies wish to sell their life insurance products through their own agents. They do not wish to sell them through the IFAs. It is their business decision.

It is difficult for MAS to tell the insurance companies to stop selling throughtheir own agents. I hope that a new insurance company will be set up to sell low cost insurance through the internet and call center.

Whole life policy

Dear Mr Tan,
Your blog has mentioned so much about buy term invest the difference.

When I ask my friends and co-workers, most of them buy whole life policies and want to surrender the policy when they retire. Some said that the cash value will be reduced after age 65 and it will be better to surrender it. Why is this so? Is this defeat the purpose of having whole life insurance?

Is this the reason why you want to educate people to buy term insurance till age 65 and invest the difference? They can avoid the high distribution charges (at least 15 months of premium) and get a better return on their savings by investing in low cost funds, such as ETFs, unit trusts from online distributers?

REPLY
The sum assured under a whole life policy should continue at the same level, provided that the premium continue to be paid yearly. If the policyholder decide to stop the premium after age 65, the sum assured will be reduced.

A term insurance plan provides high coverage at low cost. The savings should be invested in a low cost investment fund to get a good return.

Travel to Jakarta

I will be in Jakarta for the next four days. The updates to my blog will be less frequent, as internet connection from Jakarta is slow and expensive.

Satisfactory return on Endowment Policy

Hi Mr. Tan,

In Mar 1994, I bought a 14-year endowment with compound reversionary bonus insurance policy from company X, paying an annual premium of $2,390. The policy provides a basic sum assured of $30,000.

Today, this policy has matured. The company has now given a cheque of $45,350, comprising $30,000 sum assured, $12,792 accumulated bonus and $2,558 special maturity bonus. Do you think this is a reasonable return?

REPLY
The return is 4.0% per annum (based on annual premium, payable in advance). It is quite satisfactory.

Insuring against critical illness

I recommend coverage of $50,000 for critical illness up to age 65 or earlier. Some people think that this is not adequate. Insurance agents have advised them to insure for $200,000 or more.

Here are the reasons for my recommendation:

a) The cost of treatment should be covered by a medical insurance policy.

b) The loss of income should be for a period of up to 2 years. If the illness is serious, it is likely to lead to death. If not, the patient is likely to recover.

c) There is no need to insure for loss of income beyond age 65. By that time, the person is likely to have retired from work.

The cost of critical illness coverage, based on my recommendation, is quite low. This allows the bulk of the savings to be invested in a low cost investment fund, to earn a high yield. This money is needed for retirement. There is a stronger need for adequate savings for retirement (simply because more people are expected to retire, than to suffer a critical illness).

There is high cost in buying a whole life critical illness product. About two years of the savings goes to pay the marketing expenses. This should be avoided. I shall be working out a FAQ to explain the cost structure.

A new product: BTID

1. Introduction

This is the code name of a new life insurance product called “Buy term and invest the difference”.

I hope to get a new insurance company to offer this product to the public. I am publishing the details, so that some of the existing large companies can copy it and introduce it to the public.

2. Features

The key features of this new product are:

- Good yield on the savings
- Flexible
- Adequate coverage at low cost

This can be achieved by designing simple products that

- Fair to consumers
- Easy to understand
- Have low operating cost
- Reduced marketing cost

3. Yield

The savings are invested in a diversified investment fund that have an expense ratio less than 1% per annum. It is invested in quality investments, comprising of equities and bonds, that can earn an average gross yield of 6% over the long term. After deducting expenses, the net yield should be at least 5%.

This yield will give a higher return, compared to life insurance products that currently earn 3% to 4% for consumers.

4. Flexible

The product offers the following flexibility:

- To increase or reduce the savings rate
- To make withdrawals at minimal cost

An important feature of this product is that there is no front-end load to pay for the marketing expenses. The transaction cost is low and covers the actual expenses. This makes it possible for people to make withdrawals at minimal cost or penalty.

5. Insurance Coverage

The insurance coverage will be bought in a separate policy. It covers a selected period of 20 or 25 years to provide the following payments on death or critical illness during the period of insurance:

- A lump sum payable on death
- A monthly income benefit payable on death for the remainder of the term
- A monthly income payable for the period of recovery from a critical illness

This insurance coverage should be adequate to meet the financial needs. To reduce the cost, the coverage should be taken for a period of 20 or 25 years. It should not extend beyond the age of 65, where most people are expected to retire.

These products are fairly priced, based on the actual cost of benefits plus a margin to cover expenses and profit. The cost is much lower than similar products now offered in the market.

Beyond the period of 20 or 25 years, there is no need for the insurance coverage as the invested savings will accumulate to a sufficient amount.

6. Low marketing cost

This product can be marketing at low cost through the following strategy:

- The product is easy to understand
- It offers good value to consumers
- Consumers are educated about the product
- Many consumers are willing to buy the product directly
- The product can be purchased through the internet, call center or sales office

With low marketing expenses, consumers do not have to pay a hefty front-end load.

7. Conclusion

This product will give great value to consumers. I hope that more insurance companies will offer this product, so that consumers can benefit from it.

Tan Kin Lian

Car Loan

Hi Mr. Tan,
I have just booked a new car and am shopping for a loan. I found that over the past few years, banks & finance companies have outsourced their car loans to car dealers. This produced an unhealthy situation in which buyers cannot get good advice from the car dealers because they
are not held responsible for the advice they give and commission bias their advice towards longer & higherloans.

My calls to banks and finance companies draw blanks as call centre staff don't have details of the deals struck with the various car dealers and are afraid of getting intoany details.

Do you know of any place that can offer a fairer simple interest loan secured by the car. Is there a government body that could look into this situation as car buyers end upbeing ill-advised.

REPLY
I am not aware that the banks and finance companies do not deal with the public anymore.I suggest that you bring this matter up with the MAS. I will ask my blog readers to tell us if they know of any financier wiling to provide a car loan.

Invest in Foreign Currency

Hi,
I have no experience or knowledge about investing in financial product but was keen in doing so. I wish to invest in foreign currency and like to ask you how it works and how can I start?

I have around 10k for investment and hope to have a decent return every month. Is it possible?I dont mind taking some risk if find that is worth doing it.

REPLY

Please read these FAQs
http://www.tankinlian.com/faq/foreign.html
http://www.tankinlian.com/faq/duali.html

I suggest that you attend the 2 day workshop that is mentioned in my blog. You can ask the lecturer to deal with your question of investing in foreigh currency.

Existing Life Insurance Policy

Mr. Tan,

I have an existing life insurance policy (details deleted). I do not need the insurance cover any more, as I have bought a large term insurance policy. Should I continue with this policy as an investment?

REPLY

You should ask your insurance company to tell you the cash value now, the cash value in (say) 5 years time and the premium payable for the next 5 years. If the yield on the policy is more than 3% p.a. you can keep the policy as an investment.

Here is a simple way to check if the yield is more than 3%.

Take the cash valuw now and muliply by the factor of 1.1593
Multipy the monthly premium by 64.6650 or the annual premium by 5.4684.
The total of the two figures is the "target value".
If the cash value is more than the "target value", you can keep the policy.

Here is an example:
Cash value now $5,000
Monthly premium: $90

$5,000 X 1.1593 = $5,796
$90 X 64.6650 = $5,820
Total = $11,616

If the cash value is more than $11,616, you can keep the policy. If it is less, you can cancel the policy.

If you wish, you can also deduct the cost of the term insurance from the monthly premium. For example, if the cost of the term insurance is $10 a month, the calculation will now be:

$5,000 X 1.1593 = $5,796
($90 - $10) X 64.6650 = $5,173
Total = $10,969

You can get the term insurance premium from my FAQ below. I think that it is all right to ignore this item, as you are using only 3% (which is somewhat low) to calculate the target value.
http://www.tankinlian.com/faq/benchmark.html

Some people think that they should take a different period (instead of 5 years) or use a different yield (instead of 3%) to calculate the target value. They are also right. It is a matter of judgement. I have adopted 5 years and 3% for simplicity.

I shall be writing a separate FAQ to give the factors for different periods and different yields.

Regular premium investment-linked policy

Mr. Tan,
My insurance agent advised me to invest monthly in an ILP policy, as I can benefit from dollar averaging. He said that if I invest a lump premium, which does not benefit from averaging. Is this a correct approach?

REPLY
The agent is probably telling you only one side of the story. You should ask the agent the following question:

"If I invest a regular premium, how much of my premium is invested? How much is taken away to pay expenses?"

"How much commission do you earn from a regular premium policy, compared to a single premium policy?

Most regular premium ILP in the market takes away up to 24 months of your savings. During the first year, a small proportion of your premium is invested, and the rest is taken away to pay commission to the agent and other expenses. The agent usually avoid explaining this charge to you, but is is disclosed in the policy illustration.

If you save $300 a month, the charges of 24 months amount to $7,200. This is a lot of money to give away, just by investing in a regular premium ILP. This is the most expensive part of an ILP policy.

Some insurance companies have a lower front-end charge. You should ask the insurance agent about it.

If you wish to do dollar averaging, it is better to invest in a unit trust. You do not have to incur this heavy front-end charge.

Read this FAQ:
http://www.tankinlian.com/faq/ilp.html

Large increase in motor insurance premium

Dear Mr. Tan,
Last year, I insured my new car with NTUC as the premium is cheaper. I have just received the renewal notice, and found that the premium increased by about 20%. This is a shock to me. Why should the premium increased by so much? Is NTUC still trying to keep the premium lower than the market, or will it be more expensive, due to the big advertising expenses?

I do not want to stay with NTUC. Can you recommend any other insurance company that charge lower premium?

REPLY
I read that the claims on motor insurance have gone up last year, not only for NTUC Income but for other insurance companies as well. I am not sure if the increase for NTUC Income is due to higher expenses and lax claim control.

I suggest that you telephone a few insurance compamies directly and see if you can get a lower premium rate. Read this FAQ:
http://www.tankinlian.com/faq/motord.html

Someone sent me an e-mail a few days ago. By telephoning a few insurance companies for a quote, he was able to get a premium that was 30% lower. He said that it was time consuming but worth the trouble.

60th birthday

I reached my 60th birthday today. Another 60 years more to go!