Sunday, February 08, 2009

Buying a life insurance policy

Dear Mr. Tan,
I read from your blog that the minibonds and other structured products, earning 5% yield, can be very risky.  I do not wish to take this kind of risk. Is it all right for me to buy a life insurnce product? Although the return is low, it is at least capital protected and relatively safe.

REPLY
If you save $5,000 a year in a life insurance policy for 20 years, the total savings is $100,000. 
The benefit illustration shows the return that you can get assuming the gross return over the next 20 years to be 3.75% or 5.25%. The average is 4.5%. In my view, this is a reasonable projection for the next 20 years, assuming a balance mix of investments at moderate risk.
If you get an average return of 4.5%. you should get $164,000 at the end of 20 years. However, the actual return is lower, due to the charges taken away by the insurance company to cover marketing and other expenses and profit. In most cases, the charges is about 50% of the gain, i.e. $32,000. This leaves a maturity return of $132,000 or a net yield of 2.6%.
I consider a net yield of 2.6% to be unsatisfactory, as it may not be sufficient to cover the rate of inflation.
A good value policy will take away about 25% of the gain, leaving a return of $146,000 or a net yield of 3.5%. As a rule of thumb, the reduction in yield should not exceed 1%.
If you wish to invest in a life insurance policy, you should ask the following questions.
1. What is the projected return on my policy, based on the assumed yield on the investments?
2. What is the amount deducted in various charges to cover the death benefit and expenses?
3. How much, as a percentage of the assumed gain, is taken away by these charges?
4. What is the effecitve reduction in yield?
If the charges is more than 25% of the projected gain, the life insurance policy is high cost and does not give good value to the customer. It is better to buy term insurance for the life insurance cover and invest the savings in an indexed fund (such as the STI ETF). Alternatively, the reduction in yield should not exceed 1%,

30 comments:

Anonymous said...

Mr Tan

It is difficult to calculate the interest yield because most benefit illustrations have 2 components - guaranteed and non-guaranteed returns.

Anonymous said...

Never, never, never save using an insurance whole life or endowment product.You say capital guaranteed? Many of these WLs and endowments don't break even after 20 years. Do you want the return of your "guaranteed" capital after 20 years and expect no loss? There is bigger loss if you factor in the inflation.
You may want to ask why WLs and endowments cannot give a decent return. The answer is cost, cost cost../ Every body wants high salary, from CEO , senior management to insurance agents.Worse,the insurance agents need to be motivated with carrots otherwise they will not work. To pamper them, more money is poured in to get them to work. Incentives like promotion, gifts to help them , overseas trips, cash incentives, meeting at posh places, wine and dine at high class restuarants, all these incentives are used to motivate them. Where does the company get the money? The ceo donates his salary? or the GMs work for free? Friend , this money comes from your high premium, from the life fund.How much of your money goes to work for you or invested? What is the return? Only a tiny bit of your premiun left after paying all these greedy people is invested in a low return portfolio which everybody's money is in there.
Can you see , these people are NOT interested to give you the best. They give themselves the best. Come on, common sense tells you high cost means low return return.
Now the company is "trying" to get you "higher' but at what price? You guys, remember the bonus restructure? By restructuring, by reducing the annual bonus you are letting the company to GAMBLE with your money in the hope of giving you more return. Can they deliver?
Not sure, right? What does this mean? It means you are taking more risk. Were you told ? No!!!the agents told you please trust..trust..the risk is the same.
These agents, don't blame them they are not qualified, would do anyhting the company tells them, to lie , to misrepresent, to cover up. They would stoop to anything.
Friend , if you are taking so much risk it is better that you do the same and get more.. You can construct the same portfolio and get better return by dollar cost averaging. You may even have lower risk and get better return. You can have the cake and eat it, so to speak.
Don't rust the company; don't trust agents. They are just salesmen selling you a snake oil product. Many baby boomers have been played out by the insurance agents and that is why they cannot return.Don't make the same mistake.

Concerned

Anonymous said...

Hi Mr Tan,

What do you think of TM Asia life policy? Their track record is good. To my knowledge, they have never cut bonus.

Thanks V much

Tan Kin Lian said...

Hi 5.31 PM
Take the total of the guaranteed and non-guaranteed benefit. But take the average between the low and high return (i.e. 3.75 and 5.25%).

Ask the agent to compute the yield for you. It is the agent's job.

Anonymous said...

Dear sir
i think the example you gave are not realistic to real market condition mr tan...
Today's market.. you can get a single premium insurance policy yielding equivalent around 4% p.a. compounding for 10 years investment, net of all commissions. Yes this percent is not guarnateed but usually insurance companies are able to average out their earnings and able to pay out the higher limit instead of lower limit when policy matures. The best thing is principal is guaranteed. I think 4 % is very good, even if waiting 10 years. Anyway by rolling the money in blocks of consecutive 10 years, after some time it is like getting annual interest. Try also 5 years single premium, it is paying 3.2 % today. After 4 years of nothing from the 5th year onwards if you follow my rolling advice, you get interest of 3% p.a with all principal guaranteed.

So, I disagree with ETIF and other stock funds you recommended. The capital is subject to company performance though the dividends is good and high. It is difficult to cash-out without suffering on the nth year when you plan to take it out. At the nth year it could be a bad year then you have to wait for the market to go up (which i think it will). But insurance, they are clear cut 10 year or 5 year term your principal is guaranteed available at the time you pre-set!! So in summary i don't agree with your views, i am fully advocating single premium insurance concepts, it is good!
REX

Anonymous said...

REX,
you are NOT getting the full picture, ie the full disclosure.Do you know the risk? Do you know you may NOT get the projected return?
Do you know that the risk is increased?
Do you know the risk free 10 year SGS is only 3%?
Do you know you are risking a long lock in and you may get only 3.5% at best? Inflation is 3.5% over the long term.
Yes it is capital(face value) guaranteed. Not many people are as rich as you whose goal is capital preservation. Many people out there require to grow their money above inflation to get out of the poverty trap. They are poor and investing in a product that returns less than 4% is as good as preserving status quo, ie poverty.
Mr. Tan's advice is to grow money in real term and to grow at least 3% excess return above 3.5% inflation., ie 6.5% return.
REX, do you know what the insurance
company invests in? To provide you a guarantee they must lock in in bond and NO bond is giving you 4%. Then how to get the extra return? They invest in a portfolio of 30%/70% , equities and bonds + property respectively. It is fixed. If you emulate the portfolio and you can get better return or a portfolio that suits you and get even better return.
REX, if you have an investment(growth) that matures this year you will be surprised that you won't get 3.5% because last year was a big loss for the company. (someone estimated $200mills)It is not as simple as you think. I suggest that you get a qualified advsier to help you and NOT some salesman from the company who knows nothing but product pushing.

Anonymous said...

Ha Rex, you and your 3.2% locked in for 5 years is good again? Some people never learn. A fool and his money is soon parted. Take your own money to burn if you like, but do not act like an expert, you do not know what you are talking about. You think you know better than Mr Tan who has headed and grown NTUC Income for 30 years? Where were you 30 years ago? Think about it. You do not need to be brilliant or smart. Just keep your mouth shut. Follow the master's advice, not go and throw a dice.

Everlearning said...

Follow the line of discussion, Rex has a point there. I like his idea of keeping the principal amount intact in view of the recent collapsed or conned investments.

Being conservative in view of investments, I prefer Rex's way of increasing wealth: safe and steady although the gains/profits not that impressive. But, I don't mind to give a try in other forms of investments like investing in ETF stocks or UTs. There is one disadvantage and that is if the price/fund dropped or keeps dropping and when one withraws from the investments, one incurrs great losses.

It is a matter of preference. Just don't be enticed by easy ways of making money. Most often, there are pitfalls in investments that sound too good to be true.

Anonymous said...

I think REX is a policyholder of NTUC growth plan. He is trying to get assurance that what is projected will be delivered. Wait long long, in this climate? Common sense tells you that insurance company must invest in high risk assets to deliver above the bond rate, although in smaller and conservative portion. Some companies dabble in derivatives too. Why? for more return, lah.
I wonder REX knows he is taking more risk now.. Does REX know that the new ntuc product SAIL has only 1.6% guaranteed over the 10 years and beyond this, it is like going to casino.To deliver 4% ntuc , the remainder 2.4%, has to be won from playing 'blackjack', roulette, poker, maybe 4D or toto.If to get the extra 2.4% the company has to gamble isn't this risk? More than 60% of the return is driven by high risk investment.
Now the company has more to gamble because of the restructured bonus, ie more in special bonus for gambling at the casino.
Come to your senses and rationality and not fantasising, Mr. Tan meant well and he had lots of experience of what can and cannot .

Anonymous said...

7.19pm,
TMAsia is also subject to same market forces. Not that it is smarter company but it has lower annual bonus to pay. In bad time it is able to meet the low annual bonus. Ntuc is adopting this to look good. The other companies which cut bonus did worse than TM. From this you can see how insurance companies manipulate the 'bonus'strategies so to look good to their policyhholders. Don't be fooled by this.
The truth is cost is getting higher and return is getting lower so the policyholders get what is left after paying everyone.

Anonymous said...

Everlearning,
using REX's approch is a suicide approach especailly for a young person.THERE IS NO GROWTH IN WEALTH!!
If you are rich like REX maybe your objective can be capital preservation because he doesn't need to grow his money. He wants only to preserve his wealth. That is what this investment is good only.
If you adopt this strategy you need to work very hard to earn more money otherwise you can NEVER meet your life goals.You are working harder and not your assets.
For young people they need to take risk. Risk can be managed.
You should learn a lesson from the current situation that many cannot retire with their CPF alone.CPF is a conservative asset.
For most their biggest investment is their home which is their best asset and which is a risky asset. That is why it can grow in great value over the years, higher than 4%.You must understand that risk is not necessary bad. Risk rewards.
There is no free lunch, they say. Handouts make you complacent and make your money lazy.

Anonymous said...

I do not trust any financial institues anymore including insurance companies and banks. THey can cheat your money with a good excuse. You got nothing to fight back.

THey are smart enough to design many traps for you to jump in. Only leave money to CPF, I hope Singpaore goverment won't eat our money. If that is the case after I retire, the Singore dollar is worthless.

Anonymous said...

10 years for 3 times will come to 30 years. It is long time horizon. It is stupidity to take such a low risk. Many will never make it for to retirement.
Take CPF for example. If you add up the average man's assets, ie, his house (3-room), CPF balance, Growth policy of $50K taken 10 years before his retirement from CPF balance and invested twice and $50K total cash value of all his WL and endowment plans at retirement..
$200K(home at market value) + $100K($50K after 10 years X2 times) + $60K (minimum sum) + $75K.
Assuming he downgraded to a $90K studio to free up of $110K (high risk) he will have $260K for retirement + $600 (CPF LIFE) monthly income for life time. This is assuming a prudent frugal person. The figures are not adjusted for inflation.

Anonymous said...

Mr. Tan, I agree with it. Life insurance is a new need for individual or family regarding beneficiary for term life. You can assure your family in a period of time. Some insurance offers great opportunity and benefits. Thanks to this article, it is a informative one. Cheers and keep posting.

Everlearning said...

Dear Anonymous 10:47AM,
I thank you for bringing out the fact that I might have missed out growing my investments to the fullest: making my money works harder for me than vice versa.

One thing we must realize is that we come from different backgrounds, have different objectives in lives and hold different principles and values.

Ultimately, the person that knows you best, is still yourself. Self-knowledge is one of the guidelines that one makes the final decision in taking up an insurance policy or investment.

Because ambiguity creeps in, the insurance and finacial sectors are no longer viewed to be trustworthy and transparent in their services that we now must be knowledgeable not to fall into their traps, thus, we share our experiences and expertise(of course I have none)here.

Just a personal sharing. If my existence on earth is to acquire wealth and ultimately to be considered rich by men's standard, then I will feel and fail miserably.

Anonymous said...

Hello here is REX again,
I would like to comment as follows:
1. Single premium insurance policies are poor insurance products. It is not meant to be an insurance cover anyway. Additionally, it is well known that the return is not so high compared to dividends from ETI funds, as pointed out by Mr Tan. But single premium insurance products still pay typically 600% higher than POSB bank interest. You don't actually "part with your money" like a fool, as someone here suggested if you buy single premium product. Instead, Your capital is guaranteed! Think of it as a fixed deposit!

2. single premium insurance are more like super high fixed-deposit accounts, capital-guaranteed!!!

The market today is about 3% non guaranteed pa interest for 5 year plan. Of course it loses out to ETI funds dividend payments, but do not forget that for ETI funds if you need the capital back in a hurry the market at that time might be bad and you could not get full capital out. For Single premium, you plan the year you want back the money and you are guaraneed to get it back exactly that year!! Low risk, low return, fair deal. Why not?

I think the above analysis has nothing to do with whether one is rich or poor. A poor person could still have a bit of life savings and could consider Single premium insurance as safety contingency storage place where capital is protected. To be realistic, you can't make a living from interests or dividends against small money like $30,000 or $50,000.. there is too much hype over the idea of "cover inflation", lehman bonds seller use such kind of arguments to con people...
It seems to me that the best way to cover inflation and sustain your lifestle, is by working harder and getting promoted, etc. or alternatively, inherit wealth or flip properties, it is chasing after wind to hope that you can get rich from playing with ETI funds or single premium policies.

The preservation of the principal amount is of utmost importance. It has nothing to do with whether one is rich or otherwise, though some readers here seem to form such associations.

REX

Anonymous said...

REX,
all investment has this primary objective of capital preservation and above which is to grow in real term. Have you heard otherwise?
The point is if you can and NEED to take risk it is always better to take risk for more return otherwise you are condemned to status quo or worse less than status quo.
REX, if you are young person your assets will NOT grow in real term if you put your investment in insurance product that will only return at the best at projected 4%.Imagine 10 years ago you had invested in this product your 4% would have eaten up by today's 6.5% inflation. Are you better off 10 years ago or now?
Working hard is good but saving alone is not good enough. If you were in charge of Singapore it will be still in the 3rd world. There is NO real GROWTH in the nation's wealth..Temasek or GIC will still have a few million dollars in yesterday's dollars.
Our GDP will will be be like Veitnam's.YOu NEED to take risk for better return if you can .
The point is REAL GROWTH is to beat inflation. It is not hype. it is reality. Rich can afford to invest in 3% to preserve status quo.They don't need growth.They will still be rich. The poor if to invest in 3% and if they can take risk is to condemn themselves to poverty. Working hard is good but if yuo can make your money work harder and smarter is even better. Risk is NOT loss.Risk is uncertainty. What you invest is also uncertain but is low. There is no such thing as risk free. Even SGS is exposed to inflationary risk or reinvestemnt risk or purchasing power risk.
Putting in FD is very high risk.
You will lose your real capital. You get only return OF your capital.

Anonymous said...

Hello here is REX again,
I comment on the example given, i.e. a country as a whole need to invest in products with some level of risk in order to beat inflation and raise GDP over years. As for a country's wealth, for sure it is much more than individual wealth, and i fully agree the wisdom to park SOME of the money in stocks and shares, etc. for the reason quoted. That means if the country has $1000 million, of course SOME of it need to be invested in bonds, etc for high returns, it is foolish to put all 1000 million in fixed deposit account.

What i am saying is that for mere INDIVDIALS with a barely 20,000 or so spare cash... what do you want to invest in bonds etc for? Is the extra bit of annual returns(compared to fixed deposit) going to help you a great deal? It is better to have peace of mind with a fixed capital guarantee, and wait till you accumulate GREATER wealth before investing in products which are not capital guaranteed. I think investing in higher risk products (compared to bank deposits) is for the rich, and investing in lower risk products (single premium insurance aka fixed deposits) is for the not-so-rich. It is the opposite of what some people think here!!

I think our regular salaries and promotion and bonuses, if we work very hard, is the better way to beat inflation. By going into other means, the risk of not getting back the capital when you want it, is too high for the poor man. I would still think that for a poor man with say 10,000 spare money it is better to park it in lower risk products and in the meantime concentrate on his day-job and get that promotion, or change jobs and upgrade.
The poor man can't afford to lose the 10,000, unlike the rich man!

REX

Anonymous said...

REX,
to illustrate what we meant .
Example : if you invest $50K in ntuc growth, assuming it will give 4%.
Your $50K can buy a Honda civic to day. After 10 years your $50K investment has appreciated to $70K but the Honda Civic also costs $70K. Is there a real growth of your $50K?
No, it is only preserving the Honda Civic. If you have no need for a Mercedes then investing in ntuc growth is alright.Like the rich people there is no need to take risk. They have enough wealth.They can even lose a little bit of it. But many poor NEED to get out of the poverty trap
and when opportunities present like age, earning capacity they should take risk to get out.
Another example ( borrowed from Robert Kiyosaki) working for someone is low risk and low return, safe except retrenchment. Starting a hawker business is risky but you can earn more than you work, this is an investment which you can LOSE but a good opportunity to get out of the rut.
The poor should think like the rich dad when they are young.
The poor if he is old and not earning , yes , he can't afford to lose. But he is poor and young he CAN afford to lose and he should and he need to and he must take risk in order to get out.

Anonymous said...

Hello here is REX again

I agree that to get out of poverty trap it is nec. to take risks. It can be risk like starting hawker business or whatever, as in your example. On the other hand, what we are discussing, really, is risks of putting idle money in financial markets controlled by many other factors totally outside our control (unlike hawker stall).

It is an endless trap that consumes us as we become more and more greedy with each little bit of success in speculating in the financial market. For many conservative averaged income people it is far better to leave their savings in something safe and sound with full capital protection. It's simply not true that only the rich will keep their money in fd's and safe instruments with lower yields. The rich have other ways of becomeing rich like flipping properties or creating value in their own business ventures, i.e. work hard.

And by the way i own a Kelisa cheap car only, very happy with it, even though i can well afford honda. i am not even thinking of mercedes even if i can afford it. Don't think of me as a rich man, please, i am merely a super super kiasu contented person who work hard for a living and not asking too much, therefore no worries about lehman bonds and other crazy complicated products.

rex

Anonymous said...

Wait till you wake up one morning like the baby boomers to find that they can't retire because the insurance policies they bought cannot provide decent income for them.How come? The high projected cash value was slashed to 3-4% instead of the projected 10%. The cash value cannot meet their retirement needs.They have to continue to work.
The cause of this debacle is over projection by unethical insurance companies and the incompetent insurance salespeople. Both were in cahoot to cheat these people.
In UK, a company selling annuity product was sued upside down for mis-selling to the tune of hundreds of millions. To compound the problem the company was fined by FSA for mis-selling , also to the tune of nearly hundreds of millions.Real double whammy.
The next time choose your adviser correctly and not an insurance salesman./

Anonymous said...

Now another insurance company, Standard Life has the gumption to admit their wrong doings.
Maybe you will hear of our local insurance companies soon.

Anonymous said...

Hello again, REX speaks,
Insurance companies like banks (Lehman bank etc), are supposed to make money for themeselves in the first place. A big company sometimes sell products which are good, and products which are simply rip-offs. I think one should not penalise any particular industry. For example NTUC INCOME have bad, poor value, complicated products but I think they also have reasonable value straight-forward products (by reasonable i mean something paying much more than posb interest rate 0.25%). I shall not elaborate here but i can actually help anyone here to analyse those different types of single premium products using amazingly simple methods you wouldnt believe.

Whilst i judge that certain simple single premium insurance policies are reasonable conservative investement,for the purpose equivalent to F.d. (yes, single premium insurance products are rip-offs if viewed in terms of insurance coverage) i do agree that they are not enough to support oneself in retirement years. It was not meant to be, never mind what the brochures tell you.

My contention is simply that if single insurance premium products can give 600% more interest than normal bank deposits, why are some people dead set against it? Remember: you can't grow rich playing with your existing money unless the existing money is of the order of several millions of dollars. You grow rich through starting a business and capital appreciation methods (flip properties) or else strike lottery.. it is futile to believe that by saving a teeny weeny bit here and there, and putting a bit of money in FDs, insurance policies, and ETI funds one can become really really rich. For most of us, the returns from such small investments are just helping to cope like having extra petty cash yearly.

So i am very content with 3.2% p.a interests which come from 5 year single insurance policy premiums. Let bonuses and job promotions and opportunities take care of day to day requirements. Excess money is all parked into Capital guaranteed products, call me kiasu, kiasi, foolish, stupid idiot, anything you wish. However...I am Worry free, stress free, don't worry bear or bull market. $$$$$$mile!

rex

Anonymous said...

When money no enough during retirement i wonder what would you say.Would you say I wish I had done this or that and other of "I should have".
if you are planning your retirement you should ask yourself how much monthly income you like to have during during retirement and work backward to find out how much you need to set aside to grow. Can I achieve the income to fund the life style I want?.Is 4% sufficeint to grow? if not what kind of return?
Is there risk? How can I manage it?
By asking questions like these, maybe you can see clearer, your goals. Ohterwise you see in isolation.
Using bank rates as Benchmark is wrong. You know you are losing but you are consoling yourself that it is better than bank rate. The insurance agents like to use them as bashing rates. They are misleading you.The correct benchmark is the inflation rate.

Anonymous said...

REX, indeed you are what you said you are. You may end on the dole. PA is not inflation adjusted too.

Anonymous said...

You are right ,REX, to do whatever YOU think it is your best.
This is the biggest problem in financial planning. It seems the customers "know" a lot about their own 'wants' which is often confused with needs.For these people they should buy without having to pay commission. This includes insurance products too. Companies should allow huge discount for people who DIY.
Like REX, he knew what he wanted. He need not pay a 'fee' or commission to the agent who, I am sure, didn't do anything that worth the commission. Form filling should not be paid so much as it is a not financial activity.
Cost of distribution which includes commission lowers the return.
For example, if ntuc growth is free of insurance coverage and commission the return can be better by another 1% in the long run.
DIY customers should demand that.

Anonymous said...

Another old woman fell prey to glib tongue salesman. Imagine paying $3000 for 4 stainless steel pots.
Are you a also victim of insurance agent using similar ruse?
Did you sign up for stainless steel revosave? Did the agent make dubious claims? Did the agent put undue pressure on you? Did the agent misrepresent the product? Did the agent lie?
The old woman would lose only $4000 but your case can be a life time.

Anonymous said...

Hi
Yes i know Revosave is rubbish, i had done a thorough analysis of it before, and i know, certainly i would not fall prey to that. What i am speaking about are simple single premium products, you put in $x, after 5 years you are guaranteed back $x, and the interest is about 3% pa with compounding, all paid to you in a lump sum. No tricks, very very easy to understand. These are good products for kiasu and simple people (not necessarily rich!) It has got totally nothing to do with stainless steel pots which you find are worth close to nothing!

REX

Anonymous said...

It is not a good idea to buy insurance from people you know, especially from close ones and friends. Most of the times you will be short changed.
Why?
They take for granted. You take for granted. You assume he or she is competent and put your interest first.It inevitably turns out your agent is sincerely incompetent and wrong.Remember NOT all agents are qualified as advisers and as many as 99% are salesmen and product peddlers. You notice they are most active when they have new products and promotion.
Financial Planners are not driven by them.They are the ones who advise and plan your needs and they are consistent and objective and their recommendations are not influenced by promotion or new products.
When looking for an adviser look for a qualified one with the right designation and honesty.

Anonymous said...

why take risk with these people. just do yourself

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