Expensive medical treatment

My friend's wife passed away recently from cancer. She was in her early 50s.

This was the third cancer attack over the past 15 years. My friend appointed a private cancer specialist to treat her. The initial estimate was $50,000. The total medical bill increased to $150,000.

My friend knew that the chance of recovery was very slim. When the initial estimate was exceeded, he found it difficult to decline the suggestion of further treatment. He had to spend so much money, when there was virtually no hope. He earned a modest income, so the medical bill represented many years of his earnings.

He had made an insurance claim on an earlier cancer treatment. The latest episode was not covered by insurance.

Lesson: There is no point in spending so much money for treatment, when there was virtually no chance of recovery. He should have obtained independent, objective advice from another specialist (other than the specialist that treated his wife).

Learn about property derivatives

Dear Mr. Tan,
I would like to ask about property derivatives. How are they used (examples) and valued? Could you explain them in detail? Please recommend some journals which could help me to find the answers of the questions above. Your efforts will be greatly appreciated. With many thanks.

REPLY
You are probably referring to the asset back securities and collaterilised debt obligations (CDO) in the USA. I suggest that you search Google for these items, and read the writings from the experts. All the best.

Government Bonds

Dear Mr. Tan
I am interested to buy Singapore Government Bonds for investment. Can you please tell me more about it as to where, how can when should I buy the Bonds.

REPLY
You can approach a bank or a stockbroker.

Invest your SRS

Dear Mr. Tan,
I am 47 yrs old and have been contributing regularly in cash to my SRS account so as to lower my income tax. I have been using the money to buy NTUC Income Growth policies for 15 to 17 years' term. The projected return is about 4 %. Do you think I am making a wise investment decision? Are there better ways to invest the cash in my SRS account?

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

Poor value from USD policies

Dear Mr. Tan,
I have been a regular reader of your blog since recent months. and found it is very informative and helpful. Thank you so much for your invaluable sharing.

I understand more about how insurance works, but start to struggle about the policies bought for my families now. We bought the whole life plan for my husband and myself since 2004. The coverage is US $50,000. The premiums total USD 2000 for both policies. The breakeven is 12 years in USD, but we are also losing on the depreciation of USD.

What will be your advice on these policies? Stop? Reduce the coverages? I know the current value of them should be very poor.

REPLY
I am sorry that I do not have the time to give specific advice of this kind.
I suggest that you read the FAQ in my blog and see if you can get any answers from there.
www.tankinlian.com/faq

Set a realistic goal

Dear Mr. Tan
What ETF should I be looking at if I would like to achieve a return of 10-15% p.a. Thanks.

REPLY
I am not able to advice on any product that can offer 10% to 15% p.a. I only aim for 5% to 6% p.a. for my personal investments.

Read this FAQ about investing for the long term:
http://www.tankinlian.com/faq/savings.html

If you wish to invest in the STI ETF, you have to approach a stockbroker.
Wish you all the best.

Defamatory comments

I have blocked defamatory comments posted by visitors. These defamatory comments are directed at specific persons or organisations. They attack a person's character.

I allow comments that are fair and substantiated by facts.

Honesty is the best policy

Dear Mr. Tan,

I would like to extend my warm thanks for your honest insights into the insurance sector. Your advice correlates with what I have personally experienced and discovered through readings.

I'm afraid that while many agents state that they have the interests of the consumer at heart, in reality, they're more concerned about the commission.

I'll be recommending your blog to all of my friends. I hope more insurance agents will realise that "honesty is the best policy".

Thank you for your honesty. It is much appreciated in present times.

Stamp duty on purchase of property

I hope that the government will remove the stamp duty on purchase of property. The removal of this cost will encourage some people to change their homes to be closer to their place of work. This will reduce the number of people that have to commute long distance to work and reduce the congestion on the road.

If there is a loss of revenue, it can be compensated by an adjustment to the property tax. (In my opinion, this is not necessary).

The government has removed estate duty. It is time to take the next step, in the interest of reducing road congestion and travelling time and cost.

Mall of Asia, Manila

I visited the SM Mall of Asia in Manila. My host said that it is the largest mall in Asia.

It has an ice skating rink, cinemas, entertainment outlets, many stores, restaurants, a large department store and a hypermart.

Although the mall is large, it is easy to move around. The signage are excellent. In contrast, I often get lost in many of the smaller shopping malls in Singapore.

The mall is across a park and beach at the side of Manila bay. Here is a picture of sunset at the bay.

Role of agents

Dear Mr. Tan,
Is there a role for agents to sell low cost insurance and investment funds?

REPLY
The customer can buy from the following channels:
a) call center
b) internet
c) agent

As the agent earns a low commission, the customer has to contact the agent by telephone or visit the agent's office to complete the transaction.

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

Cost of insurance

Dear Tan Kin Lian
My agent said that my ILP covers are personal accident, medical card, 36 disease and permanent disability. If I want to buy a separate policy to cover the above, I have to pay a higher premium. Is this true?

REPLY
You can compare the cost of the insurance covers under your ILP with the benchmark premium mentioned in this FAQ:
http://www.tankinlian.com/faq/benchmark.html

You can use the term insurance rates to compare with the death benefit, including permanent disability. The premium to cover 36 critical illness is 1.5 times of the term insurance rates (as a rough guide).

The ILP will probably charge you a rate that increases each year. The benchmark premium shows the level premium for the period. You can add the total premium for the period (say 20 years) to make a comparison.

Best insurance plan for your child

As a parent, you will probably ask the following questions:

a) What insurance protection should I buy for my child?
b) How can I save for my child's education fund?

An insurance agent will usually sell an endowment or critical illness to you to cover your child. The agent can earn commission of one or two years of your premium. The plan will give a low return to you.

Read this FAQ for an alternative approach:
http://www.tankinlian.com/faq/childlife.html

Earn a return of 6% to 24% per annum?

How can you earn this high rate of return?

By lending to yourself. Read this FAQ:
http://www.tankinlian.com/faq/return.html

Fuel consumption for your car

Here is a method to calculate the fuel consumption for your car:

a) Each time you top up the tank, record the mileage meter and litres of petrol filled
b) Find the distance travelled between two top-ups, and the litres of petrol used
c) Calculate the number of kilometers travelled for each liter of petrol

If you know the fuel consumption of your car (i.e. the number of kilometers travelled per litre of petrol), you can work out the cost per kilometer based on the current price of petrol.

Record the results for your car in the comment below.

Sunset at Manila Bay

Here is a picture of the sunset at Manila Bay, taken from a yacht.

Later, when the yacht was out in the bay and the night has fallen, there was a 4 string quartet playing nostalgic songs on the yacht. It was nice to feel the breeze as the yacht sailed slowly in the bay and hear the captivating sounds of the violins.

This experience reminds me of the song... You belong to my heart, now and forever .... And our love has its start, not long ago ... We were gathering stars while a million guitars played our love song ... When I said I love you, every beat of my heart said it too ....

Good advice from an uncle

Dear Tan Kin Lian,
I purchase the investment link policy(ILP) for 1 year. My uncle told me that ILP is not worth to buy. The insurance company and agent earn more commission. His advise is:

1) Don't join investment and insurance together, will definitely not benefit the policy holder.
2) For insurance, buy term life insurance which is cheaper and coverage higher.
3) For investment, buy mutual funds by our own.
Then I consult my agent and told him what my uncle told me.

My agent said that:
1) Term life policy do not cover the 36 diseases and medical card.
2) ILP coverage are Personal Accident(PA), Medical Card, 36 disease, Permanent Disability.
3) If I want to buy a policy which cover up all the above without investment, the premium pay is even more higher than ILP.
4) He will get higher commission if I buy all those policy separately.

Is that true? Hope can receive your valuable advise.

REPLY
I agree with your uncle. The agent does not give you the best advice.
Read these FAQs:
http://www.tankinlian.com/faq/savings.html
http://www.tankinlian.com/faq/choice.html

1,027 visits on Mar 26, 2008

There were 1,027 visitors to my blog yesterday. It is the highest over the past year. I seem to get a lot of visitors each time that I am overseas. (I am now in Manila, Philippines).

Universal Life - look at the charges

Dear Mr. Tan,
What is your opinion on the use of "universal life insurance" as a retirement tool. It is highly recommended if the objectives of retirement is to be able to maintain a comfortable lifestyle during retirement and to also preserve wealth to pass it on. Let me have your comments. Thanks

REPLY
Universal life in a life insurance product. It is likely to have high charges taken away from your savings to pay commisison to the agent. You should ask the agent about the charges. A universal life policy is likely to have charges similar to an investment-lined plan.

You can read about the charges on investment-linked plan (ILP) from this FAQ
http://www.tankinlian.com/faq/ilp.html

Simpler way to mail a letter

I sent a letter addressed to:

Tan Kin Lian
Singapore 809744.

10 days have passed. It never arrived!
Singapore Post must have decided that this address is incomplete and thrown the letter away!

Low cost products

I wish to give an idea of the type of products that give good value to consumers. I hope that these products will be available through a new life insurance company later this year.

This company will offer the products through the internet and call center, making it easy for consumers to buy the products.

LOW COST INSURANCE

1) Term insurance
Pays the sum assured in the event of premature death during the insurance period The sum assured is level during the period. Example: insure $200,000 for 20 years.

2) Reducing Term Insurance
Pays the reducing sum assured in the event of premature death during the insurance period. The sum assured starts at a higher amount and reduces each year during the period. Example: insure $400,000 reducing by $20,000 yearly over 20 years.

3) Family Income Benefit
Pays a monthly income in the event of premature death during the insurance period. The income is payable for the remainder of the period. Example: insure $2,000 payable monthly for the remainder of 20 years.

4) Family Protector
Combines a term insurance and a family income benefit. Example: insures $50,000 plus $2,000 a month for 20 years.

LOW COST DIVERSIFIED FUND

5) Wealth Accumulator
Allows you to invest in a diversified investment fund (i.e. equity, bond or treasuries) to earn the market rate of return. Reduces the risk by diversifying over a large number of quality investments. You can invest for the long term to average out the good and bad years. There is no front-end load. The expense ratio is probably the lowest in the market (e.g. 0.6% for an equity fund).

Financial planning can be confusing

Hi, Mr. Tan,
I spent two hours with an insurance agent to do a financial planning exercise. We went through many projections using different rates of inflation and insurance products. I find the projections to be quite confusing as they produce different results.

To meet my target of retiring at age 60 with a monthly income of $x (adjusted for inflation), I have to save $y (about 30% of my salary) each month. I cannot afford to save this amount. If I save a smaller sum, I need to invest my savings more agressively to earn 10% per year. Is this realistic? Can you advice?

REPLY
I find this approach to be quite speculative. The results differ according to the assumptions on:
a) inflation
b) investment return
c) period of investment (or retirement age)

Here are my general tips:
a) Save 10% to 15% of your monthly salary, if your budget is tight
b) Save more, if your regular expenses take a smaller share of your salary (for singles and high earners)
c) Invest your savings in a low cost, diversified fund
d) Buy low cost insurance, to provide a payment in event of premature death
e) Retire at an age when your accumulated savings (with yield) is sufficient to meet your future lifetime expenses
f) Be flexible on your retirement age and the amount of retirement income (i.e. live within your means)

Using my guidelines, you will be able to retire quite comfortably at the age of 65 years. You can retire earlier, if you are prepared to accept a more frugal lifestyle.

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

Petrol cost per kilometer travelled

With the increase in petrol price, do you know what is the petrol cost per kilometer for your car?

Here is a simple way to calculate this cost factor:

a) When you next top up to full tank, record the kilometer reading.
b) On the following top up to full tank, record the kilometer reading and the amount paid
c) Subtract the difference between the reading to get the kilometer travelled
d) Divide the petrol bill by the kilometer reading to get the cost per kilometer travelled.

If you have done this calculation, please post a comment showing the following: your model of car, petrol cost per kilometer travelled.

Travel to Manila, Philippines

I will be in Manila for the next four days. I shall present a paper to a meeting organised by the regional office of the International Cooperative Alliance. During this period, I shall be updating my blog less regularly.

Switching into the Wealth Accumulator plan

Dear Mr. Tan,
I am interested in your Wealth Accumulator plan, which is to be introduced later this year. I am now invested in the Combined Fund of NTUC. Should I switch to this new plan?

REPLY
The expense ratio of the low cost funds that can be purchased under the Wealth Accumulator plan is likely to be 0.3% lower than the Combined Fund. There is a small advantage in making this switch, but it is a recurring annual saving.

For new investments, the Wealth Accumulator plan has no front end charge (except for a small transaction fee). New investments into the Combined Fund attract a front end charge of 3% (invested through Flexi-Link) or 18.5% for the first three years and 3.5% for subsequent years (invested through the Ideal plan).

It is better to switch to the Wealth Accumulator plan, if you expect to make new investments. There is no penalty on withdrawal from the Combined Fund.

A similar advantage applies to switching form the ILP funds of other insurance companies.

Note: The Wealth Accumulator plan is not available at this time. Please wait for it to be available and details to be confirmed, before you make your decision.

Investing in REITS

Dear Mr. Tan,
Thank you for maintaining your blog. I have learned a lot from your experience, observation and answers to other people's questions..

May I know your views on Real Estate Investment Trusts (REIT) for long term investment as compare to STI ETF?

There are 20 REITs listed on SGX
http://stquote.sgx.com/live/st/STREIT.asp.
At the current price, their average return is about 6.8% p.a
http://www.reitdata.blogspot.com/

REIT would meet some of your criterias for long-term investment:
a) A diversified fund
b) Blue chip investments, i.e. non-speculative
c) Low cost, i..e. less than 1% per annum
d) Low upfront fee, less than 1%

REPLY
REITS are invested in properties. This is an asset class separate from equities.

Properties are also suitable for long term investments. You can have some of your long term savings in REITS. A suitable proportion is 25% in REITS and 75% in equities and bonds.

You are right that REITS offer an attractive yield. Part of the yield represents a return of your invested capital, as the properties are a depreciating assets.

After allowing for this factor, the yield is still attractive. I have invested part of my savings in REITS. If you search my blog and look for REITS, you will get a few postings.

Quality of a Good Leader in Science

Mrs Lee Kum Tatt has dug up some scripts of her husband which she wants to share with us. It will be interesting to find out how some of the values which Dr. Lee selected have affected his life and work.

This is meant to encourage, if not inspire, those who are pursuing a Science profession and career to be courageous to pursue their ideals and dreams. If handled properly it is a small prize to pay to be a good scientist.

www.leekumtatt.blogspot.com

Price subsidy for essential products

A newspaper report explained the difficulty faced in Malaysia about handling price control for fuel and essential products. It appears that price control distorts the distribution of the products and cause artificial shortages.

Is there any other way to provide relief to ordinary people from high prices, apart from price controls?

During war time, the distribution of essential products were done through coupons. This is the rationing system. People can buy the products only through coupons. This system also has its problems. A black market is created for the sale of these coupons.

In today's world, there is a better system to handle this problem. It involves the use of low-cost technology.

Anyone like to suggest what is a workable system?

Life insurance products

There are three main types of life insurance products:

a) Term insurance - pays the sum assured on death during the period of insurance. The policy ceases at the end of the period. There is no savings in this policy.

b) Whole life insurance - pays the sum assured on death. The policy can be continued for a lifetime. The policyholder has the option to terminate the policy and receive a cash value.

c) Endowment insurance - pays the sum assured on premature death or on the maturty date (i.e. at the end of the period of insurance). This policy combines the term insurance together with a savings element that accumulates the benefit payable on maturity.

The premium paid under whole life or endowment insurance is higher than term insurance. The excess premium, less charges, is accumulated to produce the cash value or maturity benefit. Due to the high charges, the yield on this savings portion is generally poor.

If you buy a participating or with-profits policy (i.e. whole life or endowment policy), your policy will earn an annual bonus that depends on the profits of the insurance company. This bonus is added to the policy. The yield on a participating policy is marginally higher, but is still low compared with other financial products.

It is better to pay a separate premium for the term insurance, and invest the remaining savings in a low cost investment fund, which can produce a higher yield on the investments.

The annuity is a different product. I shall explain its features separately.

Know What's Ethical

Minister for Health Khaw Boon Wan said,

"Doctors should be aware that they should not prescribe procedures of dubious benefits to their patients, exposing them to unnecessary risk or financial cost. If they do so, they will be considered unethical."

I hope that MAS Chairman Goh Chok Tong will say the following:

"Financial advisers should be aware that they should not prescribe financial and insurance products of dubious benefits to their clients, exposing them to unnecessary risk or financial cost. If they do so, they will be considered unethical."

This message, coming from the highest level in MAS, will address the marketing abuses in the financial services market.

Take the risk and get a higher return

A whole life or endowment policy will lock you into a low yield, for the following reasons:

a) the insurance company has to invest 70% of the money in low yielding bonds (to provide the guarantee), and only 30% in equity or property (which gives a higher yield)

b) up to two years of the premium is used to pay commission and marketing expenses.

Here are the yields that you can get on your savings (excluding the portion used to pay for the insurance cover):

3% - from an insurance product, after deducting marketing expenses
4% - from a no-load investment fund, invested with the same mix
6% - from a no-load investment fund, invested 100% in equity.

Here is the amount that you can get by investing $6,000 a year

Duration       3% pa     4% pa        6% pa
10 years      $70,800    $74,900     $83,800
20 years     $166,000   $186,000    $234,000
30 years     $294,000   $359,000    $503,000

An investment fund has risk, but it can be reduced by diversification and investing for the long term.

Question: Do you want a "safe" investment, that gives you $294,000 when a "no-guarantee" investment can give you much more, say $503,000?

Lesson: Take the risk and enjoy a higher return. Avoid paying high front end charges.

Creaming off the customer

Dear Mr. Tan,
Is an insurance product that offers a return of less than 2% over 20 years considered as "creaming off" the policyholder?

REPLY
Over a 20 year period, the expected return should be 5% per annum, considering the current rate of inflation and other factors.

If the product offers less than 2%, then the difference of 3% is taken away for the following:
a) cost of insurance protection
b) commission to the sales agents
c) advertising expenses
d) high salaries and other expenses.

The cost of insurance protection should taken away only 0.5%. The remaining 2.5% is large wasted on the marketing and other expenses.

The product is usually marketed with "gimmicks" that hide the real cost. This can be considered as "creaming of" the customer.

Planning for financial security of family

Dear Mr Tan,
Your blog have been most invaluable in helping me with my current review of all the policies bought by my family.

1) You mentioned so frequently about the monthly income benefit but I realised this product is not common among the insurers. From what I gather, only Aviva, GE and TM Asia (together a term or whole life policy) have it. The cheapest I found was fom GE: $3000 monthly income benefit till age 60yrs old, with waiting period of 90 days for $630 p.a. Is this a reasonable price to pay? Why isn't there more of this product in the market since it is quite essential to a person with family?

Reply:
The GE product appears to be a disability income product. It pays the monthly income during disabilty for a certain period and ceases on death.

You need a family income product, which pays a monthly income to the family on the death of the policyholder. The income is payable for the remainder of the period of insurance.

2) Also in your past entries where you mentioned we should aim for coverage of about 5x our annual income. Should we also include the coverage given by our employers in this case?

Reply:
You can include the coverage provided by your employer to make the target of 5 years. It is all right to insure for a higher sum, say up to 8 years of your income.

3) Is there any difference when insurers say Terminal Illness and Critical Illness?

Reply
The definitions of critical illness and terminal illness are different. Many people can claim for critical illness earlier, before they can claim for terminal illness.

Can you trust your insurance company?

Can you trust your insurance company on the following:

a) give you a fair deal?
b) keep your cost low?
c) handle your insurance claims fairly?
d) give you the best possible return?

Your insurance company can be trusted only if:

a) it operates efficiently
b) keeps its cost low
c) gives a fair deal to customers
d) communicates openly with you
e) makes it convenient for you to reach the right people
f) does not lock you up in a long term contract with termination penalty

The trustworthy insurance company can still make a fair profit for its shareholders, but this is done by giving good value to its customers (and not by "creaming off" the customers).

Invest for the long term

Hi Mr. Tan,
As current market was already so volatile, some says that this time around may be the bottom, and even predicted that stock market will surge, like in this article: http://www.reuters.com/article/hotStocksNews/idUSN0732951420080323.
What is your opinion about this?

REPLY

If you are investing for the long term, the current level is a good time to make the investment. It is now 30% below the previous peak.

Disability income and family income

There is a difference between disability income benefit and family income benefit.

A disability income benefit pays a monthly benefit during the period of disabilty and ceases on death or for a specified benefit period, e.g. 60 months. The extent of the disability is defined in the policy. The payment starts after a waiting period, e.g. 90 days.

A family income benefit pays a monthly benefit to the family following the death of the policyholder, and is payable for the remainder of the insurance period. If the insurance is for 30 years and death occurs at the end of 20 years, the monthly benefit is payable for 10 years.

Submit income tax return by e-filing

I submitted my income tax return by e-filing. This is the first time that I filed my income tax return way ahead of the deadline.

My previous employer made a mistake with my income statement. The e-filing does not allow me to correct the figure. It was quite troublesome for me. I hope that people who design website think about the customer, and not about their own convenience.

Term insurance with income benefit

If you have young children, you can provide low cost, adequate financial security to your family by buying a term insurance policy combined with a monthly income benefit.

Here are some examples:

Entry age 30
Period of insurance: 25 years
Lump sum benefit: $50,000
Monthly income benefit: $2,000 payable for remainder of term
Initial coverage = $50,000 + $2,000 X 12 X 25 = $650,000
Annual premium: $303 X 2 = $606 (male).
Annual premium: $184 X 2 = $368 (female).

Entry age 35
Period of insurance: 20 years
Lump sum benefit: $50,000
Monthly income benefit: $2,000 payable for remainder of term
Initial coverage: $50,000 + $2,000 X 12 X 20 = $530,000
Annual premium: $331 X 2 = $662 (male).
Annual premium: $187 X 2 = $374 (female).

If your children are older, you need insurance for a shorter period.

These benchmark rates are calculated based on the current mortality rates, and a fair loading for expense and profit margin. It may not be the actual rates now charged in the market.

See this FAQ:
http://www.tankinlian.com/faq/termassurance.html

Estate duty in Singapore

Hi,
I missed out the news on Estate Duty of Death Tax. Can someone fill me up with more information?

REPLY
Estate duty has been abolished on 15 Feb 2008. This was announced by the M of Finance in the recent budget speech.

Here are the announcements:
http://www.simplywills.com.sg/node/25
http://www.prlog.org/10051481-singapore-abolished-estate-duty-tax-with-immediate-effects.html

Low cost insurance

Dear Sir,
I would like to register my interest for insurance planning. Over time, I have bought some policies mainly from insurers. I have also obtained assessment from independent advisor such as Provident.

However, I still would like to look around some cheap term insurance to further strengthen my coverage. If I have understood your message correctly, you are in the middle of setting an insurance operation. How could I proceed to learn more about your products?

REPLY

If you want low cost insurance, you can contact the companies listed below:
http://www.tankinlian.com/faq/termd.html

Some future products, which I hope will be available in Singapore soon, are shown in:
http://www.tankinlian.com/faq/btid.html
http://www.tankinlian.com/faq/termassurance.html