Saturday, October 31, 2009

Benefit illustration - samples

Here are samples of the benefit illustrations, with an explanation on how to read them. In all cases, the effect of deduction are too high and do not give good value to the consumer.

Investing in a Life Annuity

Here is a chapter from my book entitled "TKL Financial Planning". I hope that you find it useful.

Lawmakers attack bank overdraft fees

Read this article.

Banks in Singapore also have the bad practice of overcharging fees for various services. These fees are much higher than their actual cost of providing the services. They are exorbitant and are intended to reap obscene profits for the banks.

Rechargeable torchlight as gift

I gave the rechargeable torchlight to a friend. He liked it and ordered 10 pieces to be given as gifts to his friends.

Someone came to buy 5 pieces from my office. He came back the following day to buy another 5 more. The rechargeable torchlight sells for $6.50 compared to $27.20 for a branded torchlight with similar functions.

Underlying problems of capitalism

The economic growth achieved during the past six months of 2009 is unsustainable. The underlying problems of capitalism needs to be solved before the world can see a revival of growth and prosperity. These problems are:

a) wide gap in income
b) insufficient employment opportunities
c) cheating

The wide inequality in come means that a few people are super rich while the majority are poor and struggling to get by. The poor families cannot consume goods or services, which are necessary for economic growth. The super wealthy can flout their wealth, but their actual consumption is limited.

Insufficient job opportunities leads to uncertainty and insecurity. They force more families to increase their savings and have fewer children, in case they lose their jobs. Many people work harder to keep their jobs, leading to fewer jobs for the unemployed.

There is rampant cheating, especially in the financial products. Bad products that rip off consumers are being sold under the regime of "caveat emptor". Many are unregulated investment products, which are actually scams created to cheat people of their money using deception and false promises. Even regulated products are sold using deceptive means, and are used to hide exorbitant charges to enrich the issuer and the marketeers.

If the underlying ills of the capitalist system are not addressed, the global economy cannot have a sustained recovery. As individual countries struggle to take care of their people, they will increase the suffering inflicted on other countries. This could lead to economic and military conflicts.

The measures to address these economic ills include:

a) Fairer distribution of income through minimum wage and high taxation of the super rich
b) Fairer distribution of work by imposing a cap on the working hours, so that more jobs can be created for the unemployed and school leavers
c) Stronger regulation to prevent cheating of consumers and to encourage honest business practices.
d) Return to some measure of protectionism, to reduce the harmful effects of globalization and international competition.

We have to say goodbye to the bad capitalism of the past two decades, and to the excessive greed and dishonesty that thrived during this period, before we can see a better economic and social world. We also have to return to religion.

Tan Kin Lian

Big investors grow wary of hedge funds

Clients are worried about liquidity, lock-up periods and fees, according to this article.

Friday, October 30, 2009

A great statesman

Guess who is the great statesman?

Market Economy with Church

Read this article about the behavior of the market economy in China. It also applies to Singapore.

Reserved parking in HDB estates

Are the reserved parking for season tickets apply for the whole day or from 7 pm to 7 am? Please give your reply here.

Dependent grown children

Is this a healthy trend? Read this article.

Obamu - to persevere with optimism

A new word has been coined. Read here.

Thursday, October 29, 2009

Not allowed to withdraw the investment

Dear Mr. Tan,
An investor who is now unemployed and in her late 50s has put a large amount of her life savings on an investment which "pays on yearly basis" with a land banking company X. On maturity, she wanted to cash out part of her investment but was told by X that she must renew all into the 6 months investment. When she insisted that she want to take out some, she was scolded by X's director, that she was a fool.

Upon hearing this from her, I am very angry about this company. I could not understand why they treat their customers like that. If we put our money in banks fixed deposits or any regulated investment products, nobody can stop us from renewing or surrendering our investment upon maturity because it's our money.

REPLY
Please ask the investor to lodge a complaint with the Commercial Affairs Department. I believe that there is a law to prevent companies from taking deposits on interest, unless it is licensed as a financial institution.

The global recovery is unsustainable

Read this article.

Purchase from my office

If you are interested to buy the rechargeable torchlight (5 pieces or more), you can get a discount of $1 per piece (i.e. you pay $5.50 instead of $6.50). You also get a discount of $1 for any of my books, provided that the order is for 5 books or more, of the same or different titles (i.e you pay $6.90 instead of $7.90). You can buy them from my office shown here. Open weekdays from 9 am to 6 pm.

A customer who bought 6 pieces of the torchlight came back today to buy another 5 pieces. He also bought 10 pieces of the Shape Quiz ($1.50 per piece) to give to children.
To make it worthwhile for a trip to my office, you should take orders for your family and friends. Ask someone who has a car to collect the torchlight or books from my office.

Fair value for investors

Dear Mr. Tan,
What return is considered as fair value for investors? Is it 3%, 4% or 5%?

REPLY
It depends on the following:
a) What are the underlying assets? How risky?
b) What are the charges taken away by the fund manager and distributor?
c) Do you get the residual gain?

The best type of investment is a low cost unit trust or exchange traded fund (ETF). You enjoy low charges (usually less than 0.5% p.a.) and the benefit of diversification. This is likely to give you a return, over 20 years or longer, of 5% per annum or more, but is not guaranteed.

A poor investment is a participating life insurance policy, due to the following:
a) High charges taken away for distribution, mortality and expenses, usually 3% per annum
b) You may not get the full residual gain as some part of it may be kept from you due to "smoothing of bonus".

Another poor investment is a structured product, where most of the charges are not transparent and the yield to the investor depends on chance (i.e. gambling) and is likely to be low, especially for a guaranteed product.

Tan Kin Lian

Quiz Books

Mr Tan:
I was sad when Sunday New Paper stopped the game....about the house,sports, person, etc...I enjoyed figuring it out every Sunday and looked forward to Sunday morning when I receive my newspapers. Can you please let me have the title of the game book and where can I purchase it?

REPLY
www.easysearch.sg (Internet shop)
Intelligence Quiz Vol 1, 2 $7.90 each

Hub and spoke system for public transport

Read my views here. I hope that the Land Transport Authority is planning along the lines that is suggested here.

Unreliable display of bus arrival times

Read my views.

Do parents have to finance their children?

Read this article.

Wednesday, October 28, 2009

Benefit illustration for a Cash Back Policy

A reader asked me to use an actual case of a cash-back policy. If you have bought this policy, please fax the benefit illustration to 6405 3100.

Cash back insurance policy

I wish to explain why a cash back insurance policy gives a poor yield to the consumer.

A cash back policy combined a basic policy with an annual refund feature. Let us take a hypothetical case. The basic policy is a whole life policy with an annual premium of $5,000 and a yield at the end of 25 years of 2% per annum. The cash back feature adds an additional premium of $1,000 and pays $950 a year from the 2nd year (i.e. no payment for the first year). The cash back feature reduces the yield to 1.8% per annum.

The agent tells the customer that he is getting a cash back every year (after the first year) and makes it look like a more attractive policy. But the agent does not explain that the yield has reduced or the effect of deduction has increased with the cash back feature.

The agent earns commission on the increased premium of $6,000 (including the premium paid for the cash back feature). If the distribution cost is 200%, the customer will be paying $12,000 in distribution cost, including the cost attributable to the cash back feature.

It does not make sense for the customer to pay a higher premium for the cash back feature and get back less than the increased premium. But the consumer does not know about this structure of the policy. The agent tells the consumer that this is an "innovative policy".

Tan Kin Lian

Insurance for poly and university students

Dear Mr. Tan,
I read your view that it is not necessary for a poly student to buy insurance for saving. My friend, who is an agent, told me that I should save early and pay a lower premium. He said that if I do not save, I will spend away the money. Who should I listen to?


REPLY
As you are not working to earn a regular income, you should avoid making any commitment to make fixed saving in an insurance policy. You should save your money in a flexible saving account which can be withdrawn at any time, without any penalty, to meet emergency needs.

A life insurance policy is the worst type of saving plan for a student or any person with irregular income. Up to two years of your savings is taken away from you as "distribution cost". This is your earned earned savings, which you earn from part time work or from the allowance given by your parent. Why should you give it away to the insurance agent or company as distribution cost?

Many students find it a burden to continue the fixed commitment and give up their insurance policy, leading to the forfeiture of their savings.

It is wrong for the insurance agent to sell a fixed saving plan to a student who does not have a regular income. The agent is only thinking of earning the commission from the sale - without thinking about the financial burden that is being given to the student.

My comment applies to university undergraduates as well.

Tan Kin Lian

Guess the owner of this resume

Resume

Tuesday, October 27, 2009

When cancer disappears

Some cancers do not need to be treated. They can stop growing and disappear, according to this article.

Break-even point for old NTUC policies

Dear Mr. Tan,
When you were in charge of NTUC, did your products have a breakeven point of 5 years?
REPLY
If my memory was correct, most of the products have a break-even point of 5 to 8 years. They also provide a good yield to the customer, after 20 years, i.e. 5% or higher. So, most customers who bought the NTUC policies in the early days obtained a good deal. The high yield was possible due to low distribution cost, and a high rate of bonus distribution.

Advice on stock selection and timing

Dear Mr Tan,
In the investement section of yday's Sunday Times, CIMB research recommended Parkway Life Reits as heath care assets is seen as one of the most stable asset classes and this reits stands out as one of the few heath-care reits that can amalgamate such assets.

I am thinking of liquidating my Comfortdelgro shares (with some profit) and invest into Parkway Life Reits as it seems to pay higher dividends. What is your opinion on this ?

REPLY
I am not able to advise on stock selection and timing. Wish you all the best in your decision.

Breakeven point

Dear Mr. Tan,
What is an acceptable break-even point for a life insurance policy? I have a policy that breaks even after 20 years, i.e. the cash value is more than the premiums paid. Is this acceptable?

REPLY
If you are saving your money, the break-even point should be 0 years. This is what you get when you put your money in a bank account. You can withdraw it at any time without penalty.

If you invest in a unit trust with a front end load of 2% (or less), you can break even within 1 year (provided that the stock-market gives a positive return.

A life insurance policy takes many years to break even due to the high commission paid to the insurance agent. If the distribution cost is 50% of the annual premium, it should take 5 years to break even. If it is 100%, it should take 7 years to break even.

I consider a distribution cost of 50% to be rather high, but may be acceptable. Your life insurance policy should take 5 years to break even. If it takes longer than 5 years, it is not good for consumers. There are better ways to invest your money.

However, if the life insurance policy is able to give an attractive yield, compared to other types of investments, you may accept a higher break-even point of 7 years.

Tan Kin Lian

NOTE
The break-even point is the number of years required for the surrender value of the policy to reach the total amount of premiums paid.

Monday, October 26, 2009

Why do bankers make so much money?

Read this article. It did not mention the following - "they create toxic products to sell to their clients".

Bend reality and become dishonest

QUOTE
We MUST recognise that when we get into situations where our personal benefits (mostly financial) stand in opposition to our moral standards, we are able to "bend" reality, see the world in terms compatible with our selfish interest, and become dishonest.
Dan Ariely, author of Predictably Irrational

Inadequate parking spaces for visitors in HDB estates

Do you experience difficulty in finding parking space as a visitor and see many spaces reserved for residents that are unused? Read my views here. If you agree with my views, please write a follow up letter to Today paper.

Enjoy $1 discount on my books

I publish the following books that sells for $7.90 each at the bookstores:

Intelligence Quiz Vol 1, 2
Sudoku Vol 1, 2
Shape Quiz

You can buy them at a discount of $1 per book (i.e. $6.90) if you buy 5 books or more (of same or different titles) from my office (open Monday to Friday, 9 am to 6 pm).

You can collect orders from your family and friend and buy them together on one trip. Ask a friend to drive to my office and collect it from there. You save on postage and enjoy a discount.

Amazing Numbers

Amazing Numbers is a game that amazes many people. You ask your friend to choose a number and you can find out the number by showing him or her just a few cards.

I have arranged these cards in a single sheet of paper that you can print and cut them out. You can use them to amaze your friends. Interested? Click here.

Financial reform - what needs to be done

Read this article.

Make our roads smart?

Do you have any suggestions to make our roads smart and win this IBM award?

Build up 6 to 12 months of savings

Hi Mr Tan,
I have read the draft 5a of your Financial Planning book. It is a great read and contains many practical financial tips.

Would it be better for young people to clear off their debts (e.g. study loans, wedding loans, renovation loans, car loans) before embarking on an investment plan?

Most young people are short-sighted and do not see the benefit of saving 6-12 months of their salary. Recently, I have attended a course which covered personal finance. The trainer said that it is beneficial to have savings to fall back on as you can treat it as a interest free loan instead of borrowing from the banks.

Considering how much the banks are charging for the loans, I realised that having money at hand to handle personal emergencies is very important indeed.

Would you agree that for a HDB housing loan, it would be better to borrow to the max(30 years) as Mr Larry Haverkamp has suggested in his articles. What are your opinions for a bank housing loan as a comparison? Do you agree that housing loan is probably the only loan that we should not draw down on even if we have the means to do so?

REPLY
I agree that it is better to pay off the loan, if they carry a higher interest rate than the yield on low risk investment (say 3%). As HDB loan is 2.6%, it is better to take the max loan from HDB and invest to earn more than 2.6%. I agree that a housing loan is probably the only loan that you should have in your lifetime.

The 10 paradox of Warren Buffett

Read this article for the secrets of Warren Buffet's success.


Sunday, October 25, 2009

A heavy burden to pay insurance premiums

A poly student told me that he has to $300 a month on this insurance premium. His friend sold him two policies recently, and advised him that he pays a lower premium at a younger age.

The poly student receives a monthly allowance of $600 from his father. Half of this allowance goes to pay the premium. He is finding it to be a burden, but he does not wish to cancel the policies and lose the premiums that were paid.
It is bad advice for his friend to sell him these two policies when he has not yet started to work. His friend was greedy to earn his commission and meet his sales target, and left a burden to the poly student.

Belgian prosecutor wants Citibank to repay 'duped' savers

Read this report. The public prosecutors in other countries are more active in protecting the interest of consumers. I hope that our authority can also be more active.

Effect of Deduction

The benefit illustration for a life insurance policy (i.e. whole life, endowment, critical illness) shows the projected surrender values based on an interest rate of 3.75% and 5.25%. The average of 4.5% represents, in my view, a fairly realistic projection of the future yield on the investment of a well diversified life insurance fund based on current economic conditions.

If you are getting this type of yield, it is important that the amount taken away from your savings should be modest, and not excessive. In my view, a reduction in yield (to cover the mortality and expenses) of 1.5% is acceptable, giving you a net yield of 3%. If you buy riders to cover other risks, the premiums are charged separately and do not affect the calculation for the basic policy.
I find that most benefit illustrations show a higher reduction in yield, due to high commission and high profit margin for the insurance company. The product is bad for consumers and should be avoided.
The reduction in yield is not shown in the benefit illustration. However, you can compute it by looking at two figures that are shown, namely the "effect of deduction" and the "value of accumulated premiums".
Based on the benchmark of 1.5% reduction in yield, the "effect of deduction" should not exceed the following percentage of the "value of accumulated premiums".

Premium
payable for

Maximum
deduction

10 years

8%

15 years

11.8%

20 years

15.6%

25 years

19.4%


For example, if you pay $X a year in premium and the value of premium after 20 years is $100,000, the "effect of deduction" should not exceed 15.6%,or $15.600. I have seen many examples where the effect of deduction could be twice of the fair amount, giving a poor yield to the policyholder.
Tip: If the "effect of deduction" is less than the above benchmark, the policy gives you a good value. If it exceeds the above benchmark by a small amount (say 5%), it is still acceptable. But do not accept any product where the "effect of deduction" is more higher. If you are earning so little (due to the low interest environment), do not allow the insurance company or the agent to take so much away from you.


Personal attack

There is one person who finds all opportunities to attack me personally. This person posts anonymously and will find fault and pass cynical remarks on most of my views. I have blocked his views, so he goes to other blogs to attack me. I suspect that this person has been paid to do this type of dirty work.

Electronic display on MRT trains

Here are my views of the electronic displays.

Ask the insurer to provide an explanation

Dear Mr Tan,
Recently I received my renewed incomeshield with the attachment of Endorsement E0901 stated that with effect from the renewal date, the following new definitions shall replace and supersede the existing definitions by the same name appearing in the "definitions" section of the policy.

Can you comments over all those definitions? How are they different from the previous definitions? Any 'small prints' that we should be aware of & take exception? I think those who are in this scheme received the same endorsement.


REPLY
I suggest that you write to NTUC Income and ask them for an explanation of the effect of the change in definition. It is their duty to provide a satisfactory explanation to you. If you have received the explanation, you can send them to me for a second opinion.

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