COMMENT POSTED IN MY BLOG
Wonder if all insurance company sell low cost, will the insurance company survive the business environment?
Is the distribution cost paying the agent commision only? What about the CEO's pay where does it come from?
So it is not fair to always lament on the commission earn by agents. What the agent earns is only part of it, distribution cost goes to pay more than agent commission.
I wonder if Mr Tan will comment on this or allow this to be posted.
REPLY:
Products that are simple and meet the real needs of the consumers can be sold with a low distribution cost. It can have a reasonable margin for all parties to earn a reasonable income.
Unfortunately, many products are designed to be complicated, costly to administer, costly to market, and give poor value to customers.
The insurance agent can easily sell these high cost products to naive customers, and earn a high commission from the sales. The managers and CEO can also earn high salaries from the high profit margin.
After the product is sold, the customer is locked in for 20 to 30 years, and can only terminate the contract at a great loss. If they keep the contract, they get a poor return from their years of savings.
I hope that businesses will be ethical and will market products that are fair and give good value to customers.
Thursday, September 06, 2007
Be fair in your views
One anonymous visitor to my blog has expressed strong views against insurance agents. Some of the comments are quite rude. I have to block them.
There are some agents who are driven by commission to act against the interest of the customers.
There are many other agents who act ethically and offer the best advice to their customers. They play a useful role to help the ordinary people to save and protect their families.
Please be fair and considerate in expressing your views.
There are some agents who are driven by commission to act against the interest of the customers.
There are many other agents who act ethically and offer the best advice to their customers. They play a useful role to help the ordinary people to save and protect their families.
Please be fair and considerate in expressing your views.
Encourage more people to use public transport
The roads in Singapore are getting congested. The Government plans to extend the Electronic Road Pricing (ERP) to more roads, extend the chargeable hours and increase the charges. These measures will reduce the congestion on the road.
The Minister for Transport said that building more roads does not help to solve the congestion problem. It encourages more people to use cars and will lead to more congestion at a later date.
I agree.
Read my views in this article which was published in Straits Times one week ago.
The Minister for Transport said that building more roads does not help to solve the congestion problem. It encourages more people to use cars and will lead to more congestion at a later date.
I agree.
Read my views in this article which was published in Straits Times one week ago.
Insure against real needs
Some customers bought more insurance than they really need. They were over-sold by insurance agents who are keen to make the commission.
Here are some tips:
1. Buy insurance for the risks that you need to cover. Do not buy insurance for risks that you can shoulder on your own.
2. Buy low cost insurance. Do not bundle it with savings. Invest your savings separately.
3. Do not over-insure. Do not take several medical insurance policies. You are paying too much premium for no value. You are allowed to claim up to the amount that you spent only.
4. Find an honest adviser who help you to pay less on your insurance, and find the lowest cost.
I shall be making a separate posting to talk about the risks that you really need to insure, and the risks that you do not need to insure (i.e you can take on your own).
Here are some tips:
1. Buy insurance for the risks that you need to cover. Do not buy insurance for risks that you can shoulder on your own.
2. Buy low cost insurance. Do not bundle it with savings. Invest your savings separately.
3. Do not over-insure. Do not take several medical insurance policies. You are paying too much premium for no value. You are allowed to claim up to the amount that you spent only.
4. Find an honest adviser who help you to pay less on your insurance, and find the lowest cost.
I shall be making a separate posting to talk about the risks that you really need to insure, and the risks that you do not need to insure (i.e you can take on your own).
Life Insurance sales in France
In France, there are virtually no life insurance agents left. All the life insurance sales are carried out by the banks or by salaried employees.
The upfront sales charge is 1% or less for single premium products. The annual fee deducted from the investment fund is 0.5% for equities and 0.1% for fixed income.
These charge are very low. Life insurance gives good value to the customers.
Previously, the sales were done by life insurance agents earning a high rate of commission. When the agents were forced to disclose the high commission to the customer, resulting in no cash value for the first two years, the customers refused to buy the products.
In Singapore, the high charges are disclosed to the customers. But the customers are not aware that they have the alternative to "buy term and invest the difference". They pay the high sales charges and, when they learned about these charges later, they regret their decisions.
The upfront sales charge is 1% or less for single premium products. The annual fee deducted from the investment fund is 0.5% for equities and 0.1% for fixed income.
These charge are very low. Life insurance gives good value to the customers.
Previously, the sales were done by life insurance agents earning a high rate of commission. When the agents were forced to disclose the high commission to the customer, resulting in no cash value for the first two years, the customers refused to buy the products.
In Singapore, the high charges are disclosed to the customers. But the customers are not aware that they have the alternative to "buy term and invest the difference". They pay the high sales charges and, when they learned about these charges later, they regret their decisions.
Over selling by insurance agents
I was told that some young people bought too much life insurance. They bought policies for themselves, for their children, to save for their eduation, for their medical expenses, etc.
The total insurance premium that they have to pay takes away half of their salary. They face some financial difficulty in managing their expenses.
I was asked by their counsellor, on what are their options. If they terminate some of the policies, they would have to suffer a loss. But, if they continue, they find it difficult to cope.
Here is my frank view. The insurance adviser has over-sold and gave bad advice to the customer. The customer can make a complaint to the authorities for the bad advice, and ask for a refund of the premiums that they have paid.
I hope that the adviser is made responsible for the bad advice that has been given. Do not let them get away with it.
The total insurance premium that they have to pay takes away half of their salary. They face some financial difficulty in managing their expenses.
I was asked by their counsellor, on what are their options. If they terminate some of the policies, they would have to suffer a loss. But, if they continue, they find it difficult to cope.
Here is my frank view. The insurance adviser has over-sold and gave bad advice to the customer. The customer can make a complaint to the authorities for the bad advice, and ask for a refund of the premiums that they have paid.
I hope that the adviser is made responsible for the bad advice that has been given. Do not let them get away with it.
Keep your living policy
Dear Mr Tan
I really enjoy reading your blog. You have certainly opened up my mind especially with respect to insurance.
I have a NTUC Living policy for a sum assured of $35K. I have been paying it for 13 yrs now. The bonus is about $14K. The surrender value is $9K now.
Does it means that if I die now or come down with critical illness, I will only get the sum assured + bonues (ie $35K + $14K = $49K). I'm paying a total annual premium of $723.
On the other hand, if I buy a $50K term now, I only pay about $120 per yr. So for the same payout, I will be paying much less ($120 vs $723). It just seems too good to be true to terminate my current living policy, pay less premium and yet get the same coverage.
Thank you for your time Mr Tan, it really brings a new perspective on financial planning.
REPLY:
This is correct. You are covered for $49,000 in the event of a claim.
I suggest that you keep your living policy and take the term insurance as well, if you can afford both premuim. The living policy covers 30 dread disease and have a cash value at any time that you terminate it. The cash value increases each year.
The term policy is cheaper, but it does not have any cash value. It covers you for a specific term, i.e. 10 or 20 years. After the term, the cover ceases.
I really enjoy reading your blog. You have certainly opened up my mind especially with respect to insurance.
I have a NTUC Living policy for a sum assured of $35K. I have been paying it for 13 yrs now. The bonus is about $14K. The surrender value is $9K now.
Does it means that if I die now or come down with critical illness, I will only get the sum assured + bonues (ie $35K + $14K = $49K). I'm paying a total annual premium of $723.
On the other hand, if I buy a $50K term now, I only pay about $120 per yr. So for the same payout, I will be paying much less ($120 vs $723). It just seems too good to be true to terminate my current living policy, pay less premium and yet get the same coverage.
Thank you for your time Mr Tan, it really brings a new perspective on financial planning.
REPLY:
This is correct. You are covered for $49,000 in the event of a claim.
I suggest that you keep your living policy and take the term insurance as well, if you can afford both premuim. The living policy covers 30 dread disease and have a cash value at any time that you terminate it. The cash value increases each year.
The term policy is cheaper, but it does not have any cash value. It covers you for a specific term, i.e. 10 or 20 years. After the term, the cover ceases.
Wednesday, September 05, 2007
Career prospects for an actuary
A reader of my blog asked about the career prospects for an actuary. Here are some facts given by someone who recently qualified as an actuary.
1. It takes about 7-8 years to qualify from start
2. Most actuaries work in insurance or consulting, but actual practice is not as mathematically challenging as most people think. Programming, common-sense and business considerations are needed to be successful..
3. Starting salary for fresh grads are about $2,000 to $2,500, but can grow fast depending on passes in the actuarial examinations. Work experience is also valuable in insurance/consulting firms.
4. The demand for qualified actuaries is growing in the region. There is less demand in Singapore, as the insurance market here is small.
5. You can get more information from www.actuaries.org.sg.
6. Actuaries can work in other finance areas geared towards mathematics eg quantitative finance, investment, financial engineering. They generally earn more but their work is more stressful.
1. It takes about 7-8 years to qualify from start
2. Most actuaries work in insurance or consulting, but actual practice is not as mathematically challenging as most people think. Programming, common-sense and business considerations are needed to be successful..
3. Starting salary for fresh grads are about $2,000 to $2,500, but can grow fast depending on passes in the actuarial examinations. Work experience is also valuable in insurance/consulting firms.
4. The demand for qualified actuaries is growing in the region. There is less demand in Singapore, as the insurance market here is small.
5. You can get more information from www.actuaries.org.sg.
6. Actuaries can work in other finance areas geared towards mathematics eg quantitative finance, investment, financial engineering. They generally earn more but their work is more stressful.
People are living longer
I made a research into trend in death rates in Singapore during the 10 years from 1996 and 2006.
The death rates for each age group, falls by about 4% per year. For example, for males age 55 to 59, the death rate dropped from 17.9 per in 1996 to 11.3 in 2006.
If this trend continues, we will see some interesting situations:
1. Based on the current death rates, a male age 65 can expect to live another 17.8 years. If the rates continue to fall, the life expectancy increases to 27.3 years, i.e. 10 years more.
2. If the age-specific death rates continue to fall by 4% per year, a baby born today can expect to live to an average of 116 years. Wow!
What does this mean? It is important to have a life annuity. You will live longer than you expect!
Note. Some people think that it is not possible for death rates to continue to fall by 4% per year. It will reach a certain point and stop declining after that.
The death rates for each age group, falls by about 4% per year. For example, for males age 55 to 59, the death rate dropped from 17.9 per in 1996 to 11.3 in 2006.
If this trend continues, we will see some interesting situations:
1. Based on the current death rates, a male age 65 can expect to live another 17.8 years. If the rates continue to fall, the life expectancy increases to 27.3 years, i.e. 10 years more.
2. If the age-specific death rates continue to fall by 4% per year, a baby born today can expect to live to an average of 116 years. Wow!
What does this mean? It is important to have a life annuity. You will live longer than you expect!
Note. Some people think that it is not possible for death rates to continue to fall by 4% per year. It will reach a certain point and stop declining after that.
Tuesday, September 04, 2007
Legacy of Goh Choo San
Goh Choo San was a Singaporean, well known in the dance circles in America and was the resident chereographer of the Washington Ballet prior to his death in 1987.
The Singapore Dance Theatre is making a special performance showing the dance pieces of Goh Choo San, to commerate the 20th anniversary of his death. This will be performed at the Esplanade Theatre on Saturday, 8 pm.
If you have a free evening, come and watch this performance. Tickets are available at a modest price of less than $70.
The Singapore Dance Theatre is making a special performance showing the dance pieces of Goh Choo San, to commerate the 20th anniversary of his death. This will be performed at the Esplanade Theatre on Saturday, 8 pm.
If you have a free evening, come and watch this performance. Tickets are available at a modest price of less than $70.
Investment in a degree or continuing education
One Polytechnic graduate has asked me on August 30th whether it is worth his while in investing in a part time business degree? I have given my answers to his question.
Dr. Lee Kum Tatt, who has considerable experience especially in S & T manpower development, has volunteered to share his personal experiences. He intends to write some articles in his blog on this important subject of education and manpower development. Read about his experiences and views on this subject in his blog.
Dr. Lee Kum Tatt, who has considerable experience especially in S & T manpower development, has volunteered to share his personal experiences. He intends to write some articles in his blog on this important subject of education and manpower development. Read about his experiences and views on this subject in his blog.
Buying a HDB resale flat
Hi Mr Tan,
I need your advice on acquiring a HDB resale flat. I am considering the following options:
1) A 5-rm HDB flat in Bishan, cosing $400k. I qualify for a HDB concessionary rate of 2.6%.
2) A 4-rm flat in Bishan, costing $300K. The catch: I need to get a bank loan with floating interest rate of 4-6%.
In your opinion, which is a better decision?
REPLY:
I hope that the following figures will be useful for you to make a decision.
If you have to pay a floating interest rate at 5%, the annual repayment for a $300,000 loan is $19,515. This is almost the same as the repayment for a larger loan of $400,000 at a subsidised interest rate of 2.6%.
It may be better for you to take the 5 room flat for $400,000 at the subsidised rate. Bear in mind that the interest rate of 2.6% is subject to revision.
I need your advice on acquiring a HDB resale flat. I am considering the following options:
1) A 5-rm HDB flat in Bishan, cosing $400k. I qualify for a HDB concessionary rate of 2.6%.
2) A 4-rm flat in Bishan, costing $300K. The catch: I need to get a bank loan with floating interest rate of 4-6%.
In your opinion, which is a better decision?
REPLY:
I hope that the following figures will be useful for you to make a decision.
Loan Repayable Interest Annual
over rate repayment
$400,000 30 years 2.6% $19,367
$300,000 30 years 4% $17,349
$300,000 30 years 5% $19,515
$300,000 30 years 6% $21,794
If you have to pay a floating interest rate at 5%, the annual repayment for a $300,000 loan is $19,515. This is almost the same as the repayment for a larger loan of $400,000 at a subsidised interest rate of 2.6%.
It may be better for you to take the 5 room flat for $400,000 at the subsidised rate. Bear in mind that the interest rate of 2.6% is subject to revision.
Commission payable on life insurance product
Hi Mr Tan,
May I ask how does an insurance agent from a tied company earn? Do they have a fixed income + variable commission? How do they work? How does an independent financial advisor earn monthly?
REPLY:
The insurance agent earns entirely on commission. For most regular premium product, they earn about 100% of the annual premium (over the first few years) and their agency manager earns about 50% of the premium.
If you invest $200 a month, or $2,400 a year, you can expect about $3,600 to be taken away from your savings to pay the commission of the agent and the manager. In my view, this is too high.
The actual commission depends on the type of product and the term of premium payment.
The insurance company pays a total to the independent financial adviser a total that comprises the two levels of commission plus the cost of recruiting and training the agent.
In the case of NTUC Income, the total cost is about 40% lower than the market.
This are just my guess. I think that the figures are about right.
May I ask how does an insurance agent from a tied company earn? Do they have a fixed income + variable commission? How do they work? How does an independent financial advisor earn monthly?
REPLY:
The insurance agent earns entirely on commission. For most regular premium product, they earn about 100% of the annual premium (over the first few years) and their agency manager earns about 50% of the premium.
If you invest $200 a month, or $2,400 a year, you can expect about $3,600 to be taken away from your savings to pay the commission of the agent and the manager. In my view, this is too high.
The actual commission depends on the type of product and the term of premium payment.
The insurance company pays a total to the independent financial adviser a total that comprises the two levels of commission plus the cost of recruiting and training the agent.
In the case of NTUC Income, the total cost is about 40% lower than the market.
This are just my guess. I think that the figures are about right.
Investing CPF savings
Mr Tan,
Any advice on investing CPF savings?
REPLY:
1. Transfer the maximum amount to the special account, to earn a higher interest rate of 4 percent.
2. Keep a modest amount of your ordinary account to meet a few monthly installments of your property. Invest the remainder in a low cost, diversified equity fund, as explained in this FAQ. You are likely to earn a higher return on this fund, compared to the interest charged on your housing loan.
3. Talk to a financial adviser, to make sure that the figures are up-to-date, and correct.
Any advice on investing CPF savings?
REPLY:
1. Transfer the maximum amount to the special account, to earn a higher interest rate of 4 percent.
2. Keep a modest amount of your ordinary account to meet a few monthly installments of your property. Invest the remainder in a low cost, diversified equity fund, as explained in this FAQ. You are likely to earn a higher return on this fund, compared to the interest charged on your housing loan.
3. Talk to a financial adviser, to make sure that the figures are up-to-date, and correct.
Investing after a market correction
Dear Mr Tan,
Your posting on your blog 2 weeks ago just before the market plunged to below STI 3000 mentioned that the index may not drop to 2700. You also mentioned that Warren Buffet had started nibbling on some stocks.
I have never bought stocks during a correction but did so only because I wanted to emulate your disciplined approach to investments. I took courage and bought some blue chips at good prices. I am an investor and not a trader.
The market has somewhat recovered, although volume is rather thin. In your opinion, would you continue to buy stocks at this point or would you wait for the market to correct further? I notice corrections of 20% of the STI occur infrequently.
REPLY:
You did well. Congratulations.
I think that it is all right to continue accumulating from here. I shall be doing it myself. Let us hope that we are both right!
Your posting on your blog 2 weeks ago just before the market plunged to below STI 3000 mentioned that the index may not drop to 2700. You also mentioned that Warren Buffet had started nibbling on some stocks.
I have never bought stocks during a correction but did so only because I wanted to emulate your disciplined approach to investments. I took courage and bought some blue chips at good prices. I am an investor and not a trader.
The market has somewhat recovered, although volume is rather thin. In your opinion, would you continue to buy stocks at this point or would you wait for the market to correct further? I notice corrections of 20% of the STI occur infrequently.
REPLY:
You did well. Congratulations.
I think that it is all right to continue accumulating from here. I shall be doing it myself. Let us hope that we are both right!
Revosave
COMMENT POSTED IN MY BLOG:
I hear from sources that the REVOSAVE was actually designed during Mr Tan's term as CEO.
Perhaps Mr Tan can tell us why it was not introduced to be sold during his time and after he retired, it was promoted as a good flexible hybrid plan?
REPLY:
The source is totally incorrect. I do not design any product which (in my opinion) is complicated, has a high cost, and gives poor value to the customer.
However, I think that the Revosave is better than a similar product which is sold very well in the market. It does give a choice to the consumer.
I hear from sources that the REVOSAVE was actually designed during Mr Tan's term as CEO.
Perhaps Mr Tan can tell us why it was not introduced to be sold during his time and after he retired, it was promoted as a good flexible hybrid plan?
REPLY:
The source is totally incorrect. I do not design any product which (in my opinion) is complicated, has a high cost, and gives poor value to the customer.
However, I think that the Revosave is better than a similar product which is sold very well in the market. It does give a choice to the consumer.
Commission payable to the agent
Dear Mr Tan,
The illustration shows the Total Distribution cost, which comprises of several items.
I have been trying to get my sales person (a.k.a. financial planner) to disclose to me the commission rate that is paid to him, but it seems that his managers are unwilling to disclose such information to me.
Based on your past experience in the insurance field, is it common industry practice to only provide Total Distribution Cost in the benefit illustration?
I have also found this phrase from a website which mentioned the following:
" By law, insurance companies must reveal all costs and charges associated with the product you are buying. This includes, specifically, the distribution costs which include any commission the insurance company will pay to your adviser. These details are shown in the benefits illustration of your product."
Would you suggest that I consult MAS on this matter, since the website mentioned the phrase "by law", although so far I have not seen the details of their commission structure?
Again, thank you very much for your kind attention. My wife and I feel very much empowered by the insights you have shared in your blog.
REPLY:
I think that it is a good idea for you to consult MAS on this matter. Another organisation that you can address the matter, when it comes to a dispute, is FIDReC.
The illustration shows the Total Distribution cost, which comprises of several items.
I have been trying to get my sales person (a.k.a. financial planner) to disclose to me the commission rate that is paid to him, but it seems that his managers are unwilling to disclose such information to me.
Based on your past experience in the insurance field, is it common industry practice to only provide Total Distribution Cost in the benefit illustration?
I have also found this phrase from a website which mentioned the following:
" By law, insurance companies must reveal all costs and charges associated with the product you are buying. This includes, specifically, the distribution costs which include any commission the insurance company will pay to your adviser. These details are shown in the benefits illustration of your product."
Would you suggest that I consult MAS on this matter, since the website mentioned the phrase "by law", although so far I have not seen the details of their commission structure?
Again, thank you very much for your kind attention. My wife and I feel very much empowered by the insights you have shared in your blog.
REPLY:
I think that it is a good idea for you to consult MAS on this matter. Another organisation that you can address the matter, when it comes to a dispute, is FIDReC.
Suitable products
COMMENT POSTED IN MY BLOG:
Today, endowment and whole life products are poor performers because of low interest rate and high distribution costs and they are bad vehicles to use for investment and for accumulation for any long term goals. Over long term both these kinds of products can only return 3% to 4% which barely beat inflation. Wealth is never created this way.
For low and middle income, higher rate of return is necessary to make your hard earned money work harder otherwise 20 years down the road whatever you accumulated has the same purchasing power as it was 20 years ago.There is no improvement in real term.Your risk averseness must change. There is a necessity to take risk to get out of the poverty trap when you have the capacity.
That is the reason why you are often urged to look for good adviser to help you and not insurance salesman. An adviser who is skillful in investment can help to design a portfolio that eliminates risk over time and yet gives a decent return for you, at least 6% to 8%.
What Mr. Tan is advising is in good faith. After all he spent more than 30 years in this business and he knows what he is talking about.
Time has changed. What was good is not good today anymore. I hope Mr. Tan's well meaning advice will be heeded.
REPLY:
In my view, both of the following products are suitable, for different groups of people:
1. Low cost, diversified investment fund with the potential to earn 6% to 8% over the long term.
2. Endowment plan, e.g. from NTUC Income, that gives a return of 4% p.a. (non-guaranteed) over 20 to 30 years.
I prefer option 1, but recognise that option 2 may also be suitable for certain groups of people.
Today, endowment and whole life products are poor performers because of low interest rate and high distribution costs and they are bad vehicles to use for investment and for accumulation for any long term goals. Over long term both these kinds of products can only return 3% to 4% which barely beat inflation. Wealth is never created this way.
For low and middle income, higher rate of return is necessary to make your hard earned money work harder otherwise 20 years down the road whatever you accumulated has the same purchasing power as it was 20 years ago.There is no improvement in real term.Your risk averseness must change. There is a necessity to take risk to get out of the poverty trap when you have the capacity.
That is the reason why you are often urged to look for good adviser to help you and not insurance salesman. An adviser who is skillful in investment can help to design a portfolio that eliminates risk over time and yet gives a decent return for you, at least 6% to 8%.
What Mr. Tan is advising is in good faith. After all he spent more than 30 years in this business and he knows what he is talking about.
Time has changed. What was good is not good today anymore. I hope Mr. Tan's well meaning advice will be heeded.
REPLY:
In my view, both of the following products are suitable, for different groups of people:
1. Low cost, diversified investment fund with the potential to earn 6% to 8% over the long term.
2. Endowment plan, e.g. from NTUC Income, that gives a return of 4% p.a. (non-guaranteed) over 20 to 30 years.
I prefer option 1, but recognise that option 2 may also be suitable for certain groups of people.
Reverse mortgage
Dear Mr Tan,
A few years ago, I took a reverse mortgage from NTUC Income and draw out $1,200 a month. The value of my property has appreciated since. Who keeps the gain on the property? Is it NTUC Income?
REPLY:
Under a reverse mortgage, you are still the owner of the property. The reverse mortgage is a loan that accumulates interest.
If you decide to sell the property (which is not at a much higher value), you keep the entire amount of the property (after repaying the loan and accumulated interest on the reverse mortgage). All the property gains goes to you, as the owner.
It is a good scheme!
A few years ago, I took a reverse mortgage from NTUC Income and draw out $1,200 a month. The value of my property has appreciated since. Who keeps the gain on the property? Is it NTUC Income?
REPLY:
Under a reverse mortgage, you are still the owner of the property. The reverse mortgage is a loan that accumulates interest.
If you decide to sell the property (which is not at a much higher value), you keep the entire amount of the property (after repaying the loan and accumulated interest on the reverse mortgage). All the property gains goes to you, as the owner.
It is a good scheme!
Monday, September 03, 2007
Whole life and endowment policies sold by NTUC Income
Dear Mr Tan
I read your blog form some time. You now advise consumers to avoid the insurance products with high charges, such as endowment and whole life plans.
During the years that you were in NTUC, your agents actively sold these products. Were these products costly for customers?
REPLY:
The commissions paid to the agents on the life insurance products from NTUC Income were about 40% lower than the market.
The premiums were lower, the cash values were higher, and the return on maturity were about 10% to 15% better than similar products in the market.
Most of the products marketed by NTUC Income in the past gave reasonably good value to the consumers. They were much better than similar products offered by other insurance companies.
The conditions have changed today. I now recommend consumers to invest in low cost, diversified investment funds that give a better long term return. Read my FAQ in www.tankinlian.com/faq.
I read your blog form some time. You now advise consumers to avoid the insurance products with high charges, such as endowment and whole life plans.
During the years that you were in NTUC, your agents actively sold these products. Were these products costly for customers?
REPLY:
The commissions paid to the agents on the life insurance products from NTUC Income were about 40% lower than the market.
The premiums were lower, the cash values were higher, and the return on maturity were about 10% to 15% better than similar products in the market.
Most of the products marketed by NTUC Income in the past gave reasonably good value to the consumers. They were much better than similar products offered by other insurance companies.
The conditions have changed today. I now recommend consumers to invest in low cost, diversified investment funds that give a better long term return. Read my FAQ in www.tankinlian.com/faq.
High cost products
TWO COMMENTS POSTED IN MY BLOG (edited)
Examples of high cost products are limited premium critical illness plans, repackaged endowment like REVOSAVE, whole life plans and regular ILPs like ID2 and other s from other insurance companies, high expense ratio ILPs.
They have high distribution cost with part of it which goes to agents as commission. Because of high cost the return is affected.
-----------------------------------------------------------------------
Since the critical year saga the insurance companies were rolling out products with limited premium on the premise that customers do not like to pay for life.
The question one should beg is "is it to the benefit of the customers"? The answer is yes and no. Yes, it benefits the high earners and the rich without their compromising their needs for high coverage. The rich never have this problem of servicing the premium.
For the poor it makes it even worse for them. Before this they were already struggling with the premium for a normal wholelife. Now the premium is even more menacing for them. Lapsing seems inevitable, just a matter of time. Why then insurance salesmen still recommend limited premium to the average income customers?
I am sure if they have done fact finding limited premium would never been recommended. As I have said insurance salesman is a salesperson. He sells with one objective, ie. to close the sale.
Does the agent bother whether the customer continues the premium for the next 20 years? He has collected the huge commission and if the customer should lapse he can sell him another one with high commission, an opportunity to make a sale.That is good strategy.
So what should be done to this type of insurance salesmen?
Examples of high cost products are limited premium critical illness plans, repackaged endowment like REVOSAVE, whole life plans and regular ILPs like ID2 and other s from other insurance companies, high expense ratio ILPs.
They have high distribution cost with part of it which goes to agents as commission. Because of high cost the return is affected.
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Since the critical year saga the insurance companies were rolling out products with limited premium on the premise that customers do not like to pay for life.
The question one should beg is "is it to the benefit of the customers"? The answer is yes and no. Yes, it benefits the high earners and the rich without their compromising their needs for high coverage. The rich never have this problem of servicing the premium.
For the poor it makes it even worse for them. Before this they were already struggling with the premium for a normal wholelife. Now the premium is even more menacing for them. Lapsing seems inevitable, just a matter of time. Why then insurance salesmen still recommend limited premium to the average income customers?
I am sure if they have done fact finding limited premium would never been recommended. As I have said insurance salesman is a salesperson. He sells with one objective, ie. to close the sale.
Does the agent bother whether the customer continues the premium for the next 20 years? He has collected the huge commission and if the customer should lapse he can sell him another one with high commission, an opportunity to make a sale.That is good strategy.
So what should be done to this type of insurance salesmen?
Suggestion: CPF to provide investment funds
COMMENT POSTED IN MY BLOG
It would supplement the compulsory annuity if we can some control of the use of CPF fund. Currently, the control isn't good, it still gives almost free rein to the members. The capping of the usage for various purposes needs further tweaking. Example, for housing. The 120% limit is not good enough because people are buying houses bigger than they need and over stretch their fund. This leaves little or nothing for other areas like accumulation for retirement.
Members still need to grow their fund because the minimum sum for annuity just provides subsistence living.
Another area needs tweaking is using the fund for investment. As you have noticed from all reports of CPF investment very few members made profit and if they did it was just above 2.5%. If this is so, members may as well leave their fund in the CPF to grow at 2.5% without the unnecessary risk they have been taking.
I propose that CPF make it compulsory for members who wish to invest to invest directly into some life cycle funds run by CPF or approved by CPF, otherwise leave it in CPF. This is to prevent abuses, mismanagement and losses in the hands of insurance sales agents who have no idea about investing but sales. With this in place, I believe members can earn as high as 6% to 8% rate of return, easily.
Cut out all intermediaries (agents, advisers, stock brokers etc) and go direct. The saving of cost will add to the return. It has proven again and again the intermediaries have done nothing but damages.
REPLY:
I agree with this proposal, to a large extent. They are similar to my suggestion that was published in the Business Times. Read here
It would supplement the compulsory annuity if we can some control of the use of CPF fund. Currently, the control isn't good, it still gives almost free rein to the members. The capping of the usage for various purposes needs further tweaking. Example, for housing. The 120% limit is not good enough because people are buying houses bigger than they need and over stretch their fund. This leaves little or nothing for other areas like accumulation for retirement.
Members still need to grow their fund because the minimum sum for annuity just provides subsistence living.
Another area needs tweaking is using the fund for investment. As you have noticed from all reports of CPF investment very few members made profit and if they did it was just above 2.5%. If this is so, members may as well leave their fund in the CPF to grow at 2.5% without the unnecessary risk they have been taking.
I propose that CPF make it compulsory for members who wish to invest to invest directly into some life cycle funds run by CPF or approved by CPF, otherwise leave it in CPF. This is to prevent abuses, mismanagement and losses in the hands of insurance sales agents who have no idea about investing but sales. With this in place, I believe members can earn as high as 6% to 8% rate of return, easily.
Cut out all intermediaries (agents, advisers, stock brokers etc) and go direct. The saving of cost will add to the return. It has proven again and again the intermediaries have done nothing but damages.
REPLY:
I agree with this proposal, to a large extent. They are similar to my suggestion that was published in the Business Times. Read here
How to get better advice
COMMENT POSTED IN MY BLOG
I think some kind of legal precedents will help to tidy up the industry. A body to advise on legal suits against roque insurance agents like CASE (Consumer Association) at affordable fee should be set up.
Once policyholders get litigious and know their rights and where to turn to for advise, this will then make insurance agents not to play play. Their recommendations must be able to withstand close scrutiny by third party review.
However customers must be educated on financial awareness. It is not about insurance only but about many areas of their personal finances. They have to know that all their needs are always competing for attention and the right and qualified adviser can help them to sort it out and not an insurance salesman.
Insurance agents are trained to sell, push and peddle products. They don't know about financial planning. Most are looking for get rich quick scheme and insurance selling offers them this opportunity. So unless the industry is cleaned up of these unscrupulous and unethical and cheats insurance salesmen we will continue to risk engaging one. A unified effort is needed.
To start with, only engage advisers with accredited tertiary qualifications like CFP, CFA, CPA, MFP or Master of science in wealth management.
REPLY:
I agree with most of the views.
High net worth people can engage advisers with tertiary qualifications. They can benefit from savings in tax through estate and tax planning.
Ordinary people should be educated about the simple facts of investments and encouraged to buy simple, low cost products available in the market. They do not need to pay high commission to advisers who do not add value to their financial planning.
I think some kind of legal precedents will help to tidy up the industry. A body to advise on legal suits against roque insurance agents like CASE (Consumer Association) at affordable fee should be set up.
Once policyholders get litigious and know their rights and where to turn to for advise, this will then make insurance agents not to play play. Their recommendations must be able to withstand close scrutiny by third party review.
However customers must be educated on financial awareness. It is not about insurance only but about many areas of their personal finances. They have to know that all their needs are always competing for attention and the right and qualified adviser can help them to sort it out and not an insurance salesman.
Insurance agents are trained to sell, push and peddle products. They don't know about financial planning. Most are looking for get rich quick scheme and insurance selling offers them this opportunity. So unless the industry is cleaned up of these unscrupulous and unethical and cheats insurance salesmen we will continue to risk engaging one. A unified effort is needed.
To start with, only engage advisers with accredited tertiary qualifications like CFP, CFA, CPA, MFP or Master of science in wealth management.
REPLY:
I agree with most of the views.
High net worth people can engage advisers with tertiary qualifications. They can benefit from savings in tax through estate and tax planning.
Ordinary people should be educated about the simple facts of investments and encouraged to buy simple, low cost products available in the market. They do not need to pay high commission to advisers who do not add value to their financial planning.
Licencing of financial advisers
COMMENT POSTED IN MY BLOG (edited)
Dear Mr Tan,
In your opinion, is there a need for MAS to license insurance agents? For those IFAs operating in a licensed financial firm, why do they need a license individually to practice?
I feel that MAS is trying to distinguish these 2 groups of advisers but doing it slowly over time. I do hope the licensing requirements (including renewals) do help to weed out unethical advisers.
Also, i feel that there is a conflict of interest in the insurance companies trying to enforce compliance issues on their representatives and watching their bottomline.
I share your vision where advisers operate in a fee-based model and salaried advisers. Free of commissions and conflict of interests.
REPLY:
My view is:
* There is a need for MAS to licence insurance agents, and not leave it to the insurance company. Currently, MAS licence independent financial advisers only.
* There should be clear standards of products and practices that are fair for consumers. Currently, some financial products are designed to make a lot of commission for the distributor and the product issuer (i.e. the insurance company or investment bank), and give poor value to consumers (who are not knowledgeable).
* There should be stronger enforcement of the practices, to make sure that the financial advisers and act in the interest of the consumers (which is their duty anyway).
* We need standards similar to the medical and legal professions.
Dear Mr Tan,
In your opinion, is there a need for MAS to license insurance agents? For those IFAs operating in a licensed financial firm, why do they need a license individually to practice?
I feel that MAS is trying to distinguish these 2 groups of advisers but doing it slowly over time. I do hope the licensing requirements (including renewals) do help to weed out unethical advisers.
Also, i feel that there is a conflict of interest in the insurance companies trying to enforce compliance issues on their representatives and watching their bottomline.
I share your vision where advisers operate in a fee-based model and salaried advisers. Free of commissions and conflict of interests.
REPLY:
My view is:
* There is a need for MAS to licence insurance agents, and not leave it to the insurance company. Currently, MAS licence independent financial advisers only.
* There should be clear standards of products and practices that are fair for consumers. Currently, some financial products are designed to make a lot of commission for the distributor and the product issuer (i.e. the insurance company or investment bank), and give poor value to consumers (who are not knowledgeable).
* There should be stronger enforcement of the practices, to make sure that the financial advisers and act in the interest of the consumers (which is their duty anyway).
* We need standards similar to the medical and legal professions.
Save energy
When I was in Japan last week, I learned about their energy saving movement. Their offices are encouraged to set the thermostat at 28 degrees Centigrade. The outside temperate is above 30 degrees.
The male employees are encouraged to wear short sleeve shirts, called "Cool Biz". They do not wear tie and jacket.
The Japan Ministry of the Environment calculated that the annual saving in energy per household from 1 degree of efficiency (from cooling and heating) is 84.6 kilowatt.
The offices in Singapore are quite wasteful in the use of energy. Many offices are cooled down to as low as 22 degrees. The employees have to wear jackets to keep warm. Knowledgeable people tells me that 25 to 26 degrees is the right temperate.
The cost of 1 kilowatt hour is $0.20. If offices and households in Singapore can be more energy saving by 2 degrees, the annual saving could be (just a rough guess), 2 million household X 2 degrees X 84.6 kilowatt X $0.20 = $34 million. (I hope that the experts can verify my figure).
It is not only just saving of $34 million. We have to do our part to prevent global warming and climate change.
The male employees are encouraged to wear short sleeve shirts, called "Cool Biz". They do not wear tie and jacket.
The Japan Ministry of the Environment calculated that the annual saving in energy per household from 1 degree of efficiency (from cooling and heating) is 84.6 kilowatt.
The offices in Singapore are quite wasteful in the use of energy. Many offices are cooled down to as low as 22 degrees. The employees have to wear jackets to keep warm. Knowledgeable people tells me that 25 to 26 degrees is the right temperate.
The cost of 1 kilowatt hour is $0.20. If offices and households in Singapore can be more energy saving by 2 degrees, the annual saving could be (just a rough guess), 2 million household X 2 degrees X 84.6 kilowatt X $0.20 = $34 million. (I hope that the experts can verify my figure).
It is not only just saving of $34 million. We have to do our part to prevent global warming and climate change.
Saturday, September 01, 2007
Unethical practices
When I give financial planning talks to the general public, I get approached by many people who ask my advise on the insurance policies that they have bought.
Here are the common faults of insurance agents:
1. Over-selling. Selling more life insurance than is needed, e.g. too much critical illness coverage.
2. Unsuitable products. The agent sell products that earn a high commission, but do not serve the important needs of the customer.
3. Fail to explain the product. Many customers are not clear about the product that they have bought.
4. Unrealistic projections. For example, stop paying premiums on reaching the critical year.
Clearly, the high commission that is paid to the agent is responsible for these unethical practices.
The blame is not entirely on the agent. The insurance company that design the products and "motivate" the agents to sell aggressively and meet high sales target are also responsible.
Some agents act professionally and look after the interest of their clients. I hope that all agents can fall in this category - but this may be just wishful thinking.
Here are the common faults of insurance agents:
1. Over-selling. Selling more life insurance than is needed, e.g. too much critical illness coverage.
2. Unsuitable products. The agent sell products that earn a high commission, but do not serve the important needs of the customer.
3. Fail to explain the product. Many customers are not clear about the product that they have bought.
4. Unrealistic projections. For example, stop paying premiums on reaching the critical year.
Clearly, the high commission that is paid to the agent is responsible for these unethical practices.
The blame is not entirely on the agent. The insurance company that design the products and "motivate" the agents to sell aggressively and meet high sales target are also responsible.
Some agents act professionally and look after the interest of their clients. I hope that all agents can fall in this category - but this may be just wishful thinking.
Friday, August 31, 2007
Several living policies
Question:
I presently have a few living policies paying about $2,000 yearly for each policy. Should I terminate them and convert them to term insurance policies?
REPLY:
You have probably over-invested in the living policy. It has high charges and give a low return, as a large part of the premium goes towards the critical illness coverage.
You should have more of your savings to earn a high return for your retirement. You can buy decreasing term insurance for your protection. A sum insured of $50,000 is probably adequate to provide for critical illness.
I presently have a few living policies paying about $2,000 yearly for each policy. Should I terminate them and convert them to term insurance policies?
REPLY:
You have probably over-invested in the living policy. It has high charges and give a low return, as a large part of the premium goes towards the critical illness coverage.
You should have more of your savings to earn a high return for your retirement. You can buy decreasing term insurance for your protection. A sum insured of $50,000 is probably adequate to provide for critical illness.
Saving for a child's education
Question:
What is an education policy? I was told by my agent that I should buy a living policy for my child instead of an education policy as it serves the same function and have life coverage. Your advice?
REPLY:
An education policy is for the parent to save for the expenses of sending a child to university. As this is quite expensive, the parent has to save in advance for many years.
It is better to invest in a low cost investment plan, and get the best return on your savings. A living policy is not appropriate. It has high expenses and gives a poor return.
Read this FAQ.
What is an education policy? I was told by my agent that I should buy a living policy for my child instead of an education policy as it serves the same function and have life coverage. Your advice?
REPLY:
An education policy is for the parent to save for the expenses of sending a child to university. As this is quite expensive, the parent has to save in advance for many years.
It is better to invest in a low cost investment plan, and get the best return on your savings. A living policy is not appropriate. It has high expenses and gives a poor return.
Read this FAQ.
Equity or Currency Link Insturments
Dear Mr Tan,
I like to know your views about equity and current linked investments that are issued by the banks. There are for a period of 2 to 4 weeks. They estimate a return from 4 to 15%.
For example, Product X with a spot price $3.60 is offered with a strike price of $3.40. If, after 4 weeks, the securities is above 3.40 your get 13.7% yield. If the security falls below $3.40 you will get the securities and of course suffer a paper loss.
What do you think of this type of instruments and are worthed investing in?
REPLY:
This is a structured financial product. My views of this type of product, in general, are described in the following FAQ.
Generally, I advise people to avoid any product that they do not understand. It is difficult to calculate the probability of a negative event, and the potential amount of the loss. So, you should avoid this type of product.
I believe that the issuing bank takes away a large margin for their profits. They will leave you with a low return and a high risk.
I like to know your views about equity and current linked investments that are issued by the banks. There are for a period of 2 to 4 weeks. They estimate a return from 4 to 15%.
For example, Product X with a spot price $3.60 is offered with a strike price of $3.40. If, after 4 weeks, the securities is above 3.40 your get 13.7% yield. If the security falls below $3.40 you will get the securities and of course suffer a paper loss.
What do you think of this type of instruments and are worthed investing in?
REPLY:
This is a structured financial product. My views of this type of product, in general, are described in the following FAQ.
Generally, I advise people to avoid any product that they do not understand. It is difficult to calculate the probability of a negative event, and the potential amount of the loss. So, you should avoid this type of product.
I believe that the issuing bank takes away a large margin for their profits. They will leave you with a low return and a high risk.
Compulsory Annuity
Dear Mr Tan,
I refer to the government proposed compulsory annuity for those below 50 years and payable after 85 years.
How will this be fair to those who are currently in poor health which will
impact their longevity? What is the criteria for poor health, if such people can be exempted from the scheme?
Although in theory and policy it looks good, is it practical and fair to implement and administer such a scheme which is across the board?
REPLY:
I do not have the solution to your particular situation. Anyway, the compulsory scheme will only take effect in 15 years time. It may be too early to declare that a particular person is in poor health.
I refer to the government proposed compulsory annuity for those below 50 years and payable after 85 years.
How will this be fair to those who are currently in poor health which will
impact their longevity? What is the criteria for poor health, if such people can be exempted from the scheme?
Although in theory and policy it looks good, is it practical and fair to implement and administer such a scheme which is across the board?
REPLY:
I do not have the solution to your particular situation. Anyway, the compulsory scheme will only take effect in 15 years time. It may be too early to declare that a particular person is in poor health.
Money market Fund
Q1. Money market fund (pertaining to Flexi cash) is a type of unit trust. If I buy at 100 units at an offer price of $1.10, my total investment is $1,100. If I decide to sell it at a bid price is $1.09, my proceeds will be $1,090. So I have make a loss of capital of $10. That means a person have to time his withdrawal to make sure that his capital is preserved.
Reply: It is possible, but unlikely, for the money market fund to drop in value. Even if it does drop (due to a rise in interest rate), the drop is temporary and it will recover its value in a few days or weeks time.
Q2. Can the bid price drops for a money market fund? So does that mean that one should buy when the offer price is low?
Reply: If you look at the price over the past few months, you will find it it increases by 0.1 cents very 5 to 15 days. If you time it, you may save a few days of interest.
Q3. In Singapore, the money market fund is packaged as unit trust. The value of the unit is determine by the bid/offer price?
Reply: You are right.
Reply: It is possible, but unlikely, for the money market fund to drop in value. Even if it does drop (due to a rise in interest rate), the drop is temporary and it will recover its value in a few days or weeks time.
Q2. Can the bid price drops for a money market fund? So does that mean that one should buy when the offer price is low?
Reply: If you look at the price over the past few months, you will find it it increases by 0.1 cents very 5 to 15 days. If you time it, you may save a few days of interest.
Q3. In Singapore, the money market fund is packaged as unit trust. The value of the unit is determine by the bid/offer price?
Reply: You are right.
Hedge Fund Managers
In good times, when the bubble was growing, hedge fund managers made tens of millions of dollars. They invested the funds in sub-prime mortgages and collaterialised debt obligations. They were able to show a good return on a growing bubble.
When the crunch comes, who takes the loss? The investors. The hedge fund managers were not required to pay back the tens of millions of dollars that they earned.
Lesson: Do not invest in hedge funds.
When the crunch comes, who takes the loss? The investors. The hedge fund managers were not required to pay back the tens of millions of dollars that they earned.
Lesson: Do not invest in hedge funds.
Impartial advice
There is a useful role for financial advisers (and insurance advisers) in giving impartial advice to customers. They should be paid a fee for the time spent.
Many people told me that they are willing to pay a fee of $200 for financial advice. The fee of $500 or more that is currently charged by some advisers is too high for most customers.
It is possible for the adviser to reduce the fee to $200, if they are not required to spend too much time with the client. The client can be asked to read a FAQ (frequently asked question) on financial matters before they see the adviser. It will be possible for the adviser to do a good job within 2 hours.
My ideas are set out in this paper.
Many people told me that they are willing to pay a fee of $200 for financial advice. The fee of $500 or more that is currently charged by some advisers is too high for most customers.
It is possible for the adviser to reduce the fee to $200, if they are not required to spend too much time with the client. The client can be asked to read a FAQ (frequently asked question) on financial matters before they see the adviser. It will be possible for the adviser to do a good job within 2 hours.
My ideas are set out in this paper.
Look for low cost products
Dear Mr Tan,
There are many investment products in the market. But, it seems that the life insurance product (ie endowment policy) has the biggest upfront cost to the consumer. Even the ILP has 19 months of upfront cost, according to Dr Money's website. Why are the charges so high?
REPLY
Many years ago, the governments in most countries wanted to encourage people to buy life insurance to provide protection to the family. They offered an attractive incentive - the life insurance premium can be deducted from taxable income.
Life insurance companies paid high commissions to agents to sell this product. The high cost is offset by the tax savings. The product still give good value to the consumer.
The situation changed, when most governments withdraw the tax savings. Without the tax savings, the high commission makes the product unattractive for consumers. Many insurance companies contined to sell these "poor value" products, instead of changing their product and marketing strategy.
Some companies adopt a different approach. They sell term insurance to provide the low cost protection. The consumer can invest their money in other investment funds. Some of these funds have low cost and give good value to the consumer. (But, there are high cost investment funds - which should also be avoided).
Lesson: Look for low cost insurance products (e.g. term insurance) and low cost invsetment funds (e.g. indexed funds). Avoid high cost products
There are many investment products in the market. But, it seems that the life insurance product (ie endowment policy) has the biggest upfront cost to the consumer. Even the ILP has 19 months of upfront cost, according to Dr Money's website. Why are the charges so high?
REPLY
Many years ago, the governments in most countries wanted to encourage people to buy life insurance to provide protection to the family. They offered an attractive incentive - the life insurance premium can be deducted from taxable income.
Life insurance companies paid high commissions to agents to sell this product. The high cost is offset by the tax savings. The product still give good value to the consumer.
The situation changed, when most governments withdraw the tax savings. Without the tax savings, the high commission makes the product unattractive for consumers. Many insurance companies contined to sell these "poor value" products, instead of changing their product and marketing strategy.
Some companies adopt a different approach. They sell term insurance to provide the low cost protection. The consumer can invest their money in other investment funds. Some of these funds have low cost and give good value to the consumer. (But, there are high cost investment funds - which should also be avoided).
Lesson: Look for low cost insurance products (e.g. term insurance) and low cost invsetment funds (e.g. indexed funds). Avoid high cost products
Thursday, August 30, 2007
Pay back for a part time degree
Hi Mr. Tan,
I am 25 years old. I graduated from a local polytechnic 5 years ago. I am now considering to take a part time business degree. For the time, effort and money that I will be putting in, is it worth it?
REPLY:
I am not familiar with this matter. I can only give you two conflicting views.
1. My friend, who did some research of many part time degrees, told me that many Singaporeans pursue these part time degrees (including business MBA) at great expense. On completion, they are not able to earn a higher salary that justify their investment.
2. There was a report that for each year of education, the salary increases by a significant percentage (maybe 10% or more). This suggests that the education effort has a payback.
I guess that the answer depends on the quality of the university education. If it is from a good university, you may have its payback. If not, you will probably not get the payback.
I suggest that you talk to a few friends or other people who have taken the same route before. They may be able to give you some useful views as well.
You can look at this website to check the quality of the degree that you intend to pursue.
All the best in your decision.
I am 25 years old. I graduated from a local polytechnic 5 years ago. I am now considering to take a part time business degree. For the time, effort and money that I will be putting in, is it worth it?
REPLY:
I am not familiar with this matter. I can only give you two conflicting views.
1. My friend, who did some research of many part time degrees, told me that many Singaporeans pursue these part time degrees (including business MBA) at great expense. On completion, they are not able to earn a higher salary that justify their investment.
2. There was a report that for each year of education, the salary increases by a significant percentage (maybe 10% or more). This suggests that the education effort has a payback.
I guess that the answer depends on the quality of the university education. If it is from a good university, you may have its payback. If not, you will probably not get the payback.
I suggest that you talk to a few friends or other people who have taken the same route before. They may be able to give you some useful views as well.
You can look at this website to check the quality of the degree that you intend to pursue.
All the best in your decision.
Low cost products for ordinary people
I met the chief executive of a Canadian insurance company who has over 20 years of experience in the life and non-life market.
He said that the financial planning needs of most people are quite straight forward. They can be met by simple savings and insurance (protection) product.
The advice of a financial planner is needed only for the high income earners who have to carry out estate or tax planning. This does not apply to many ordinary people.
There is no need for complicated and costly products that give a poor return to the consumers.
He said that the financial planning needs of most people are quite straight forward. They can be met by simple savings and insurance (protection) product.
The advice of a financial planner is needed only for the high income earners who have to carry out estate or tax planning. This does not apply to many ordinary people.
There is no need for complicated and costly products that give a poor return to the consumers.
Wednesday, August 29, 2007
Kabuki Performance in Tokyo
I attended a kabuki performance in Tokyo. This is the first experience of kabuki, although I have visited Japan on more than ten occasions during the past 25 years.
Kabuki is written in 3 chinese characters which mean, "song, dance and skill".
Kabuki is a play with a story line. It is performed entirely in Japanese dialogue. We can rent a receiving device which translate the dialogue into English through a earphone.
All the actors are males. They play the parts of both males and females.
It is an enjoyable performance.
Kabuki is written in 3 chinese characters which mean, "song, dance and skill".
Kabuki is a play with a story line. It is performed entirely in Japanese dialogue. We can rent a receiving device which translate the dialogue into English through a earphone.
All the actors are males. They play the parts of both males and females.
It is an enjoyable performance.
Cool Biz Wear for Summer
I am now in Tokyo to attend the 50th anniversary celebration of a Japanese cooperative society.
It is now summer in Japan. The temperature is above 30 degrees C. To save on energy, the offices are cooled down to 28 degrees.
The office wear during summer is "Cool Biz". For males, this is half sleeve shirts, without tie or jacket.
For the celebrations, they have decided to keep to the "Cool Biz" attire.
This effort is promoted by the Ministry of the Environment in Japan. It is aimed at reducing energy cost and protecting the environment.
The Japanese are serious in tackling important issues and approach them in a practical way.
Lesson: Singapore can save a lot on energy cost, if we keep the temperate at 28 degrees throughout the year. If this is too hot, perhaps we can reduce it to 26 degrees.
It is now summer in Japan. The temperature is above 30 degrees C. To save on energy, the offices are cooled down to 28 degrees.
The office wear during summer is "Cool Biz". For males, this is half sleeve shirts, without tie or jacket.
For the celebrations, they have decided to keep to the "Cool Biz" attire.
This effort is promoted by the Ministry of the Environment in Japan. It is aimed at reducing energy cost and protecting the environment.
The Japanese are serious in tackling important issues and approach them in a practical way.
Lesson: Singapore can save a lot on energy cost, if we keep the temperate at 28 degrees throughout the year. If this is too hot, perhaps we can reduce it to 26 degrees.
Tuesday, August 28, 2007
Investing in properties
Here are my views about investing in properties at the present time.
If you are eligible for a new HDB flat, it is an attractive investment. You may qualify for some Government grant as well.
I know of someone who bought a 5 room HDB flat next to Redhill MRT station for $380,000 (including renovation) recently. A private property in the same locality would cost $1 million.
The new HDB flats are built to a high standard. They are almost as good as a private property.
I hesitate to invest in private property at the current high price. It may not be sustainable over the next few years. It reminds me of the situation in 1996.
If you are eligible for a new HDB flat, it is an attractive investment. You may qualify for some Government grant as well.
I know of someone who bought a 5 room HDB flat next to Redhill MRT station for $380,000 (including renovation) recently. A private property in the same locality would cost $1 million.
The new HDB flats are built to a high standard. They are almost as good as a private property.
I hesitate to invest in private property at the current high price. It may not be sustainable over the next few years. It reminds me of the situation in 1996.
Top up special account of family members
I read that it will soon be possible to top up the CPF special account of family members and siblings. This can be done before or after they reach age 55.
This is an excellent idea. The money in their special accounts can earn an attractive interest rate, and also ensure that they have an adequate income for their future.
More details will be announced in Parliament soon.
This is an excellent idea. The money in their special accounts can earn an attractive interest rate, and also ensure that they have an adequate income for their future.
More details will be announced in Parliament soon.
STI Exchange Traded Fund
The minimum investment is 100 units of the STI Exchange Traded
Fund. The current price is about $34.00 per unit. The minimum amount is $3,400. The brokerage is 0.25% of the amount invested.
If you wish to invest in this counter, go through your stockbroker.
Fund. The current price is about $34.00 per unit. The minimum amount is $3,400. The brokerage is 0.25% of the amount invested.
If you wish to invest in this counter, go through your stockbroker.
Sufficient for 100 years
Some people thought that I must be very rich to have sufficient money to last 100 years. This is not really the case. It depends on how much you need to live comfortably.
If you have a house that is fully paid for, and your children are working, you will find $1,000 a month to be sufficient for 1 person or $1,500 for a couple.
If you can earn 4% per annum, a capital sum of $450,000 can give $1,500 a month forever. The money will not run out. It can last for more than 100 years.
A capital sum of $300,000 can provide $1,000 a month forever.
The problem is: $1,500 may drop in value year by year, due to inflation.
Here is how you can deal with inflation. You have a larger capital sum of, say $900,000. If you can earn 4% a year, you can draw out $1,500 a month, and this amount can increase yearly at the rate of about 2% per annum. This should be sufficient to keep pace with inflation, and preserve the real value of your monthly income.
This is how the participating annuity plan works. It pays a smaller sum (compared to a non-participating plan) and pays a bonus each year to keep up with inflation.
You can earn an average of more than 4% per annum, if you invest in a large, well diversified low cost fund that is mainly invested in equities. Read this FAQ.
In summary:
1. You only need a capital sum of $900,000 to provide a monthly income forever.
2. This allows you to draw a monthly sum of $1,500 increasing by 2% yearly,
If you have a house that is fully paid for, and your children are working, you will find $1,000 a month to be sufficient for 1 person or $1,500 for a couple.
If you can earn 4% per annum, a capital sum of $450,000 can give $1,500 a month forever. The money will not run out. It can last for more than 100 years.
A capital sum of $300,000 can provide $1,000 a month forever.
The problem is: $1,500 may drop in value year by year, due to inflation.
Here is how you can deal with inflation. You have a larger capital sum of, say $900,000. If you can earn 4% a year, you can draw out $1,500 a month, and this amount can increase yearly at the rate of about 2% per annum. This should be sufficient to keep pace with inflation, and preserve the real value of your monthly income.
This is how the participating annuity plan works. It pays a smaller sum (compared to a non-participating plan) and pays a bonus each year to keep up with inflation.
You can earn an average of more than 4% per annum, if you invest in a large, well diversified low cost fund that is mainly invested in equities. Read this FAQ.
In summary:
1. You only need a capital sum of $900,000 to provide a monthly income forever.
2. This allows you to draw a monthly sum of $1,500 increasing by 2% yearly,
Monday, August 27, 2007
How to buy term insurance
If you wish to buy term insurance, you have to call the insurance company directly. You can try NTUC Income, Aviva and AXA.
Give them your age, the sum insured and the number of years of coverage. I suggest that you take a 20 or 30 year term. Ask for a quote on level and decreasing term.
Compare the premium rates. Ask the insurance company to explain their coverage. Ask for a FAQ.
You can also qet a quote from their website.
It is all right to approach an adviser. But, you have to be alert that the adviser does not steer you to take an expensive policy (for which they can earn a higher commission).
As the adviser does not earn much from selling the term insurance policy, you should try to handle the transaction over the telephone.
Give them your age, the sum insured and the number of years of coverage. I suggest that you take a 20 or 30 year term. Ask for a quote on level and decreasing term.
Compare the premium rates. Ask the insurance company to explain their coverage. Ask for a FAQ.
You can also qet a quote from their website.
It is all right to approach an adviser. But, you have to be alert that the adviser does not steer you to take an expensive policy (for which they can earn a higher commission).
As the adviser does not earn much from selling the term insurance policy, you should try to handle the transaction over the telephone.
Talk on Managing Your Finance
I gave a talk on Managing Your Finance for young teachers. Here are some of the questions asked by them.
1. Please explain the products - bonds, equities, blue chips
2. Any advice on investing CPF savings?
3. How much is the fee of an independent financial adviser? Any tips on selecting a good adviser?
4. If I buy term insurance directly, do I still need to pay commission?
5. What are the risks of investing in properties at this time?
6. I have invested in a fund which is losing money year after year. Is it better to withdraw from this fund (cut loss) and invest in another fund?
7. What is an education policy? I was told by my agent that I should buy a living policy for my child instead of an education policy as it serves the same function and have life coverage.
8. Do you advise us to buy critical illness policy? Does the medical benefits for teachers cover critical illness?
9. How can I buy the STI Trakker fund? Is it a good buy at this time?
10. I am 51 years old. Is it too expensive to buy term insurance now?
11. I am on a pension scheme. Should I buy insurance?
12. Why are there no encouragement for older government servants to enjoy the fruits of their labour, instead of work, work. Older teachers like to continue to stay for the long term ,but most cannot cope with the stress .Why should there be so much stress for older teachers who have already worked for 30 yers? They have already stressed a lot when they were young.
13. I presently have a few living policies paying about $2,000 yearly for each policy. Should I terminate them and convert them to term insurance policies?
14. I want to buy a medical insurance to cover H&S for my daughter (20 years old). What kind of insurance should I buy for her. Is Medishield insurance good enough? What insurance plan would your recommend? she is a NUS undergraduate.
15. STI Trakker fund is not liquid. To buy or sell it is a hassle. Why do you recommend it?
16. What are some institutions I should start investing with? POSB? DBS? NTUC Income? others?
17. My son had a heart operation when he was 5 months old. He is now 7 years old and is well and healthy. However, I was not able to get any insurance for him. Any advice?
18. Do you think that the sub-prime turmoil is approaching its end?
19. Currently, I intend to buy an insurance plan. I asked for 2 quotations. Both are similar in terms. Monthly premium $120 for 20/ 30 years. Covers death, total permanent disability ,terminal illness. Return of $99,000 after 20/30 years. Is this a good plan?
20. What is the minimum amount that can be invested in the STI Trakker fund?
21. What do you think of land investment like Canada land Investment by Walton?
12. What do you think of Eldershield policy for medical coverage? Can you comment on the Eldershield Plus that is coming?
I shall answer them in separate postings.
1. Please explain the products - bonds, equities, blue chips
2. Any advice on investing CPF savings?
3. How much is the fee of an independent financial adviser? Any tips on selecting a good adviser?
4. If I buy term insurance directly, do I still need to pay commission?
5. What are the risks of investing in properties at this time?
6. I have invested in a fund which is losing money year after year. Is it better to withdraw from this fund (cut loss) and invest in another fund?
7. What is an education policy? I was told by my agent that I should buy a living policy for my child instead of an education policy as it serves the same function and have life coverage.
8. Do you advise us to buy critical illness policy? Does the medical benefits for teachers cover critical illness?
9. How can I buy the STI Trakker fund? Is it a good buy at this time?
10. I am 51 years old. Is it too expensive to buy term insurance now?
11. I am on a pension scheme. Should I buy insurance?
12. Why are there no encouragement for older government servants to enjoy the fruits of their labour, instead of work, work. Older teachers like to continue to stay for the long term ,but most cannot cope with the stress .Why should there be so much stress for older teachers who have already worked for 30 yers? They have already stressed a lot when they were young.
13. I presently have a few living policies paying about $2,000 yearly for each policy. Should I terminate them and convert them to term insurance policies?
14. I want to buy a medical insurance to cover H&S for my daughter (20 years old). What kind of insurance should I buy for her. Is Medishield insurance good enough? What insurance plan would your recommend? she is a NUS undergraduate.
15. STI Trakker fund is not liquid. To buy or sell it is a hassle. Why do you recommend it?
16. What are some institutions I should start investing with? POSB? DBS? NTUC Income? others?
17. My son had a heart operation when he was 5 months old. He is now 7 years old and is well and healthy. However, I was not able to get any insurance for him. Any advice?
18. Do you think that the sub-prime turmoil is approaching its end?
19. Currently, I intend to buy an insurance plan. I asked for 2 quotations. Both are similar in terms. Monthly premium $120 for 20/ 30 years. Covers death, total permanent disability ,terminal illness. Return of $99,000 after 20/30 years. Is this a good plan?
20. What is the minimum amount that can be invested in the STI Trakker fund?
21. What do you think of land investment like Canada land Investment by Walton?
12. What do you think of Eldershield policy for medical coverage? Can you comment on the Eldershield Plus that is coming?
I shall answer them in separate postings.
Some tips on medical Insurance
1. The Shield plans requires me to pay the deductible and to pay a share of the balance of the hospital bill. Some insurers offer a rider to cover these items, but it has to be paid in cash. Should I buy the rider?
For most people who are in good health, there is no need to take the rider. If you have to be hospitalised, you can pay these items from your Medisave account. This amount is not large, and can be self-insured.
If you insure these items, you have to pay a premium that covers the expected claim, expenses and a profit margin.
2. My employer now provides medical insurance to me. Should I buy a Shield plan to provide continuity of cover after I retire from work?
Many people take a Shield plan to provide continuity of cover. They pay a premium under the Shield plan, but they are not likely to make a claim under this play, as the hospital bill is likely to be paid by the employer.
It is advisable to take the Medisheild plan for this continuity of cover, as it has th elowest cost. There is no need to pay a high premium for a plan that you are not likely to use when you are covered by the employer.
If you do not take a Shield plan now, you can still apply for a Shield plan later when you retire from work. At that time, you will be accepted, if you are in good health. If not, you can still buy insurance by paying a higher premium.
Some people are willing to save on the premium for the Shield plan and apply for insurance only when it is needed. They can save on the premium in the meantime.
For most people who are in good health, there is no need to take the rider. If you have to be hospitalised, you can pay these items from your Medisave account. This amount is not large, and can be self-insured.
If you insure these items, you have to pay a premium that covers the expected claim, expenses and a profit margin.
2. My employer now provides medical insurance to me. Should I buy a Shield plan to provide continuity of cover after I retire from work?
Many people take a Shield plan to provide continuity of cover. They pay a premium under the Shield plan, but they are not likely to make a claim under this play, as the hospital bill is likely to be paid by the employer.
It is advisable to take the Medisheild plan for this continuity of cover, as it has th elowest cost. There is no need to pay a high premium for a plan that you are not likely to use when you are covered by the employer.
If you do not take a Shield plan now, you can still apply for a Shield plan later when you retire from work. At that time, you will be accepted, if you are in good health. If not, you can still buy insurance by paying a higher premium.
Some people are willing to save on the premium for the Shield plan and apply for insurance only when it is needed. They can save on the premium in the meantime.
Friday, August 24, 2007
Encourage more people to use public transport
The roads in Singapore are getting congested. The Government plans to extend the Electronic Road Pricing (ERP) to more roads, extend the chargeable hours and increase the rates. These are measures to reduce the congestions on the road.
The Minister for Transport said that building more roads does not help to solve the congestion problem. It encourages more people to use cars and will lead to more congestion at a later date.
I agree.
We need to encourage more people to use public transport. As a recently converted user of our public transport, I now prefer to use the train or bus, rather than to drive a car. I avoid paying ERP and parking charges and the hassle of driving on congested roads.
Previously, like many other car owners, I found the bus routes to be too complicated.
If we make some effort, we can learn how to take the bus from our home to the nearest MRT station. But, if we are travelling anywhere else by bus, it is quite difficult to find the right bus. This explains the heavy demand for taxis.
We need a revamp of our bus routes, to make it easier for many people to use them to move around.
I wish to suggest a longer term strategy and an interim measure for the shorter term.
For the longer term, we need a public transport system that has the following components.
• The MRT forms the backbone of the public transport
• Feeder services take commuters from pick up points within a town to the MRT station or bus interchange
• Express services bring commuters between the bus interchanges and provide an alternative to the MRT
The feeder services can use large or small buses and should preferably be operated by a number of small operators.
As the express bus does not require stop at pickup points, they can keep to a more reliable and frequent schedule.
This system may require a commuter to take up to three segments, if their start and end points are not within walking distance of the train station or bus interchange. This is not a problem, as the connection can be done at the same place. It is useful for the commuter to take a short walk or move around anyway.
As an interim measure, I suggest that the existing bus services be actively promoted as a feeder service. At each bus stop or MRT station, there should be a map showing the bus services that serve an area within (say) a radius of up to three kilometres. The services can be colour coded to make it easier for the commuters to pick the right bus to take to their ultimate destination.
It will also encourage commuters to travel to move around their neighbourhood.
If it is easy and convenient to take public transport, more car owners will choose this option. This has been my personal experience.
Tan Kin Lian
The Minister for Transport said that building more roads does not help to solve the congestion problem. It encourages more people to use cars and will lead to more congestion at a later date.
I agree.
We need to encourage more people to use public transport. As a recently converted user of our public transport, I now prefer to use the train or bus, rather than to drive a car. I avoid paying ERP and parking charges and the hassle of driving on congested roads.
Previously, like many other car owners, I found the bus routes to be too complicated.
If we make some effort, we can learn how to take the bus from our home to the nearest MRT station. But, if we are travelling anywhere else by bus, it is quite difficult to find the right bus. This explains the heavy demand for taxis.
We need a revamp of our bus routes, to make it easier for many people to use them to move around.
I wish to suggest a longer term strategy and an interim measure for the shorter term.
For the longer term, we need a public transport system that has the following components.
• The MRT forms the backbone of the public transport
• Feeder services take commuters from pick up points within a town to the MRT station or bus interchange
• Express services bring commuters between the bus interchanges and provide an alternative to the MRT
The feeder services can use large or small buses and should preferably be operated by a number of small operators.
As the express bus does not require stop at pickup points, they can keep to a more reliable and frequent schedule.
This system may require a commuter to take up to three segments, if their start and end points are not within walking distance of the train station or bus interchange. This is not a problem, as the connection can be done at the same place. It is useful for the commuter to take a short walk or move around anyway.
As an interim measure, I suggest that the existing bus services be actively promoted as a feeder service. At each bus stop or MRT station, there should be a map showing the bus services that serve an area within (say) a radius of up to three kilometres. The services can be colour coded to make it easier for the commuters to pick the right bus to take to their ultimate destination.
It will also encourage commuters to travel to move around their neighbourhood.
If it is easy and convenient to take public transport, more car owners will choose this option. This has been my personal experience.
Tan Kin Lian
Revosave Plan
Several visitors to my blog have criticised the Revosave plan introduced by NTUC Income. Their criticisms are:
* It offers a low return
* It is similar to another plan actively successfully by another insurer
* It is a way to give high commission to the agent
We have to recognise the following facts:
* Some people like this type of plan, that offers several features put together. This is why the other insurer was able to sell the product very successfully. Their customers appear to be willing to accept a lower return.
* The product from NTUC Income probably offer a better return compared to the competitor's product
Lesson:
1. If the customer likes this type of product feature, let them buy it from NTUC Income (instead of the other insurer).
2. If the customer wants a better return, they can buy an plain endowment or ILP.
* It offers a low return
* It is similar to another plan actively successfully by another insurer
* It is a way to give high commission to the agent
We have to recognise the following facts:
* Some people like this type of plan, that offers several features put together. This is why the other insurer was able to sell the product very successfully. Their customers appear to be willing to accept a lower return.
* The product from NTUC Income probably offer a better return compared to the competitor's product
Lesson:
1. If the customer likes this type of product feature, let them buy it from NTUC Income (instead of the other insurer).
2. If the customer wants a better return, they can buy an plain endowment or ILP.
Thursday, August 23, 2007
Suitable plans for a young person
Hi Mr Tan,
I have just bought a Limited Premium Living Policy on $100,000 coverage.
I am wondering what other plans in the market I can purchase to provide a more cost-effective coverage on a lower cost. There are so many plans in the market. I am very confused.
Is there a rule of thumb of how much coverage a person should have? Would buying term insurance be more cost-effective when starting out on a career?
MY REPLY:
I hope that this FAQ will help you to make the right decision.
I have just bought a Limited Premium Living Policy on $100,000 coverage.
I am wondering what other plans in the market I can purchase to provide a more cost-effective coverage on a lower cost. There are so many plans in the market. I am very confused.
Is there a rule of thumb of how much coverage a person should have? Would buying term insurance be more cost-effective when starting out on a career?
MY REPLY:
I hope that this FAQ will help you to make the right decision.
Discount between Hongkong and Shanghai shares
Two visitors have asked me the list of China shares listed in Hongkong that showed a large discount to the price in Shanghai.
I am not able to share this list, as my stockbroker asked me to keep it uncirculated (as he obtained it from an unofficial source).
If you are interested in the information, ask your stockbroker to get it from his firm. They have the list. It is quite easy for the firm to compile it from their financial terminal.
I am not able to share this list, as my stockbroker asked me to keep it uncirculated (as he obtained it from an unofficial source).
If you are interested in the information, ask your stockbroker to get it from his firm. They have the list. It is quite easy for the firm to compile it from their financial terminal.
Allow diverse views
COMMENT POSTED IN MY BLOG
Mr. Tan, more people are visiting your blog because you have an open policy and you are tolerant of views expressed. People like to have diverse views.
Although you are also taking risks of an attack but so far I have seen none except for some strong views.
We've learned a lot from various postings on various subjects and not only on insurance and finance. At least our view of the insurance industry is now widened.
We now know more, example like the posting on the newly launched product, revosave, by Income. We are aware of the features and we will not be taken in by the agents of Income.
Thank you, Mr. Tan, for your stout heartedness and vision. We hope you will continue to open up your blog.
Mr. Tan, more people are visiting your blog because you have an open policy and you are tolerant of views expressed. People like to have diverse views.
Although you are also taking risks of an attack but so far I have seen none except for some strong views.
We've learned a lot from various postings on various subjects and not only on insurance and finance. At least our view of the insurance industry is now widened.
We now know more, example like the posting on the newly launched product, revosave, by Income. We are aware of the features and we will not be taken in by the agents of Income.
Thank you, Mr. Tan, for your stout heartedness and vision. We hope you will continue to open up your blog.
Buy annuity for a useful purpose
COMMENT POSTED IN MY BLOG
Hi,
I think you belong to the group of investment guru who will not buy annuity. For most people, they might not even know how to invest and might not even know about or understand annuity.
MY REPLY:
Annuity serves a useful purpose, for people who need it.
I will buy an annuity to give an annual payment to my children (instead of a lump sum that they can spent away all at once).
I will buy an annuity for my wife, so that she has a steady income for her lifetime.
Hi,
I think you belong to the group of investment guru who will not buy annuity. For most people, they might not even know how to invest and might not even know about or understand annuity.
MY REPLY:
Annuity serves a useful purpose, for people who need it.
I will buy an annuity to give an annual payment to my children (instead of a lump sum that they can spent away all at once).
I will buy an annuity for my wife, so that she has a steady income for her lifetime.
A view on financial planning
COMMENT POSTED IN MY BLOG (EDITED)
Mr. Tan,
Would you then agree that the government should only make it compulsory for "people who do not have enough money, and need to stretch it for their lifetime" to purchase an annuity?
In view of protecting local citizens, I agree that some form of scheme is neccessary especially for the mid to lower income. However, I do not see how a payout of 400-500 dollars for the rest of a person's life a month can significantly help. For example, 400-500 dollars for today is probably okay. Do you think it would be sufficient in 30 years time? What would 500 dollars buy you in the future?
Singapore should review once again the possibility of gaining higher returns on the CPF or even looking into the main purpose of CPF itself. Is the CPF for you to buy a home? Or for you to have some financial independance when you are unable to work? Why not force more money into the SA since it is already at 4%?
I for one believe that the OA CPF purpose in Singapore is to allow everyone to purchase a home and not something you can fall back on when you retire. Simply put, pay for your home with your CPF. Keep the minimum sum in your SA (because you have no choice but to comply).
Make sure you save at least 30% of your earned salary (WHY? because you don't have to pay the housing loan with your personal cash, so SAVE it!). Invest your savings into low and medium risk money markets or high dividend paying stocks with strong management and fundamentals.
Last but not least, educate your children. If you're stuck in this boat, a wise person once said to me 'one generation must always suffer for the rest to prosper'. How willing are you to give a better life for your children. As Chris Gardner says 'Education is a way out'. Educate, educate, educate.
Good luck.
MY REPLY:
I agree with your views, in particular:
1. Buy an annuity to stretch your limited savings for a lifetime
2. The annuity should increase to cover inflation
3. Save 30% of your earnings (but invest in and invest in a low cost, high return, well diversified fund).
4. Educate your children (but make sure that it has its payback).
Mr. Tan,
Would you then agree that the government should only make it compulsory for "people who do not have enough money, and need to stretch it for their lifetime" to purchase an annuity?
In view of protecting local citizens, I agree that some form of scheme is neccessary especially for the mid to lower income. However, I do not see how a payout of 400-500 dollars for the rest of a person's life a month can significantly help. For example, 400-500 dollars for today is probably okay. Do you think it would be sufficient in 30 years time? What would 500 dollars buy you in the future?
Singapore should review once again the possibility of gaining higher returns on the CPF or even looking into the main purpose of CPF itself. Is the CPF for you to buy a home? Or for you to have some financial independance when you are unable to work? Why not force more money into the SA since it is already at 4%?
I for one believe that the OA CPF purpose in Singapore is to allow everyone to purchase a home and not something you can fall back on when you retire. Simply put, pay for your home with your CPF. Keep the minimum sum in your SA (because you have no choice but to comply).
Make sure you save at least 30% of your earned salary (WHY? because you don't have to pay the housing loan with your personal cash, so SAVE it!). Invest your savings into low and medium risk money markets or high dividend paying stocks with strong management and fundamentals.
Last but not least, educate your children. If you're stuck in this boat, a wise person once said to me 'one generation must always suffer for the rest to prosper'. How willing are you to give a better life for your children. As Chris Gardner says 'Education is a way out'. Educate, educate, educate.
Good luck.
MY REPLY:
I agree with your views, in particular:
1. Buy an annuity to stretch your limited savings for a lifetime
2. The annuity should increase to cover inflation
3. Save 30% of your earnings (but invest in and invest in a low cost, high return, well diversified fund).
4. Educate your children (but make sure that it has its payback).
A science pioneer and his dilemma
Dr. Lee Kum Tatt has received a few comments on the articles he wrote on how S & T has helped Singapore’s development. Now in his golden years he still encourages the spirit of enquiry through the study of S & T to be stepped up for Singapore’s continued progress. He has received some comments. Read about them in his blog and his replies.
Wednesday, August 22, 2007
Life Annuity for Tan Kin Lian
A journalist asked me, "Mr Tan, did you buy a life annuity? I suppose that you did?"
Here is my honest reply.
Quote: I did not buy an annuity because I have enough money to last me for the next 100 years, and I cannot live that long. An annuity is necessary for people who do not have enough money, and need to stretch it for their lifetime. Unquote.
Here is my honest reply.
Quote: I did not buy an annuity because I have enough money to last me for the next 100 years, and I cannot live that long. An annuity is necessary for people who do not have enough money, and need to stretch it for their lifetime. Unquote.
More visitors to my blog
The stockmarket turmoil appears to be encouraging more people to read my blog. I used to have an average of 500 visitors on weekdays. I received 1,500 visitors during the last two days. This is 50% more than average.
Mortgage Insurance
MORTGAGE INSURANCE
The Government is drafting new rules to allow banks to take up mortgage insurance. The insurance protects banks from the risk of borrowers defaulting on their mortgages.
This insurance works well in good times. Only a small proportion of borrowers default, due to their personal circumstances such as loss of employment or severe illness. It can be covered by the premiums paid by the other borrowers.
During an economic downturn, when many people loss their jobs at the same time and property values drop severely, it can cause a big problem for the mortgage insurers.
This happened in Europe in the early 1990s. Many insurance companies that provided this type of insurance faced large losses. They had to be re-capitalised or sold to other owners.
In more recent times, we have the problems caused by the sub-prime mortgages in America. The mortgages were issued to sub-prime borrowers to generate a high return to the lender. Funds were raised through the credit market in the form of asset backed securities, with the credit risks being guaranteed by the lending institution. Several of the lenders were not sufficiently capitalised to take the losses caused by the downturn in the housing market.
Considering the risks, is it a good practice to encourage mortgage insurance as a way to transfer or spread the risks?
Here is a surprise. I think that it is a good idea. But it has to come with certain caveats.
1. The mortgage insurer must have expertise in the assessment of the risks. They should be familiar with the property market, economic conditions and lending practices in Singapore. In particular, they have to know the rules regarding the use of Central Provident Fund savings to pay the instalments under the mortgages.
2. The mortgage insurer should be required to retain the major share of the risk, and not be allowed to transfer the risk to the credit market through securitisation or other means. This is to avoid the moral hazard.
3. The mortgage insurer should have sufficient capital to allow them to ride over several years of an economic downturn.
4. The mortgage insurer should be required to use sufficient actuarial expertise to measure the potential losses and to charge an adequate premium to cover the risk. They should avoid excessive competition leading to inadequate pricing.
There is a significant advantage of the in the mortgage insurance scheme, especially for the handling of the more risky loans.
Lenders, who are hungry for business, may be tempted to lower their credit assessment standards to win a large market share. If they are required to buy mortgage insurance, the assessment is transferred to a professional mortgage insurer, which can assess the risk independently of the lending. This may impose some discipline on the lending institution.
The Government is drafting new rules to allow banks to take up mortgage insurance. The insurance protects banks from the risk of borrowers defaulting on their mortgages.
This insurance works well in good times. Only a small proportion of borrowers default, due to their personal circumstances such as loss of employment or severe illness. It can be covered by the premiums paid by the other borrowers.
During an economic downturn, when many people loss their jobs at the same time and property values drop severely, it can cause a big problem for the mortgage insurers.
This happened in Europe in the early 1990s. Many insurance companies that provided this type of insurance faced large losses. They had to be re-capitalised or sold to other owners.
In more recent times, we have the problems caused by the sub-prime mortgages in America. The mortgages were issued to sub-prime borrowers to generate a high return to the lender. Funds were raised through the credit market in the form of asset backed securities, with the credit risks being guaranteed by the lending institution. Several of the lenders were not sufficiently capitalised to take the losses caused by the downturn in the housing market.
Considering the risks, is it a good practice to encourage mortgage insurance as a way to transfer or spread the risks?
Here is a surprise. I think that it is a good idea. But it has to come with certain caveats.
1. The mortgage insurer must have expertise in the assessment of the risks. They should be familiar with the property market, economic conditions and lending practices in Singapore. In particular, they have to know the rules regarding the use of Central Provident Fund savings to pay the instalments under the mortgages.
2. The mortgage insurer should be required to retain the major share of the risk, and not be allowed to transfer the risk to the credit market through securitisation or other means. This is to avoid the moral hazard.
3. The mortgage insurer should have sufficient capital to allow them to ride over several years of an economic downturn.
4. The mortgage insurer should be required to use sufficient actuarial expertise to measure the potential losses and to charge an adequate premium to cover the risk. They should avoid excessive competition leading to inadequate pricing.
There is a significant advantage of the in the mortgage insurance scheme, especially for the handling of the more risky loans.
Lenders, who are hungry for business, may be tempted to lower their credit assessment standards to win a large market share. If they are required to buy mortgage insurance, the assessment is transferred to a professional mortgage insurer, which can assess the risk independently of the lending. This may impose some discipline on the lending institution.
Shares traded in Hongkong and Shanghai
A stockbroker sent me a list of more than 20 shares traded in Hongkong and Shanghai. They are probably the larger corporations in China.
The share prices in Hongkong showed a discount of 40% to 88% to the Shanghai price. The average is 64%. This means that, on average, the prices in Shanghai are about 2.8 times of Hongkong.
Either the prices in Hongkong are too low, or the prices in Shanghai are too high. It is likely to be the latter.
Investors in China will soon be allowed to buy shares in Hongkong. What will happen to the share prices? Will the Shanghai prices collapse to the level in Hongkong? Or will Hongkong prices move close to Shanghai?
My guess is that the prices in both Shanghai and Hongkong are over-valued. But, this is China fever.
My stockbroker thinks that the prices of these shares in Hongkong will move up (it is called arbitrage), but not to the same level as Shanghai. He is probably right.
The share prices in Hongkong showed a discount of 40% to 88% to the Shanghai price. The average is 64%. This means that, on average, the prices in Shanghai are about 2.8 times of Hongkong.
Either the prices in Hongkong are too low, or the prices in Shanghai are too high. It is likely to be the latter.
Investors in China will soon be allowed to buy shares in Hongkong. What will happen to the share prices? Will the Shanghai prices collapse to the level in Hongkong? Or will Hongkong prices move close to Shanghai?
My guess is that the prices in both Shanghai and Hongkong are over-valued. But, this is China fever.
My stockbroker thinks that the prices of these shares in Hongkong will move up (it is called arbitrage), but not to the same level as Shanghai. He is probably right.
Tuesday, August 21, 2007
Two prices for the same share
Some China companies are listed in Shanghai and Hong Kong exchanges. They are the same shares, but the prices traded could differ by more than 30%. I know of a large company where the share trades in Shanghai at three times the price in Hong Kong.
China has announced that they will soon allow the residents to buy shares in Hong Kong. This will mean that the prices of the same company will converge. The price will fall in Shanghai or rise in Hong or both.
This will be an interesting development.
More than 10 years ago, the blue chips shares in Singapore trade in local and foreign tranches. They are the same shares, entitled to the same dividend and voting rights. But the foreign shares trade at a higher price than the local shares.
When the distrinction between the two tranches were removed, the price of the local tranche increased to the foreign tranche. The increase varied from 20% to 50%. It was a big bonanza for the holders of the local tranche.
China has announced that they will soon allow the residents to buy shares in Hong Kong. This will mean that the prices of the same company will converge. The price will fall in Shanghai or rise in Hong or both.
This will be an interesting development.
More than 10 years ago, the blue chips shares in Singapore trade in local and foreign tranches. They are the same shares, entitled to the same dividend and voting rights. But the foreign shares trade at a higher price than the local shares.
When the distrinction between the two tranches were removed, the price of the local tranche increased to the foreign tranche. The increase varied from 20% to 50%. It was a big bonanza for the holders of the local tranche.
Adequate Savings for Retirement
I wrote an article on how to get adequate savings for retirement. It us published in the Business Times today. You can read this article here.
Life insurance policy with annual payout
COMMENT POSTED IN MY BLOG:
A few months ago, you said that a life insurance plan that gives out a regular payment reduces the return to the policyholder. NTUC has now introduced a new plan that pays out 5% of the sum asssured each year. Does your remark apply to this plan as well?
REPLY:
According to the advertisement, the potential return of the new NTUC plan is 3.7% per annum. This return is lower than the return on an endowment plan. The guaranteed payout seems to reduce the return to the customer.
If you are saving for the next 25 years, you should aim for a higher return, say 5% or more. Compared to 3.7%, the difference can be quite substantial (say 17% more). Read this FAQ.
A few months ago, you said that a life insurance plan that gives out a regular payment reduces the return to the policyholder. NTUC has now introduced a new plan that pays out 5% of the sum asssured each year. Does your remark apply to this plan as well?
REPLY:
According to the advertisement, the potential return of the new NTUC plan is 3.7% per annum. This return is lower than the return on an endowment plan. The guaranteed payout seems to reduce the return to the customer.
If you are saving for the next 25 years, you should aim for a higher return, say 5% or more. Compared to 3.7%, the difference can be quite substantial (say 17% more). Read this FAQ.
Comparing annuity with bank deposits
Hi,
I saw your article comparing annuity to bank deposits. Shouldn't it be compared to CPF Special Account (SA) guaranteed 4% pa ? In fact, CPF-SA should be compared to annuity with Capital Protection (returning the balance money to beneficiaries upon death) which has lower monthly payments.
You mentioned that annuity is like a pooling of risk, interest earned is left inside the pool upon death. For CPF-SA, interest earned is returned to beneficiaries right?
REPLY:
The article was written to explain the difference between investing in a life annuity and in a bank deposit. This applies to the free investible savings for most people.
I have a separate article which compares the life annuity with the CPF Retirement Account. This is relevant for people who have to decide between the two options to invest their minimum sum.
I saw your article comparing annuity to bank deposits. Shouldn't it be compared to CPF Special Account (SA) guaranteed 4% pa ? In fact, CPF-SA should be compared to annuity with Capital Protection (returning the balance money to beneficiaries upon death) which has lower monthly payments.
You mentioned that annuity is like a pooling of risk, interest earned is left inside the pool upon death. For CPF-SA, interest earned is returned to beneficiaries right?
REPLY:
The article was written to explain the difference between investing in a life annuity and in a bank deposit. This applies to the free investible savings for most people.
I have a separate article which compares the life annuity with the CPF Retirement Account. This is relevant for people who have to decide between the two options to invest their minimum sum.
Value of the Tail of the Lease
The Prime Minister has announced that HDB will be willing to allows certain categories of owners to keep the next 30 years lease on their HDB flat and sell the tail of the lease back to HDB for its present value. Part of this value can be taken in cash, while the remainder has to be kept in the CPF account.
Several people have asked me for the formula to calculate the value of this tail of the lease.
It depends on two factors:
* The current remaining lease (which can be from 50 to 80 years)
* The interest rate used to compute the value of the tail
I do not know what interest rate will be used by HDB for the calculation. It could be from 1% to 3%. In my view, an interest rate of 2% or 3% would be appropriate (but this is just a personal view).
The following table shows how much you can get by selling off the tail of the lease:
Value of tail of lease, assuming the owner retains the next 30 years:
For example, if the remaining lease is 70 years and the interest rate used for the calcuation is 2% p.a., the value of the 40 year tail (i.e. 70 years less 30 years) is 40.3% of the current value of the property.
If the HDB flat is worth $160,000, the value of the tail is $64,480.
If a higher interest rate of 3% p.a. is used in the calculation, the value of the tail is 32.7% of $160,000 or $52,320.
Let us wait for the announcement by the HDB.
Several people have asked me for the formula to calculate the value of this tail of the lease.
It depends on two factors:
* The current remaining lease (which can be from 50 to 80 years)
* The interest rate used to compute the value of the tail
I do not know what interest rate will be used by HDB for the calculation. It could be from 1% to 3%. In my view, an interest rate of 2% or 3% would be appropriate (but this is just a personal view).
The following table shows how much you can get by selling off the tail of the lease:
Value of tail of lease, assuming the owner retains the next 30 years:
Remaining Value of Tail using
lease 2% p.a. 3% p.a.
60 years 35.6% 29.2%
70 years 40.3% 32.7%
80 years 43.6% 35.1%
For example, if the remaining lease is 70 years and the interest rate used for the calcuation is 2% p.a., the value of the 40 year tail (i.e. 70 years less 30 years) is 40.3% of the current value of the property.
If the HDB flat is worth $160,000, the value of the tail is $64,480.
If a higher interest rate of 3% p.a. is used in the calculation, the value of the tail is 32.7% of $160,000 or $52,320.
Let us wait for the announcement by the HDB.
Do It Yourself Insurance
Dr Money has written an interesting article on "Do It Yourself" insurance. You can read it here.
It saves you on the high charges. There are some tips on the types of product to buy.
It saves you on the high charges. There are some tips on the types of product to buy.
Capital protection for Life annuity
Hi Mr Tan,
I read your article in the Straits Times concerning Annuities. I have a question concerning longevity risk. If I were to take up an Annuity of $100K at the age of 62 but I die 5 years later. Does that mean my wife and children won't get back $100K?
REPLY:
If you buy a capital protected annuity, your family will get back the amount invested, less the payments that you have received.
A capital protected annuity pays about 12% less than a pure annuity (ie without capital protection).
Read this article.
I read your article in the Straits Times concerning Annuities. I have a question concerning longevity risk. If I were to take up an Annuity of $100K at the age of 62 but I die 5 years later. Does that mean my wife and children won't get back $100K?
REPLY:
If you buy a capital protected annuity, your family will get back the amount invested, less the payments that you have received.
A capital protected annuity pays about 12% less than a pure annuity (ie without capital protection).
Read this article.
Life Annuity
You can buy a life annuity with:
* The CPF Minimum Sum
* Your own cash savings (i.e. other than the Minimum Sum).
What is a life annuity? Is it a good form of investment? Read about it from this FAQ.
This article is also published in MyPaper.
* The CPF Minimum Sum
* Your own cash savings (i.e. other than the Minimum Sum).
What is a life annuity? Is it a good form of investment? Read about it from this FAQ.
This article is also published in MyPaper.
Invest in a low cost fund
I have recommended that you buy term insurance and invest the difference in a low cost fund.
Some investment-linked products (ILP) in the market have high charges, and give a poor return. You have to avoid these products. This website shows a comparison of the charges.
You have to be careful about the three levels of charges:
* upfront charge to pay commission to the agent or broker
* annual charge on the investments, and policy fee
* mortality charges (to pay for the insurance cover)
The best is a "do it yourself" unit trust. If this is too difficult, you can take the next best, which is a low cost ILP.
You can buy the term insurance separately. If you wish to buy it as part of the same ILP product, you should compare the premium rates. Make sure that you are allowed to cancel the term insurance, if the cost is too high.
Some investment-linked products (ILP) in the market have high charges, and give a poor return. You have to avoid these products. This website shows a comparison of the charges.
You have to be careful about the three levels of charges:
* upfront charge to pay commission to the agent or broker
* annual charge on the investments, and policy fee
* mortality charges (to pay for the insurance cover)
The best is a "do it yourself" unit trust. If this is too difficult, you can take the next best, which is a low cost ILP.
You can buy the term insurance separately. If you wish to buy it as part of the same ILP product, you should compare the premium rates. Make sure that you are allowed to cancel the term insurance, if the cost is too high.
Insurance protection for new-born baby
Hi Mr. Tan,
Now I am planning to get a protection insurance for my newborn baby.... After listening to many insurer and products, I have finalised the below plan.... need your advise which is the best?
My main concern is I want a protection for my baby of sum assured of 100k with critical illness for whole life and my budget is hope to be within $100 monthly.
Initially I have decided to take up ILP. I met some friends who are over 50yrs old and they warned me against it as they are holding some ILP and regret it because of the high cost..... so should i spend another $20 more in other to get a traditional life policy?
(details removed)
Looking forward to your advise.
REPLY
Please read this FAQ on saving for your child's education.
If you decide to buy an ILP (which I recommend), you should choose one with low expenses. This website shows you the front end charges of several products in the market.
The best is a "do it yourself" unit trust. The next best is a low cost ILP offered by NTUC Income.
For your baby, I suggest that you buy a Medishield or private Shield plan, to cover the cost of medical treatment. The premium is very low, i.e less than $100 a year.
Now I am planning to get a protection insurance for my newborn baby.... After listening to many insurer and products, I have finalised the below plan.... need your advise which is the best?
My main concern is I want a protection for my baby of sum assured of 100k with critical illness for whole life and my budget is hope to be within $100 monthly.
Initially I have decided to take up ILP. I met some friends who are over 50yrs old and they warned me against it as they are holding some ILP and regret it because of the high cost..... so should i spend another $20 more in other to get a traditional life policy?
(details removed)
Looking forward to your advise.
REPLY
Please read this FAQ on saving for your child's education.
If you decide to buy an ILP (which I recommend), you should choose one with low expenses. This website shows you the front end charges of several products in the market.
The best is a "do it yourself" unit trust. The next best is a low cost ILP offered by NTUC Income.
For your baby, I suggest that you buy a Medishield or private Shield plan, to cover the cost of medical treatment. The premium is very low, i.e less than $100 a year.
What causes the mess in sub-prime mortgages?
The sub-prime mortgages are given to low income people who are not able to service the mortgage loans. There is a high default rate on these loans. The losses are affecting meltdown in the global stock markets.
How did this mess come about? There are two main factors:
1) The mortgage brokers earn an attractive commission to sell the sub-prime mortgages. They are not concerned about the ability of the customer (i.e. borrower) to repay the loan, or if the property is good for the customer. The brokers are motivated by the sale, and the attractive commission.
2) The lender should be the party that is interested to ensure that the borrower can repay the loan. This was the situation in past years. In recent years, they have changed to a "broker" mindset. They sell the loans, and re-package and re-sell them to the market through the asset backed securities and the collaterised debt obligations. The original lenders earn an attractive margin for providing this re-packaging service, and do not take any risk.
This is quite sad. The mortgage brokers and mortgage lenders, in their eagerness to earn the commision and the margin, have created products that are bad for the customers (i.e. the people who borrowed on the sub-prime mortgage to buy expensive property) and bad for the ultimate investors (i.e. the people who bought the ABS and CDOs in the market).
Unfortunately, there are many other financial products in the market that fall in the same category. They include high cost life insurance products and structured products.
How did this mess come about? There are two main factors:
1) The mortgage brokers earn an attractive commission to sell the sub-prime mortgages. They are not concerned about the ability of the customer (i.e. borrower) to repay the loan, or if the property is good for the customer. The brokers are motivated by the sale, and the attractive commission.
2) The lender should be the party that is interested to ensure that the borrower can repay the loan. This was the situation in past years. In recent years, they have changed to a "broker" mindset. They sell the loans, and re-package and re-sell them to the market through the asset backed securities and the collaterised debt obligations. The original lenders earn an attractive margin for providing this re-packaging service, and do not take any risk.
This is quite sad. The mortgage brokers and mortgage lenders, in their eagerness to earn the commision and the margin, have created products that are bad for the customers (i.e. the people who borrowed on the sub-prime mortgage to buy expensive property) and bad for the ultimate investors (i.e. the people who bought the ABS and CDOs in the market).
Unfortunately, there are many other financial products in the market that fall in the same category. They include high cost life insurance products and structured products.
Monday, August 20, 2007
Treasury Bill
Hello Mr. Tan,
May I ask for your guidance on what is a treasury bill and how do you invest on it? How does it work?
REPLY:
A treasury bill is issued by the government, and is usually for a few months. You get the interest (which is usually quote low) but the investment is very secure. You can ask your bank or stockbroker about it.
May I ask for your guidance on what is a treasury bill and how do you invest on it? How does it work?
REPLY:
A treasury bill is issued by the government, and is usually for a few months. You get the interest (which is usually quote low) but the investment is very secure. You can ask your bank or stockbroker about it.
Two ways to monetarise your flat
A journalist asked me, "Is it better for a HDB flat owner to take a reverse mortgage or sell of the tail of the lease back to HDB?"
My reply is, "They serve two different needs".
If the owner needs some money and has not decided on what to do with his future home, it is better to take a reverse mortgage. This is a temporary arrangement. He can repay the loan when he decides to sell his flat.
If the owner is certain that he wish to keep the current flat, and be needs money to spend, then it is better to sell of the tail of the lease. I estimate that he can get between 33% to 40% of the current value of the flat. This arrangement is likely to be permanent. He will find it difficult to sell the flat, if the remaining lease is only 30 years.
Both methods cater to different groups of people.
My reply is, "They serve two different needs".
If the owner needs some money and has not decided on what to do with his future home, it is better to take a reverse mortgage. This is a temporary arrangement. He can repay the loan when he decides to sell his flat.
If the owner is certain that he wish to keep the current flat, and be needs money to spend, then it is better to sell of the tail of the lease. I estimate that he can get between 33% to 40% of the current value of the flat. This arrangement is likely to be permanent. He will find it difficult to sell the flat, if the remaining lease is only 30 years.
Both methods cater to different groups of people.
Sell the tail of the lease
Hi Mr Tan
The Prime Minister has announced that HDB will bear back the tail of the lease, and allow the 3-room flat owner to keep the next 30 years. Is this a good scheme? How much can the owner get for selling this tail?
REPLY
It offers another option for the HDB flat owner to raise money to live on. Assuming that the remaining lease of the flat is 70 years, the amount that can be obtained by selling the tail of 40 years (i.e. keeping the next 30 years) is, according to my estimate, about 33% to 40% of the current value of the property. It depends on the interest rate that is used for the calculation.
If the current value of a 3 room flat is $160,000, the sale of the tail of 40 years can bring between $53,000 to $64,000. Part of this sum can be received in cash and the remainder has to be credited to the Central Provident Fund account.
This is just my guess. Let us wait for the details, when it is announced by HDB.
The Prime Minister has announced that HDB will bear back the tail of the lease, and allow the 3-room flat owner to keep the next 30 years. Is this a good scheme? How much can the owner get for selling this tail?
REPLY
It offers another option for the HDB flat owner to raise money to live on. Assuming that the remaining lease of the flat is 70 years, the amount that can be obtained by selling the tail of 40 years (i.e. keeping the next 30 years) is, according to my estimate, about 33% to 40% of the current value of the property. It depends on the interest rate that is used for the calculation.
If the current value of a 3 room flat is $160,000, the sale of the tail of 40 years can bring between $53,000 to $64,000. Part of this sum can be received in cash and the remainder has to be credited to the Central Provident Fund account.
This is just my guess. Let us wait for the details, when it is announced by HDB.
Adequate Savings for Retirement
Many people have inadequate savings for retirement. This is due to:
* inadequate contributions
* poor return on CPF savings
* too much money used for property purchase.
I have written a paper to suggest measures to allow people to make adequate savings for retirement, by making better use of the CPF. Here is the paper. I hope you agree with me.
* inadequate contributions
* poor return on CPF savings
* too much money used for property purchase.
I have written a paper to suggest measures to allow people to make adequate savings for retirement, by making better use of the CPF. Here is the paper. I hope you agree with me.
Sunday, August 19, 2007
Invest in AUD and NZ dollars
I asked a banker, if it is time to invest in the AUD and NZ currencies, as it has dropped by 10% against the yen. It seems to be at a more acceptable level now. He said that it is probably a good investment, as the interest rate in AUD and NZ are quite high, compared to other currencies.
CDOs problems are not over
Stockmarkets in America and Europe have rebounded strongly, following the cut in the discount rate by the US Federal Reserve Board. The Asian stockmarkets are likely to follow.
The experts told me that the CDOs problems are not solved by lower interest rate. If more hedge funds get into trouble due to the CDOs, the stockmarket may fall again.
This trend has to be watched. Be careful.
The experts told me that the CDOs problems are not solved by lower interest rate. If more hedge funds get into trouble due to the CDOs, the stockmarket may fall again.
This trend has to be watched. Be careful.
Expense ratio of insurance products
If you buy a life insurance product, including an investment-linked product, you can find out the expense ratio from the benefit illustration.
You have to look at the projected gross yield and the net yield. If you are told that the projected gross yield is 5.25%, and the net yield (after deducting expenses and mortality cost) is 2.5%, you are incurring an expense charge of 2.75% per year. That is too high.
You should try to get an insurance product with an expense charge of 1.5% or less - especially as the gross yield of an insurance product is quite modest.
If you are investing in an equity fund which aims to give you a gross return of 7%, you can accept an expense charge of 2%, to give you an net yield of 5%.
Tip: Make sure that the expense charge is not more than 1.5% per annum for a product that gives a modest return, or 2% per annum for a product that gives a higher return.
You have to look at the projected gross yield and the net yield. If you are told that the projected gross yield is 5.25%, and the net yield (after deducting expenses and mortality cost) is 2.5%, you are incurring an expense charge of 2.75% per year. That is too high.
You should try to get an insurance product with an expense charge of 1.5% or less - especially as the gross yield of an insurance product is quite modest.
If you are investing in an equity fund which aims to give you a gross return of 7%, you can accept an expense charge of 2%, to give you an net yield of 5%.
Tip: Make sure that the expense charge is not more than 1.5% per annum for a product that gives a modest return, or 2% per annum for a product that gives a higher return.
A valuable role for the financial adviser
Is there a useful role for the financial adviser? Can they provide impartial advice that is good for consumers? I have given my suggestion in this article.
Getting more people to buy Life Annuity
I wrote an article on life annuity. It explains why there is a difference between the amount payable under an annuity ($523) and the amount payable by the CPF on its retirement account ($790). It also suggest how the gap can be narrowed to make the life annuity more attractive.
The letter was published in the Straits Times (Insight) a few days ago. You can read my suggestion in this article.
The letter was published in the Straits Times (Insight) a few days ago. You can read my suggestion in this article.
LUV plan
Dear Mr Tan,
I was reviewing the NTUC Luv plan which was launched recently. This looks affordable and comprehensive considering it covers life, TPD and critical illness - which will all expire at 70.
But looking at their monthly premium at age 60 and beyond, it make me wonder if this policy is still attractive since many in that age bracket may not be able to afford $300 a month or morre premium. Pls advice.
REPLY:
I am not familiar with this new product, which was introduced after I have left NTUC Income.
I suggest that you should talk to an insurance adviser (whom you can trust to give impartial advice) or call their business center?
I was reviewing the NTUC Luv plan which was launched recently. This looks affordable and comprehensive considering it covers life, TPD and critical illness - which will all expire at 70.
But looking at their monthly premium at age 60 and beyond, it make me wonder if this policy is still attractive since many in that age bracket may not be able to afford $300 a month or morre premium. Pls advice.
REPLY:
I am not familiar with this new product, which was introduced after I have left NTUC Income.
I suggest that you should talk to an insurance adviser (whom you can trust to give impartial advice) or call their business center?
Cost of a critical illness rider
Hi Mr Tan,
Two years ago, I bought a critical illness rider for $60 per month for $50K which is attached to my whole life policy.
Is it correct to buy a rider, as it will expire should I decide to terminate my whole life policy? As I am now in my sixties, I may not want to spend too much on insurance. Pls advise.
REPLY:
I suggest that you should consider the following options:
1) The cost to you of continuing the whole life and critical illness rider for the next 10 years
2) The cost of an alternative method of giving you the protection
You should ask the insurance adviser to give information to you that you can understand, and make the best decision. Apart from talking to your current insurance adviser, you can also talk to another insurance adviser.
I hope that they can give you information to make a better choice.
Two years ago, I bought a critical illness rider for $60 per month for $50K which is attached to my whole life policy.
Is it correct to buy a rider, as it will expire should I decide to terminate my whole life policy? As I am now in my sixties, I may not want to spend too much on insurance. Pls advise.
REPLY:
I suggest that you should consider the following options:
1) The cost to you of continuing the whole life and critical illness rider for the next 10 years
2) The cost of an alternative method of giving you the protection
You should ask the insurance adviser to give information to you that you can understand, and make the best decision. Apart from talking to your current insurance adviser, you can also talk to another insurance adviser.
I hope that they can give you information to make a better choice.
Saturday, August 18, 2007
Capital protection for Life annuity
Dear Mr Tan,
Does a life annuity allow the buyer to avoid losing the capital, if he dies at an early age?
REPLY
You can buy a capital protection for the life annuity. In the event of death during the early years, there is a refund of the balance of the capital (after deducting the annuity payments that have been received.
If you buy a capital protected annuity, you will receive a lower monthly payment. For a male at age 60, the difference is about 12 percent, i.e.
Monthy annuity for $100,000 of capital invested:
- with capital protection: $429
- no capital protection: $488
If the total paid out under the annuity exceeds the invested capital, there is no refund. This will occur after 19 years, in the above example. However, if the payment is increased due to bonus, the duration will be shortened.
You can read this FAQ for more details.
Does a life annuity allow the buyer to avoid losing the capital, if he dies at an early age?
REPLY
You can buy a capital protection for the life annuity. In the event of death during the early years, there is a refund of the balance of the capital (after deducting the annuity payments that have been received.
If you buy a capital protected annuity, you will receive a lower monthly payment. For a male at age 60, the difference is about 12 percent, i.e.
Monthy annuity for $100,000 of capital invested:
- with capital protection: $429
- no capital protection: $488
If the total paid out under the annuity exceeds the invested capital, there is no refund. This will occur after 19 years, in the above example. However, if the payment is increased due to bonus, the duration will be shortened.
You can read this FAQ for more details.
Friday, August 17, 2007
Havoc caused by the hedge funds
When an investor has a certain position in the market, he puts a stop loss order to protect that position, in case the market moves against him.
During a period of market weakness, most of the buyers stay away from the market. Those holding stop orders are "exposed" in a thin market.
The hedge funds goes around to knock down the stop loss orders, even though they are placed at a large distance from the current market level. This caused the market to swing widely. This caused the extreme volatility.
Somehow, the hedge funds are able to make a lot of profit through the high volality in the market. They know how to trade in this thin market, to their advantage.
Lesson: If you have a sound position and you are not leveraged or on margin, you should hold the position. Do not place any stop loss orders. Do not panic when the market swings wildly. Stay calm. Stay invested.
During a period of market weakness, most of the buyers stay away from the market. Those holding stop orders are "exposed" in a thin market.
The hedge funds goes around to knock down the stop loss orders, even though they are placed at a large distance from the current market level. This caused the market to swing widely. This caused the extreme volatility.
Somehow, the hedge funds are able to make a lot of profit through the high volality in the market. They know how to trade in this thin market, to their advantage.
Lesson: If you have a sound position and you are not leveraged or on margin, you should hold the position. Do not place any stop loss orders. Do not panic when the market swings wildly. Stay calm. Stay invested.
How to pick the right stocks
Dear Mr Tan,
With all the stock market indices dropping by quite a lot. When it recovers, what is the best way to ride on the rise as there are so many stocks to choose from ?
REPLY
I suggest that you invest in the STI Trakker Fund. It is a ETF or exchange traded fund. It is a large, diversified, low cost fund. It is invested in blue chips, to track the STI index.
With all the stock market indices dropping by quite a lot. When it recovers, what is the best way to ride on the rise as there are so many stocks to choose from ?
REPLY
I suggest that you invest in the STI Trakker Fund. It is a ETF or exchange traded fund. It is a large, diversified, low cost fund. It is invested in blue chips, to track the STI index.
Thursday, August 16, 2007
Is it time to liquidate?
Dear Mr Tan
Stock market is down by a lot, is it adviseable to liquidate and switch to fixed depost?
REPLY:
I prefer to find the right time to make further investment in the stock market for the long term. The drop in the stockmarket make the shares more attractive.
Stock market is down by a lot, is it adviseable to liquidate and switch to fixed depost?
REPLY:
I prefer to find the right time to make further investment in the stock market for the long term. The drop in the stockmarket make the shares more attractive.
Sharp drop in Singapore market
Hi
Why does the Singapore market drop so much in two days, when the economic fundamental is still sound?
REPLY:
This is due mainly to the outflow of foreign funds. When they wish to liquidate, they will sell at any price. The investors dare not buy. So, the drop is very sharp.
This has happened many times before. When the selling by the foreign funds stops, the market will rebound sharply.
Why does the Singapore market drop so much in two days, when the economic fundamental is still sound?
REPLY:
This is due mainly to the outflow of foreign funds. When they wish to liquidate, they will sell at any price. The investors dare not buy. So, the drop is very sharp.
This has happened many times before. When the selling by the foreign funds stops, the market will rebound sharply.
High flying stocks drop more
Here are the prices of the blue chips in Singapore and the market indices.
The market indices dropped by 13%. The high flying stocks dropped by 23% to 32%.
Stock Peak Current Drop
S Land 12.10 8.20 32%
City Dev 17.90 13.10 27%
CapitaLand 8.75 6.60 25%
DBS 25.00 19.20 23%
Keppel 14.40 11.10 23%
Sembcorp 6.30 4.84 23%
UOB 24.20 19.90 18%
SIA 20.10 17.00 16%
SPH 4.76 4.22 12%
STI ETF 37.30 32.50 13%
Nikkei 18300 15900 13%
HKSI 23500 20570 13%
The market indices dropped by 13%. The high flying stocks dropped by 23% to 32%.
Switch to Global Equity?
Dear Mr Tan,
I have been waiting for your update on the stock market as I respect you as a very disciplined and shrewd investor.
What is your opinion of switching $40,000 worth of my NTUC Balanced Fund to Global Equities Fund?
Thank you for your generous sharing of your investment strategy.
REPLY:
I suggest that you wait for 1 or 2 more weeks. But you can monitor the situation and move earlier, if you feel that it is the right time.
I have been waiting for your update on the stock market as I respect you as a very disciplined and shrewd investor.
What is your opinion of switching $40,000 worth of my NTUC Balanced Fund to Global Equities Fund?
Thank you for your generous sharing of your investment strategy.
REPLY:
I suggest that you wait for 1 or 2 more weeks. But you can monitor the situation and move earlier, if you feel that it is the right time.
Collapse of the stockmarket
I have been waiting for more than six months for the right time to invest in the Singapore stockmarket.
My target entry point is 2,700 on the ST Index (representing a drop of 25% from the peak of 3,600).
It may not reach this level, so I may start to invest in small amounts from the STI level of 3,000. This is likely to occur within a few days time.
I heard that Warren Buffet had started to invest in some banks (with little CDO expsoure). He has decided that the current prices represents good value. Although the market may drop another 10% or so, he has decided that it is time to start accumulating.
My choice of funds are:
* The STI trakker fund in SGX
* The global equity fund managed by NTUC Income
My target entry point is 2,700 on the ST Index (representing a drop of 25% from the peak of 3,600).
It may not reach this level, so I may start to invest in small amounts from the STI level of 3,000. This is likely to occur within a few days time.
I heard that Warren Buffet had started to invest in some banks (with little CDO expsoure). He has decided that the current prices represents good value. Although the market may drop another 10% or so, he has decided that it is time to start accumulating.
My choice of funds are:
* The STI trakker fund in SGX
* The global equity fund managed by NTUC Income
Wednesday, August 15, 2007
Funding for research for young professionals.
Getting funding for research is never an easy task. Dr. and Mrs. Lee Kum Tatt had experienced this in their professions and their careers both as recipients and donors of grants. They share with us their experiences and what they think can be done. Read about this in Lee Kum Tatt’s blog.
Advice for a young person starting a career
Hi,
I'm a final year under-grad who is finishing up with her studies and is planning to start on her career.
I am interested to start investing for retirement and is also keen to purchase an insurance policy. Is there any advice for a young person starting out?
REPLY
Please read this FAQ on Financial Planning for the Young. Wish you all the best in your career.
I'm a final year under-grad who is finishing up with her studies and is planning to start on her career.
I am interested to start investing for retirement and is also keen to purchase an insurance policy. Is there any advice for a young person starting out?
REPLY
Please read this FAQ on Financial Planning for the Young. Wish you all the best in your career.
Learn about life annuity
According to a newspaper report, the government is considering to make life annuity compulsory.
You can learn about the life annuity by reading this FAQ.
The CPF now pays an attractive interest of 4% on its retirement account. It is better to keep your money in the retirement account. You can invest in a life annuity with your non-CPF savings.
You can learn about the life annuity by reading this FAQ.
The CPF now pays an attractive interest of 4% on its retirement account. It is better to keep your money in the retirement account. You can invest in a life annuity with your non-CPF savings.
Tuesday, August 14, 2007
Continue your existing critical illness policy
Hi Mr Tan
In your blog, you said that the premium for a critical illness policy is 10 times of a term insurance policy. I took a critical illness (living) policy two years ago. Do you advise me to cancel it, and change to a term policy?
REPLY:
The living policy combines the coverage and savings for the future. You can get a cash value from the living policy if you terminate it in the future. You can break even, i.e. get back more than the premiums paid after about 15 years. If you keep it longer, you can get a modest return of about 2 to 3% per annum.
If you have already taken a living policy, it is better to continue with you, as you can get a modest return (after 20 or 30 years) and free coverage.
If you terminate the living policy in the early years, you will suffer a loss of about half of the premiums that you have paid. This low payout takes into account the high upfront cost of the policy, which has already been incurred.
My advice of taking a term insurance policy, applies to people who have not yet taken up the critical illness policy.
In your blog, you said that the premium for a critical illness policy is 10 times of a term insurance policy. I took a critical illness (living) policy two years ago. Do you advise me to cancel it, and change to a term policy?
REPLY:
The living policy combines the coverage and savings for the future. You can get a cash value from the living policy if you terminate it in the future. You can break even, i.e. get back more than the premiums paid after about 15 years. If you keep it longer, you can get a modest return of about 2 to 3% per annum.
If you have already taken a living policy, it is better to continue with you, as you can get a modest return (after 20 or 30 years) and free coverage.
If you terminate the living policy in the early years, you will suffer a loss of about half of the premiums that you have paid. This low payout takes into account the high upfront cost of the policy, which has already been incurred.
My advice of taking a term insurance policy, applies to people who have not yet taken up the critical illness policy.
Collateralized debt obligations
Source: Wikipedia
Collateralized debt obligations (CDOs) are a type of asset-backed security and structured credit product.
CDOs gain exposure to the credit of a portfolio of fixed income assets and divide the credit risk among different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated).
Losses are applied in reverse order of seniority and so junior tranches offer higher coupons to compensate for the added risk. CDOs serve as an important funding vehicle for portfolio investments in credit-risky fixed income assets.
Market history and growth
First issued in the late 1980s, CDOs emerged a decade later as the fastest growing sector of the asset-backed securities market.
This growth reflects the increasing appeal of CDOs for a growing number of asset managers and investors, which now include insurance companies, mutual fund companies, unit trusts, investment trusts, commercial banks, investment banks, pension fund managers, private banking organizations, other CDOs and structured investment vehicles.
According to the Securities Industry and Financial Markets Association, aggregate global CDO issuance totalled USD $157 billion in 2004, USD $249 billion in 2005, and USD $489 billion in 2006.
Collateralized debt obligations (CDOs) are a type of asset-backed security and structured credit product.
CDOs gain exposure to the credit of a portfolio of fixed income assets and divide the credit risk among different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated).
Losses are applied in reverse order of seniority and so junior tranches offer higher coupons to compensate for the added risk. CDOs serve as an important funding vehicle for portfolio investments in credit-risky fixed income assets.
Market history and growth
First issued in the late 1980s, CDOs emerged a decade later as the fastest growing sector of the asset-backed securities market.
This growth reflects the increasing appeal of CDOs for a growing number of asset managers and investors, which now include insurance companies, mutual fund companies, unit trusts, investment trusts, commercial banks, investment banks, pension fund managers, private banking organizations, other CDOs and structured investment vehicles.
According to the Securities Industry and Financial Markets Association, aggregate global CDO issuance totalled USD $157 billion in 2004, USD $249 billion in 2005, and USD $489 billion in 2006.
Asset backed securities
Asset-backed securities, called ABS, are bonds or notes backed by financial assets.
Typically these assets consist of receivables other than mortgage loans, such as credit card receivables, auto loans, manufactured-housing contracts and home-equity loans.
ABS differ from most other kinds of bonds in that their creditworthiness (which is at the triple-A level for more than 90% of outstanding issues) derives from sources other than the paying ability of the originator of the underlying assets.
Financial institutions that originate loans (including banks, credit card providers, auto finance companies and consumer finance companies) turn their loans into marketable securities through a process known as securitization.
The loan originators are commonly referred to as the issuers of ABS, but in fact they are the sponsors, not the direct issuers, of these securities.
These financial institutions sell pools of loans to a special-purpose vehicle (SPV), whose sole function is to buy such assets in order to securitize them.
The SPV, which is usually a corporation, then sells them to a trust. The trust repackages the loans as interest-bearing securities and actually issues them.
The “true sale” of the loans by the sponsor to the SPV provides “bankruptcy remoteness,” insulating the trust from the sponsor.
The securities, which are sold to investors by the investment banks that underwrite them, are “credit-enhanced” with one or more forms of extra protection — whether internal, external or both.
ABS constitute a relatively new but fast-growing segment of the debt market. The first ABS were issued in 1985; in that year, the market for publicly offered ABS issues was $1.2 billion. In 2003, issuance totaled a new record of $479.4 billion.
It is estimated that a total of over $2.6 trillion of ABS were issued from 1985 through 2003
Typically these assets consist of receivables other than mortgage loans, such as credit card receivables, auto loans, manufactured-housing contracts and home-equity loans.
ABS differ from most other kinds of bonds in that their creditworthiness (which is at the triple-A level for more than 90% of outstanding issues) derives from sources other than the paying ability of the originator of the underlying assets.
Financial institutions that originate loans (including banks, credit card providers, auto finance companies and consumer finance companies) turn their loans into marketable securities through a process known as securitization.
The loan originators are commonly referred to as the issuers of ABS, but in fact they are the sponsors, not the direct issuers, of these securities.
These financial institutions sell pools of loans to a special-purpose vehicle (SPV), whose sole function is to buy such assets in order to securitize them.
The SPV, which is usually a corporation, then sells them to a trust. The trust repackages the loans as interest-bearing securities and actually issues them.
The “true sale” of the loans by the sponsor to the SPV provides “bankruptcy remoteness,” insulating the trust from the sponsor.
The securities, which are sold to investors by the investment banks that underwrite them, are “credit-enhanced” with one or more forms of extra protection — whether internal, external or both.
ABS constitute a relatively new but fast-growing segment of the debt market. The first ABS were issued in 1985; in that year, the market for publicly offered ABS issues was $1.2 billion. In 2003, issuance totaled a new record of $479.4 billion.
It is estimated that a total of over $2.6 trillion of ABS were issued from 1985 through 2003
Monday, August 13, 2007
Structured Products
I have updated my FAQ on structured products. You can read them here. Advice: avoid investing in structured products, as they have high cost and are not likely to give a good return to the investor.
Investment Tips, August 2007
I have updated my FAQ to give my investment tips as at August 2007. You can read them here. Good luck in your investment.
Stock Trading
Larry Haverkamp has written an article on the risk of stock trading. Many people may not realise it, until it is too late. Read it in his blog.
Sunday, August 12, 2007
Build up a nest egg of $1 million
You can build up a nest egg of $1 million by saving only $300 a month over a working career of 40 years.
If you invest this money to earn an average return of 8% per annum, it will accumulate to $970,000 over 40 years.
If you earn 10% per annum, it will accumulate to $1,673,000 over 40 years.
By investing in a large, well diversified fund of equities, the average return over a long period has been around 8% to 10% per annum.
If you invest in a low cost fund, the charge could be as low as 0.5% per annum. This allows you to keep most of the return for yourself.
However, if you invest in a high cost fund that takes away 2% per annum, you may have 30% of the total money disappear.
If you invest this money to earn an average return of 8% per annum, it will accumulate to $970,000 over 40 years.
If you earn 10% per annum, it will accumulate to $1,673,000 over 40 years.
By investing in a large, well diversified fund of equities, the average return over a long period has been around 8% to 10% per annum.
If you invest in a low cost fund, the charge could be as low as 0.5% per annum. This allows you to keep most of the return for yourself.
However, if you invest in a high cost fund that takes away 2% per annum, you may have 30% of the total money disappear.
Promoting cooperative insurance in Singapore
I am invited to Japan to present a paper on my experience in building up NTUC Income. The paper is entitled "promoting cooperative insurance in Singapre.
You can read the paper here.
This paper may be of interest to policyholders to learn about how NTUC Income was able to give a better return to them in past years.
You can read the paper here.
This paper may be of interest to policyholders to learn about how NTUC Income was able to give a better return to them in past years.
Fixed deposit rates
With the global stockmarket in turmoil, it may be better to keep the money in fixed deposit or the money market fund for the time being.
You can refer to this website for the latest information of the best interest rate offered by the banks. This information is fairly up-to-date, but may get outdated quite quickly, as the rates may changed daily.
It gives you a good idea about what is likely to be available in the market. Before you invest, it is best to re-confirm the latest offers from the top three in the list.
I hope that you find this reference to be useful.
You can refer to this website for the latest information of the best interest rate offered by the banks. This information is fairly up-to-date, but may get outdated quite quickly, as the rates may changed daily.
It gives you a good idea about what is likely to be available in the market. Before you invest, it is best to re-confirm the latest offers from the top three in the list.
I hope that you find this reference to be useful.
Money market funds
Dear Mr Tan,
Which money market fund gives a better return, NTUC or Lion Capital?
REPLY
Please read this website for a comparison. Dr Money told me that the information is quite up-to-date.
However, before you finally invest your money, it is better to call the fund manager and check the latest information.
Which money market fund gives a better return, NTUC or Lion Capital?
REPLY
Please read this website for a comparison. Dr Money told me that the information is quite up-to-date.
However, before you finally invest your money, it is better to call the fund manager and check the latest information.
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