Saturday, September 17, 2011

Life insurance - past and today

I have been asked many times about why I find life insurance policies to be a bad investment, when I had been selling life insurance for 30 years.

The life insurance policies sold during my time gave a yield of about 5% per annum. The expenses were low and high rates of bonuses were distributed to the policyholders. This was an attractive yield.

Today, the yield for most policies is about 2.5% per annum. This is unattractive when it is possible for the consumer to earn more than 4% per annum from other types of investments, e.g. in an index fund or exchange traded fund.

If you can find a life insurance policy that gives a yield of 4% per annum today, it is all right. But 2.5% is too low.

High reduction in yield

A life insurance company in Singapore specialised in selling investment linked policies (ILP). They also advertised regularly to improve their corporate image - as caring for their customers.

In my book on life insurance, there is an example of a typical policy that is sold by this insurance company. The projected cash value based on an investment yield of 5% gives a net yield of 1.2%. The reduction in yield is 3.8%. Based on an investment yield of 9%, the net yield is 4.8%, giving a reduction of 4.2%.

Any investment that takes away more than 1.5% in yield (to provide the investment service and insurance coverage) is bad for consumers. The reduction of 4% is far too much.

The difference in payout at the end of 25 years, based on a reduction of yield of 1.5% (which is far) and a reduction of 4% (which is far too much) is 40%. If your cash value at the end of 25 years is $200,000, you should be getting $280,000 under a fairer contract. Most consumers do not even know the difference! The insurance agent does not tell you about this.

You can find a few examples of this type in my book, Get Value from your Life Insurance.

Friday, September 16, 2011

The Finnish education system

Here is an interesting comparison of the Finnish system and the Singapore system - may by a Singaporean who now works in Finnland.

Live streaming of talk - Get Value for your Life Insurance

Live streaming of Talk - Get Value for your Life Insurance
Date: Friday 23 September 2011
Time: 9 to 10 pm
Click here to get the handout for the talk
Questions can be submitted via on-line chat and will be answered at end of the talk.

Why employers prefer to employ foreigners

Dear Mr. Tan,
There are a few reason that companies like foreigners than singaporean. A lot have been pointed out - just name a few here.
1) lower cost for compaines
2) no ns liability
3) foreigner willing to work longer hours
But I think the main reason is employment agnecy. The facts is that if the companies wanted to employ a staff, they would out source to the employment agency to get the employment done. But here is the different, employer do not need to pay the employment agency to hire if they get the foreigner as foreigner pays thousands of dollars to comes to singapore to work. If the employer wants to get a singaporean to work, then they have to pay for the services rendered by the agency - up to 1 month of the pay.
Solutions: Government should pass a law that required  all employer to pay the agency a fix amount of dollars to employment agency if they engaged their services. And all successfully employed person have to pay up to a month of their salary to the agency as well (can be pay in installment) . Thus this two combination works out to be almost the same income for the agency, which they would switch their mindset to get singaporean employed.
What is your view on this, Mr Tan.

Many people put their savings in a life insurance policy as a form of investment. Unfortunately, the policy is a bad investment, as it takes more than 10 years to break even, after paying off the commission and other expenses and finally gives a poor yield - not enough to cover inflation.

It is easy to invest your money on your own. You can open an account with a stockbroker and buy any of the following:

  • Exchange traded fund, e.g. STI ETF 
  • REITS (real estate trust)
  • Blue chip shares, e.g. DBS, SingTel, SPH, SIA, Starhub
It cost your $3,,000 to buy 1,000 units of the ETF. You may have to save for a few months (in your bank account) before collecting enough money to buy the ETF. 

You can learn about these investments by attending the FISCA workshop on financial planning. Details can be found here.

Investment banks hire risk takers

This article explains the difference between commercial and investment banking. There was a law in USA called the Glass-Stegall Act that required them to be separated. It was a good and sensible law, which was unfortunately repealled.

Risk taking is the same as gambling. When you bet in a casino, you are taking a speculative risk. When you trade stocks or currencies, you are also gambling. It makes no difference whether you gamble in a casino or work in the trading desk of an investment bank. There should be a law against banks engaging in gambling!

Critical year policy

Many policyholders bought a "critical year policy" in the belief that they can stop paying premium after that period. They were disappointed to learn that they had to pay premium for longer than the expected period and cannot get the insurance company to honour the "promise". What has happened?

If the policyholder read the actual policy document, he would have found that the word "critical year" is not mentioned in the policy. It was actually a marketing presentation. The insurance agent took the dividends paid in the past and assumed that the same rates would be paid in the future, and also that it was possible to accumulate the dividends to earn an interest rate of 6% per annum.

The actual rates of dividends paid were lower than projected, due to the low investment yield. The interest rate credited on the dividends were also lower than the 6% projection. With both impacts, the accumulated dividends were not sufficient to stop the premium payment.

There was an example of this policy given in my book, "Get value from your life insurance policy". You can buy the book here. You can also learn about some of the other policies to avoid.

Thursday, September 15, 2011

Immigrants and fake degrees

Hi Mr Tan,
The community is beginning to experience such cases of fake degrees involving the Chinese (perhaps, immigrants) which hardly occurred in the past.....

Hope that the govt is able to weigh the consequences.  I am sure Singaporeans do not need such acts/behaviour to be around to influence our students/next generation or to cause any damage to our image.  Cheers.

Relevance of Dr. Tommy Wong's books

Tommy Wong's book, Wisdom to Live your Life, is relevant to the people who have lost money on the mini-bonds and other credit-linked notes.

Tommy talked about the greed in the materialistic world where the following people make a lot of money (and in the process made other people poorer):

a) politicians

b) top CEOs
c) bankers

He also talked about how to find happiness in the spiritual world by living on certain principles. This came give some comfort to those who have been made poorer by the greedy financial institutions.

His book has relevance to the situation in Singapore. It is easy to read. You can buy his book online here.

Buying the right life insurance policy

A lady in the mid 30s was sold a whole life policy with premiums payable for 30 years. It covers $100,000 payable on death, permanent disability and dread disease. The annual premium was $3,850. The agent said that it was a good policy, as the premium stops after 30 years, and the policyholder will remain covered for life.

The cash value at the end of 30 years was projected to be $161,000 on an optimistic basis (assuming an investment yield of 5.25%). This looked attractive, compared to the total premium paid of $108,000.

However, if the policyholder were to set aside 5% of the premium to buy the cover against premature death or dread disease and to invest the remaining 95% of the premium to earn a yield of 4.5% per annum, the accumulated amount at the end of 30 years would have been $233,000. This would have been 45% higher than the cash value payable under the policy.

When the accumulated saving is $233,000, you do not need the $100,000 of life insurance protection that is paid under the policy. This type of honest advice is not given by the insurance agent who sells the limited premium policy.

You can read a few more examples of this type in my book entitled "Get value from your life insurance policy" which can be ordered here. You can also attend the talk organised by FISCA.

Consultation with Dr. Tommy Wong

Dr. Tommy Wong offers consultations on personal growth and happiness, based on the concepts in his book, "Wisdom on how to live life".

If you are highly stressed with life and need some guidance on how to deal with your problems, have a chat with Dr. Wong.

Loss of $100,000 within a few days

Two years ago, a retired couple approached me for help. They trusted  $200,000 from a retirement gratuity to a relationship manager of a local bank. The RM told the couple that the bank would lend them $800,000 and the total of $1 million would be invested in certain currencies to earn a higher rate of return, compared to the interest payable on fixed deposits.

The RM invested the money in A$ which fell by 10% within a few days during the global financial crisis. As the total investment was $1 million (including the $800,000 lent by the bank), the investor suffered a loss of $100,000 within a few days. As they were not able to top up the loss, the bank closed their position and they realized a loss of $100,000.

They could not lodge a complaint with the bank as they had signed documents that absolved the bank from responsibility for the investment loss. Their mistake was to trust the RM who was not really experienced in managing this type of investment. The RM had to meet certain sales targets to sell the investment products. It was also a mistake to invest with borrowed money (i.e the $800,000).

There is also another bad aspect of this type of investment. If the A$ had gained 10%, the investor would NOT have earned $100,000. At most, the investor would have earned a slightly higher interest rate, due to the unfair nature of these "dual currency investments". If there is a gain, a major portion would be pocketed by the bank that issued the financial product - which may not be the same bank that sold the product. If there is a loss, the investor takes the full loss.

Tan Kin Lian

Risky investment products

This letter talks about the risky investment products that are being sold in the market. It is important for consumers to be savvy to avoid these products. Attend the talks conducted by FISCA to understand what are the products that you should avoid.

30% of Singaporeans are cynics

Hi Mr Tan,
This is a valuable article.

As it stated "....Since the study did not find any significant relation between a cynic and demographic factors such as race, education and income, it means that cynics here cut across the entire cross-section of society...."  It will likely be another "put on hold" scenario.  Hard to expect changes from such report/research.....!


Singaporeans have learned, through the years, that their main source of information through the mainstream media, is not honest and not reliable, and have learned to be cynical. To correct this situation, we have to embrace honesty and fairness in presenting the facts, and not slant them to serve certain political aims.

Private bankers

Private bankers manage the wealth of people with more than US$1 million in assets and earn a fee for their services. The increase in the number of high net worth people means more business for private bankers. However, the supply of private bankers outstrip the demand, leading to high cost and thin margins for the banks. Some banks have started to trim down their numbers of private bankers.

A more important factor is the inability of the private bankers to create wealth, especially in an environment of global recession and falling asset prices. In good times, it is easy to create wealth during a bubble, but it is not real wealth. In bad times, the fictional wealth have to be paid back.

These high income jobs of private bankers have a bigger harm. They make the real jobs, e.g. teachers, nurses, policemen, factory workers - look unattractive. There are insufficient number of people willing to work in these essential services.

The challenges facing the world today - falling birth rate, high unemployment - can be traced to the growth of the financial services sector that takes away too much profit from the real economy. To solve these challenges, we have to start with finding the appropriate measures to control the excesses of this sector.

Wednesday, September 14, 2011

Ponzi demography

Hi Mr. Tan,

I came across this term, "Ponzi Demography" in some blogs with links to the original article. Thought you might be interested to have a read.

"According to Ponzi demography, population growth — through natural increase and immigration — means more people leading to increased demands for goods and services, more material consumption, more borrowing, more on credit and of course more profits. Everything seems fantastic for a while — but like all Ponzi schemes, Ponzi demography is unsustainable."

Hang Lian

Talks by FISCA

FISCA has three talks on financial planning and life insurance over the next 3 months. You can register for the talks here.

Here are the details of the Life Insurance talk. Apart from life insurance, it also explains the government insurance schemes.

The financial planning workshop (6 hours) also give details about investing in shares, REITS and ETFs.

Ask young people (e.g. your children or your friend's chidren) to attend the talks, so that they can make the right decisions right at the start of their career and avoid the bad mistakes!

Advantage of declining population

The writer points out the advantage of declining population - it re-distributes power from the owner of capital to the owner of labor, and forces employers to give better working conditions to the workers. It also gives a better life to the people - less crowded public transport and highway and more living space.

The rapid increase in population in Singapore in recent years has indeed worsened living conditions in Singapore.  It is a policy that is bad for the people.

Tuesday, September 13, 2011

Call on PM Lee to act wisely

I call on PM Lee to appoint the elected MPs to be the adviser to the grassroots organisations. My reasons are stated in this Facebook posting.

Sunday, September 11, 2011

Bad clients

Somebody posted a few comments about bad clients who take advantage of good agents. I wish to ask this person to give more details about the bad behavior of the the clients. 

Life of the Medieval Peasants

I did some research on the life of the medieval peasants and found this interesting account. The peasants had a harsh life because they have to pay rent to their lord (who owned the land) and tithes to the church.

And here is the story of the Peasant's Revolt.

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