Hi Mr.Tan,
Can you share with me your views on Estate Planning and its implications with the removal of Death Taxes? Is Estate Planning still relevant in Singapore?
I'm just trying to understand how much is left in Estate Planning after the removal of Death Taxes. The text books talk about Estate Preservation, Estate Distribution and Estate Creation in view of succession planning.
While this is all academic, I was hoping you could share some insights into some percularities or blind-sided areas on a more practical front.
REPLY
The important components of estate planning are:
a. Identify the assets in your estate
b. Buy insurance to provide funds to pay the estate duty (not required now)
c. Decide how the estate is to be distributed on your death (this is done through a will)
d. Appoint the people to manage the estate.
If you estate is substantial, it is better to transfer your assets into a separate trust now, and appoint trustees to manage the trust. You can be one of the trustees. This trust becomes part of the estate on your death.
I will invite my blog readers to share other perspective of estate planning.
Friday, March 21, 2008
Projected return of 4.16%
Hi Mr. Tan,
Recently, I am looking to invest a small sum of money in a low risk product for my children's education. After discussing with my agents, I am thinking of investing the money in a 15 year NTUC's Growth plan policy which provides a projected return of about 4.16% with a guaranteed return of about 2%. I am not looking to invest in a mutual fund because I would like to keep the risk to an acceptable level.
1) What is your view of this product?
2) Do you think my decision is wise?
3) Is there any other product that I should be looking at?
REPLY
This product is fairly satisfactory. I have also invested my SRS funds in the Growth policy to get the same modest return in the past.
My preference today is to invest in a mutual fund to get a higher return over the future years. Read this FAQ:http://www.tankinlian.com/faq/savings.html
Perhaps you can invest in 5,000 shares of the STI ETF. I believe that it should give a better return over the next 15 years.
Recently, I am looking to invest a small sum of money in a low risk product for my children's education. After discussing with my agents, I am thinking of investing the money in a 15 year NTUC's Growth plan policy which provides a projected return of about 4.16% with a guaranteed return of about 2%. I am not looking to invest in a mutual fund because I would like to keep the risk to an acceptable level.
1) What is your view of this product?
2) Do you think my decision is wise?
3) Is there any other product that I should be looking at?
REPLY
This product is fairly satisfactory. I have also invested my SRS funds in the Growth policy to get the same modest return in the past.
My preference today is to invest in a mutual fund to get a higher return over the future years. Read this FAQ:http://www.tankinlian.com/faq/savings.html
Perhaps you can invest in 5,000 shares of the STI ETF. I believe that it should give a better return over the next 15 years.
Blue chip stocks
Dear Mr. Tan,
I read from your blog there we can invest some blue-chips shares for long term. What are the blue chips shares can you lists some? Is F&N consider blue-chip? I think of investing for my children as they are around 13-15 years. Do you think is good? Please kindly give me opinions of what to do. Now the fixed deposit very is very low.
REPLY
I consider the 30 components stocks of the STI index as blue chips. These component stocks are listed in:
http://www.straitstimes.com//STI/STIMEDIA/sp/ftse08/Constituents1.pdf
F&N is a component of the index.
I read from your blog there we can invest some blue-chips shares for long term. What are the blue chips shares can you lists some? Is F&N consider blue-chip? I think of investing for my children as they are around 13-15 years. Do you think is good? Please kindly give me opinions of what to do. Now the fixed deposit very is very low.
REPLY
I consider the 30 components stocks of the STI index as blue chips. These component stocks are listed in:
http://www.straitstimes.com//STI/STIMEDIA/sp/ftse08/Constituents1.pdf
F&N is a component of the index.
Confidence in US financial firms
FROM BLOOMBERG.COM
Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke
By Pham-Duy Nguyen
March 21 (Bloomberg) -- The biggest commodity collapse in at least five decades may signal Federal Reserve Chairman Ben S. Bernanke has revived confidence in U.S. financial firms.
The Standard & Poor's 500 Index posted its first weekly gain in a month, and the dollar leapt from its lowest level since 1973 after the Fed stepped in March 16 to rescue Bear Stearns Cos., the fifth-largest U.S. securities firm, and expanded its role as lender of last resort to embrace the biggest dealers in Treasury notes.
Investors who had poured money into gold, oil and corn, seeking a hedge against inflation and a weak dollar, sold commodities to raise cash or buy stocks. The Reuters/Jefferies CRB Index of 19 commodities tumbled 8.3 percent this week, the most since at least 1956, after touching a record on Feb. 29.
"Bernanke took care of the commodity bubble,'' said Ron Goodis, the retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``Commodities are coming back to earth. The stock market looks OK, and Bernanke is starting to look a little better.''
Concern that the central bank would let inflation get out of control eased after the Fed cut its key interest rate by 0.75 percentage point on March 18, less than the reduction of at least 1 point that investors had expected.
"Clearly they've gotten some stability,'' said Keith Hembre, a former Fed researcher and chief economist at FAF Advisors Inc. in Minneapolis, which oversees more than $107 billion in assets.
"You have to stand back and say, for the time being, it looks to be a pretty successful combination of moves that have worked.''
Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke
By Pham-Duy Nguyen
March 21 (Bloomberg) -- The biggest commodity collapse in at least five decades may signal Federal Reserve Chairman Ben S. Bernanke has revived confidence in U.S. financial firms.
The Standard & Poor's 500 Index posted its first weekly gain in a month, and the dollar leapt from its lowest level since 1973 after the Fed stepped in March 16 to rescue Bear Stearns Cos., the fifth-largest U.S. securities firm, and expanded its role as lender of last resort to embrace the biggest dealers in Treasury notes.
Investors who had poured money into gold, oil and corn, seeking a hedge against inflation and a weak dollar, sold commodities to raise cash or buy stocks. The Reuters/Jefferies CRB Index of 19 commodities tumbled 8.3 percent this week, the most since at least 1956, after touching a record on Feb. 29.
"Bernanke took care of the commodity bubble,'' said Ron Goodis, the retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``Commodities are coming back to earth. The stock market looks OK, and Bernanke is starting to look a little better.''
Concern that the central bank would let inflation get out of control eased after the Fed cut its key interest rate by 0.75 percentage point on March 18, less than the reduction of at least 1 point that investors had expected.
"Clearly they've gotten some stability,'' said Keith Hembre, a former Fed researcher and chief economist at FAF Advisors Inc. in Minneapolis, which oversees more than $107 billion in assets.
"You have to stand back and say, for the time being, it looks to be a pretty successful combination of moves that have worked.''
Investing the CPF ordinary account
Hi Mr. Tan
Due to some personal reasons, my friend would like to divert all her CPF money to other investment, instead of leaving it in her ordinary account. She is not a person good at managing her finances. What are the options available to her?
She just want to make sure the sum of around 30k will be relatively safe and generate a moderate amount of interest or at least same as what CPF board is offering. When the minimum sum kicks in on 1st April 08, is it true that she can't invest all the 30k?
REPLY
Read this FAQ:
http://www.tankinlian.com/faq/savings.html
Due to some personal reasons, my friend would like to divert all her CPF money to other investment, instead of leaving it in her ordinary account. She is not a person good at managing her finances. What are the options available to her?
She just want to make sure the sum of around 30k will be relatively safe and generate a moderate amount of interest or at least same as what CPF board is offering. When the minimum sum kicks in on 1st April 08, is it true that she can't invest all the 30k?
REPLY
Read this FAQ:
http://www.tankinlian.com/faq/savings.html
Risk of forex trading
Hi Mr. Tan,
Thank You for your valuable info in your blog. It enriched my financial knowledge.
Now, economy is under unstable condition. My friend recommended me to invest in forex trading. Kindly advise on the risk involved and other factors. I am still quite clueless on it.
REPLY
Do not engage in forex trading. It is risky. You are likely to lose a lot of money.
It is better to invest for the long term in a low cost, diversified investment fund. Read this FAQ:
http://www.tankinlian.com/faq/savings.html
Thank You for your valuable info in your blog. It enriched my financial knowledge.
Now, economy is under unstable condition. My friend recommended me to invest in forex trading. Kindly advise on the risk involved and other factors. I am still quite clueless on it.
REPLY
Do not engage in forex trading. It is risky. You are likely to lose a lot of money.
It is better to invest for the long term in a low cost, diversified investment fund. Read this FAQ:
http://www.tankinlian.com/faq/savings.html
Online enquiry form
A friendly online enquiry form ask for only 3 essential information
a) Your name
b) Your e-mail or contact number
c) A text box for you to type your enquiry
Most large organisations have an enquiry form that ask for non-essential information (many of which are mandatory) and ask the customer to select the type of enquiry from a long drop down list. They seem to enjoy making life difficult for their customers.
Of course, they want to collect customer data, but do they have to alienate their customers?
a) Your name
b) Your e-mail or contact number
c) A text box for you to type your enquiry
Most large organisations have an enquiry form that ask for non-essential information (many of which are mandatory) and ask the customer to select the type of enquiry from a long drop down list. They seem to enjoy making life difficult for their customers.
Of course, they want to collect customer data, but do they have to alienate their customers?
Risk based capital
A financial institution, such as a bank or insurance company, is required by the Monetary Authority of Singapore to have a share capital (i.e. risk-based capital) that reflects its risk profile. The risk profile comes from its invested assets and from its contractual liabilities to its customers.
A financial institition that takes more risk (i.e. asset and liability risk) is required to have more share capital. One that takes less risk is required to have lower share capital.
If the financial instition has more capital, it may appear to be "safer" and "better" for their customers. But this is only one side of the story.
A financial institution with more share capital has to make more profits to satisfy their shareholders. The expected return for shareholder is usually 10% to 15% on their investments. The higher profits is usually taken away from their customers, through excessive charges and other devices to "cream off" the customer.
It may be better for customers to transact with a financial institution that take lower risks and require lower share capital from the shareholders.
When you invest in a low cost, diversified investment fund, you are taking the investment risk. The fund manager does not take the risk, and does not require to have a high capital to provide the guarantee. They are able to give you a higher return.
Read this FAQ on how you can reduce your own risk, and still enjoy the high return:
http://www.tankinlian.com/faq/savings.html
A financial institition that takes more risk (i.e. asset and liability risk) is required to have more share capital. One that takes less risk is required to have lower share capital.
If the financial instition has more capital, it may appear to be "safer" and "better" for their customers. But this is only one side of the story.
A financial institution with more share capital has to make more profits to satisfy their shareholders. The expected return for shareholder is usually 10% to 15% on their investments. The higher profits is usually taken away from their customers, through excessive charges and other devices to "cream off" the customer.
It may be better for customers to transact with a financial institution that take lower risks and require lower share capital from the shareholders.
When you invest in a low cost, diversified investment fund, you are taking the investment risk. The fund manager does not take the risk, and does not require to have a high capital to provide the guarantee. They are able to give you a higher return.
Read this FAQ on how you can reduce your own risk, and still enjoy the high return:
http://www.tankinlian.com/faq/savings.html
Risk and return
Is it better to invest in higher risk assets (e.g. equities) or lower risk assets (e.g. bonds)?
Here is my answer:
a) If you wish to get a higher return, you should invest in equity
b) Over the long term, equity gives an annual return of 2% to 4% higher than bonds
You can reduce your risk of investing in equity as follows:
a) Invest in a diversified fund
b) The fund should be invested in only shares of blue chip companies, i.e. the largest companies in the market
c) Choose a low cost fund (i.e. expense ratio less than 1% per annum)
d) Invest for the long term (i.e. 10 years or more), so that you can average out the good and bad years.
Be ready to take "diversified" risk and get a better return. There is no need to invest in highly speculative asssets, such as emerging markets or highly priced commodities, to get a higher return.
Here is my answer:
a) If you wish to get a higher return, you should invest in equity
b) Over the long term, equity gives an annual return of 2% to 4% higher than bonds
You can reduce your risk of investing in equity as follows:
a) Invest in a diversified fund
b) The fund should be invested in only shares of blue chip companies, i.e. the largest companies in the market
c) Choose a low cost fund (i.e. expense ratio less than 1% per annum)
d) Invest for the long term (i.e. 10 years or more), so that you can average out the good and bad years.
Be ready to take "diversified" risk and get a better return. There is no need to invest in highly speculative asssets, such as emerging markets or highly priced commodities, to get a higher return.
No load financial product
I wish to introduce the concept of a "no load" financial product.
Examples of "no load" products are:
a) bank account
b) shares and bonds bought through the stock exchange
Some "no load" products require you to pay a transaction fee (e.g. brokerage) but they are usually less than 0.5% of the invested sum.
Examples of "high load" products are:
a) Life insurance and investment linked policies
b) Structured financial products
c) Time-share properties
d) Land banking products
The "high load" products have high front end charges that may take more than one year of your savings or more than 5% of your invested lump sum. They are used to pay high commission to marketeers to "push" the products to consumers. After paying the high marketing costs, the consumers get a poor deal.
Go for "no load" products.
Examples of "no load" products are:
a) bank account
b) shares and bonds bought through the stock exchange
Some "no load" products require you to pay a transaction fee (e.g. brokerage) but they are usually less than 0.5% of the invested sum.
Examples of "high load" products are:
a) Life insurance and investment linked policies
b) Structured financial products
c) Time-share properties
d) Land banking products
The "high load" products have high front end charges that may take more than one year of your savings or more than 5% of your invested lump sum. They are used to pay high commission to marketeers to "push" the products to consumers. After paying the high marketing costs, the consumers get a poor deal.
Go for "no load" products.
Websites of large companies
The website of many large companies are a maze. It takes a long time to navigate through the website to find the relevant information.
Quite often, you will need an experience guide (from the helpdesk of the company) to take you through the website.
I wish to ask your your participation. Can you tell me which company has a good website that is easy to navigate?
Quite often, you will need an experience guide (from the helpdesk of the company) to take you through the website.
I wish to ask your your participation. Can you tell me which company has a good website that is easy to navigate?
A complicated feedback form
The express bus company sent me an online feedback form. It contained more than 50 questions for me to complete. I sent this reply by e-mail:
QUOTE
If you wish to ask for my feedback, you have to be considerate and send me a simpler form. Do think about the customer. Do not just think about your own convenience.
UNQUOTE
Like most other companies, this company is interested only to compile statistics. I do not think that they are genuinely interested to listen to the customer.
I hope that people will think more about the customer.
QUOTE
If you wish to ask for my feedback, you have to be considerate and send me a simpler form. Do think about the customer. Do not just think about your own convenience.
UNQUOTE
Like most other companies, this company is interested only to compile statistics. I do not think that they are genuinely interested to listen to the customer.
I hope that people will think more about the customer.
Poll: measures to cope with cost of living in Singapore
What measures will help most to cope with the cost of living in Singapore? (20 replies, multiple choices are allowed):
75% lower cost of transportation and reduced commuting time
40% higher wages for low income workers
30% higher return on financial products
20% better protection of consumers
75% lower cost of transportation and reduced commuting time
40% higher wages for low income workers
30% higher return on financial products
20% better protection of consumers
Insuring against poverty
Many people buy a large critical illness policy to insure against the risk of 30 critical illness. The chance of it happening during their working life is less than 5%.
There is a bigger risk that they overlook. It is insuring against poverty. The chance of this event is 95%.
There is a bigger risk that they overlook. It is insuring against poverty. The chance of this event is 95%.
Here is a good way to insure against poverty:
a) Save 10% to 15% of your monthly salary
b) Invest in a low cost, diversified fund to earn a good return over the future
Many advisers do not recommend this approach. They introduce high cost products to consumers, as these products provide an attractive commission to the adviser. The consumer gets a poor return. They face a conflict of interest
I hope that more advisers will come forward to give the proper advice that are good for consumers. They can earn a fair rate of commission, but at least they know that they are acting fairly and honestly.
Orderly transition in five state governments in Malaysia
A reader wrote to the Star paper in Malaysia. He congratulated Prime Minister Abdullah Badawi for the peaceful and orderly transfer of power to the new governments in five states in Malaysia. He described the Prime Minister as a gentlemen.
He mentioned about the experience in several other countries, where the opposition party faced obstacles in the election and after being elected.
He mentioned about the experience in several other countries, where the opposition party faced obstacles in the election and after being elected.
Travelling to Kuala Lumpur by bus
I took an express bus from Singapore to Kuala Lumpur. It is the first time that I took a bus to visit Kuala Lumpur. Previously, I have always taken the plane.
The journey took 5 hours. It was comfortable. I arrived in Petaling Jaya at 1 pm. If I have taken the plane, the journey would have taken the same travelling time.
I was able to have a nice discussion with another traveller on the journey. I could also do some work on the bus. I shall be travelling on this mode more often in the future.
The journey took 5 hours. It was comfortable. I arrived in Petaling Jaya at 1 pm. If I have taken the plane, the journey would have taken the same travelling time.
I was able to have a nice discussion with another traveller on the journey. I could also do some work on the bus. I shall be travelling on this mode more often in the future.
Thursday, March 20, 2008
1,004 visitors to my blog
1,004 people visited my blog on Wednesday 19 March 2008. This is the first time that it exceeded 1,000 visitors.
Impact of new CPF rule on dollar cost averaging
Dear Mr. Tan,
From April 1, 2008, CPF requires a member to keep a minimum of $20,000 in the ordinary account. I am surprised to find out that this applies also to existing policies with regular recurring premiums using CPFOA.
Now we have 2 choices:
1. Keep the minimum in OA and use the excess to fund our investments
2. Terminate plans to avoid agent bank charges
I invested my CPF savings by recurring regular premium on dollar cost averging. With the market down, I am now forced to terminate my plan. I have to stop investing even if I am making losses now.
Is this a fair practice to investors? Who regulates CPF Board? Can MAS look into this matter?
What is your opinion?
REPLY
I believe that this is decided at the highest level of Government. There are good reasons for the Government to implement this requirement to keep a minimum of $20,000 in OA.
I agree that the timing is unfortunate, as it deprive you of the chance to average down on your investment. I hope that you can have some other savings to do this averaging down (and not depend on the CPF savings). Wish you all the best.
From April 1, 2008, CPF requires a member to keep a minimum of $20,000 in the ordinary account. I am surprised to find out that this applies also to existing policies with regular recurring premiums using CPFOA.
Now we have 2 choices:
1. Keep the minimum in OA and use the excess to fund our investments
2. Terminate plans to avoid agent bank charges
I invested my CPF savings by recurring regular premium on dollar cost averging. With the market down, I am now forced to terminate my plan. I have to stop investing even if I am making losses now.
Is this a fair practice to investors? Who regulates CPF Board? Can MAS look into this matter?
What is your opinion?
REPLY
I believe that this is decided at the highest level of Government. There are good reasons for the Government to implement this requirement to keep a minimum of $20,000 in OA.
I agree that the timing is unfortunate, as it deprive you of the chance to average down on your investment. I hope that you can have some other savings to do this averaging down (and not depend on the CPF savings). Wish you all the best.
Wednesday, March 19, 2008
Low cost insurance and funds
Hi Mr. Tan,
I read from your blog that there are a few NTUC Income advisers who have agreed to offer only the low cost insurance and funds. I would like to get the email addresses and contact nos. of them.
REPLY
If you wish to buy low cost insurace, I suggest that you contact NTUC Income's business center
http://www.income.com.sg/businesscentre/
I read from your blog that there are a few NTUC Income advisers who have agreed to offer only the low cost insurance and funds. I would like to get the email addresses and contact nos. of them.
REPLY
If you wish to buy low cost insurace, I suggest that you contact NTUC Income's business center
http://www.income.com.sg/businesscentre/
Lyxor ETFs
Dear Mr. Tan,
I want so seek your advice on Lyxor ETF. It seems to track the index in several Asian countries. Can I buy it directly through stock broker like purchasing of STI ETF?
REPLY
I am not familiar with the Lyxor ETFs but I guess that they should be quite well diversified and low cost. You buy them through a stockbroker, like a share. (Note: my earlier comment about buying through an internet platform was wrong).
I want so seek your advice on Lyxor ETF. It seems to track the index in several Asian countries. Can I buy it directly through stock broker like purchasing of STI ETF?
REPLY
I am not familiar with the Lyxor ETFs but I guess that they should be quite well diversified and low cost. You buy them through a stockbroker, like a share. (Note: my earlier comment about buying through an internet platform was wrong).
The world will learn from the financial crisis in USA
Dear Mr. Tan,
With the Global uncertainties in finance, is it risky to invest in STI ETF now? It seems America is in a hot soup in managaing their monetary assets. What precautions you could advise our singaporeans, young and old not to fall into this mess in the next 5 or 10 years? Where should I go to invest the 1000 shares with STI ETF?
Pardon me, I am learning more about investments from your blog. I want to thank you that I truly enjoy reading your blog daily because I believe theory without practical approach is of no value.
REPLY
You buy the ETF through a stockbroker, just like you buy a share. If you are investing for the next 10 years, it is all right to invest in the ETF, as the financial mess will be cleared up by that time.
I believe that America will learn the lesson from this financial mess, and will sort them out to avoid similar problems in the future. The rest of the world, including Singapore, will learn from it as well. In the future, the world will be much less leveraged on debts.
--
With the Global uncertainties in finance, is it risky to invest in STI ETF now? It seems America is in a hot soup in managaing their monetary assets. What precautions you could advise our singaporeans, young and old not to fall into this mess in the next 5 or 10 years? Where should I go to invest the 1000 shares with STI ETF?
Pardon me, I am learning more about investments from your blog. I want to thank you that I truly enjoy reading your blog daily because I believe theory without practical approach is of no value.
REPLY
You buy the ETF through a stockbroker, just like you buy a share. If you are investing for the next 10 years, it is all right to invest in the ETF, as the financial mess will be cleared up by that time.
I believe that America will learn the lesson from this financial mess, and will sort them out to avoid similar problems in the future. The rest of the world, including Singapore, will learn from it as well. In the future, the world will be much less leveraged on debts.
--
Cost of Living: Lessons from the Malaysian election
FIRST POSTED ON 10 MARCH 2008
The election result in Malaysia is a big surprise, not only to the ruling Barisan National but to the opposition parties and the voters as well.
A key issue appears to be the high cost of living. It is not sufficient for a Government to say that they are due to external factors. The people expect the Government to find effective ways to deal with this challenge. This is what they elect the Government to do.
This election result has lessons for Singapore. What can the Government do about the high cost of living in Singapore?
Contributors
I wish to identify factors that make it difficult for many people to cope with the cost of living in Singapore:
1. Financial Products. Many people earn a low rate of interest on bank deposits. It is insufficient to cover the rate of inflation. If they invest in other financial products, they have to pay high charges and get a poor yield. They buy unnecessary and high cost insurance. They pay high interest charges on their borrowing. Financial institutions and intermediaries make good profits and earnings at the expense of consumers.
2. Transportation. They pay high cost for their transportation due to inefficiency of the system. One obvious example is our taxi service.
3. Commuting. Many people take one hour or more to get to their place of work and incur quite high travellng cost. The journey is uncomfortable and over-crowded.
4. High Government charges, such as ERP, GST, etc.
5. Business tie-ups. There are many tie-ups that work to the disadvantage of consumers. An example is the tie-up between motor dealers, banks and insurance companies on the purchase of a car.
Suggestions
Here are my suggestions on how to reduce the wastage, improve efficiency and help people to cope with the cost of living in Singapore.
1. Financial Products. We have to give people a fair return on their investments. Financial and insurance products that have excessive charges and offer unfair terms to consumers should be disallowed. They should not be allowed to design complex products that skim off the consumers. Financial institutions can compete to provide products to consumers on the basis of their efficiency and quality of service.
2. Transportation. We should bring down the cost of public transportation. They are a necessity for daily living, similar to fresh air. People do not consumer transportation unnecessary. The transportation cost can be reduced to the marginal operating cost. ERP charges, road tax and other levies on public transport can be waived.
3. Commuting. We should reduce the need for commuting. People should be encouraged to find work near their homes, or to move their homes to their place of work. Students should attend a school near their homes. Apart from reducing the transportation cost, it saves travelling time and improves the quality of life. This can be achieved by reducing the transaction cost in selling and buying a property to live in. Stamp duty can be abolished. Lawyers and broker fees can be reduced by simplifying the work and creating a more efficient system.
4. Consumer Education. We need a more active body to educate the consumers and protect their interest. This body should be given a stronger voice. It is necessary to balance the interest of consumers with the interest of business. We have to strike a fair balance. This body should also acti vigilently against tie-ups between businesses that restrict the choice and fair dealing for consumers.
5. Adequate wages. Workers in the lower income groups need adequate wages to meet the cost of living and save for their retirement. The current wages are depressed due to the available supply of foreign workers from low cost countries. If it is not possible to raise the wages of the local workers earning below the adequate level, they should be given a supplement through an adequate top-up to their CPF accounts.
Conclusion
There are already many existing measures taken to address these issues. We need to simplify the existing measures and make them more impactful to help the people.
We have to consider additional measures to help people to cope with the cost of living in Singapore.
Tan Kin Lian
The election result in Malaysia is a big surprise, not only to the ruling Barisan National but to the opposition parties and the voters as well.
A key issue appears to be the high cost of living. It is not sufficient for a Government to say that they are due to external factors. The people expect the Government to find effective ways to deal with this challenge. This is what they elect the Government to do.
This election result has lessons for Singapore. What can the Government do about the high cost of living in Singapore?
Contributors
I wish to identify factors that make it difficult for many people to cope with the cost of living in Singapore:
1. Financial Products. Many people earn a low rate of interest on bank deposits. It is insufficient to cover the rate of inflation. If they invest in other financial products, they have to pay high charges and get a poor yield. They buy unnecessary and high cost insurance. They pay high interest charges on their borrowing. Financial institutions and intermediaries make good profits and earnings at the expense of consumers.
2. Transportation. They pay high cost for their transportation due to inefficiency of the system. One obvious example is our taxi service.
3. Commuting. Many people take one hour or more to get to their place of work and incur quite high travellng cost. The journey is uncomfortable and over-crowded.
4. High Government charges, such as ERP, GST, etc.
5. Business tie-ups. There are many tie-ups that work to the disadvantage of consumers. An example is the tie-up between motor dealers, banks and insurance companies on the purchase of a car.
Suggestions
Here are my suggestions on how to reduce the wastage, improve efficiency and help people to cope with the cost of living in Singapore.
1. Financial Products. We have to give people a fair return on their investments. Financial and insurance products that have excessive charges and offer unfair terms to consumers should be disallowed. They should not be allowed to design complex products that skim off the consumers. Financial institutions can compete to provide products to consumers on the basis of their efficiency and quality of service.
2. Transportation. We should bring down the cost of public transportation. They are a necessity for daily living, similar to fresh air. People do not consumer transportation unnecessary. The transportation cost can be reduced to the marginal operating cost. ERP charges, road tax and other levies on public transport can be waived.
3. Commuting. We should reduce the need for commuting. People should be encouraged to find work near their homes, or to move their homes to their place of work. Students should attend a school near their homes. Apart from reducing the transportation cost, it saves travelling time and improves the quality of life. This can be achieved by reducing the transaction cost in selling and buying a property to live in. Stamp duty can be abolished. Lawyers and broker fees can be reduced by simplifying the work and creating a more efficient system.
4. Consumer Education. We need a more active body to educate the consumers and protect their interest. This body should be given a stronger voice. It is necessary to balance the interest of consumers with the interest of business. We have to strike a fair balance. This body should also acti vigilently against tie-ups between businesses that restrict the choice and fair dealing for consumers.
5. Adequate wages. Workers in the lower income groups need adequate wages to meet the cost of living and save for their retirement. The current wages are depressed due to the available supply of foreign workers from low cost countries. If it is not possible to raise the wages of the local workers earning below the adequate level, they should be given a supplement through an adequate top-up to their CPF accounts.
Conclusion
There are already many existing measures taken to address these issues. We need to simplify the existing measures and make them more impactful to help the people.
We have to consider additional measures to help people to cope with the cost of living in Singapore.
Tan Kin Lian
Mid Valley Mall in Malaysia
I am now staying in a hotel in Mid Valley, outside of Kuala Lumpur in Malaysia. It has a large shopping mall and several hotels in the complex. I shall be updating my blog less frequently for the next three days.
Tuesday, March 18, 2008
Invest to earn more than 2.6%
Dear Mr. Tan,
I currently have a housing loan with HDB. Is it a good idea to pay off as much of the loan as early as possible? I have heard different views regarding this issue. Some people say it's better to use the money in the ordinary account to invest and earn more returns. Others say paying the loan earlier will help to reduce the interest amount. What is your advice?
REPLY
Interest charge on the HDB loan is 2.6%. You should be able to earn a better return over the long term from a low cost investment fund.
If you are willing to take some risk and invest for the long term, it is better to keep the loan and invest your savings. Read the following:
http://www.tankinlian.com/faq/savings.html
I currently have a housing loan with HDB. Is it a good idea to pay off as much of the loan as early as possible? I have heard different views regarding this issue. Some people say it's better to use the money in the ordinary account to invest and earn more returns. Others say paying the loan earlier will help to reduce the interest amount. What is your advice?
REPLY
Interest charge on the HDB loan is 2.6%. You should be able to earn a better return over the long term from a low cost investment fund.
If you are willing to take some risk and invest for the long term, it is better to keep the loan and invest your savings. Read the following:
http://www.tankinlian.com/faq/savings.html
Difference: Singapore EQuity fund and STI ETF
Dear Mr. Tan,
What is the different of buying STI EFT and investing in Singapore Equity form NTUC?
REPLY
Both funds are invested mainly in equities.
The difference is in the upfront charges:
NTUC fund 3.5%
STI ETF 0.3%
The annual fee is also different:
NTUC fund - 0.65%
STI ETF 0.3%
You need $3,200 to buy 1,000 shares of STI ETF. You can buy the Singapore Equity fund for $100.
Trials & Tribulations of A Science Career
Our own home grown scientist Dr. Lee Kum Tatt has shared with us on many occasions the fun and glory of a science and research career.
The question that is sometimes asked “ Hasn’t he got some bad times doing science and what did he do about them”? His wife, Mrs. Engeline Lee has persuaded him to share with us some of the trials and tribulations of a science career and research worker’s life.
You can read about his comments in his blog www.leekumtattblogspot.com
The question that is sometimes asked “ Hasn’t he got some bad times doing science and what did he do about them”? His wife, Mrs. Engeline Lee has persuaded him to share with us some of the trials and tribulations of a science career and research worker’s life.
You can read about his comments in his blog www.leekumtattblogspot.com
Poll: LRT in CBD
Is it useful to have a LRT system within the Central Business District? (25 replies)
28% strongly support
44% can consider
4% neutral
24% not feasible
Strange. The results are exactly the same as poll on retirement housing!!
28% strongly support
44% can consider
4% neutral
24% not feasible
Strange. The results are exactly the same as poll on retirement housing!!
Travelling within the Central Business District
There is unhappiness over the new LTA rules that require taxis to pick up and drop passengers at designated stops. The LTA will make some changes to address these complaints.
Over the longer term, we need to improve the transport system within the Central Business District.
I suggest that an overhead light rail transport (LRT) be build. This will run along the major roads. It allows passengers to travel within the CBD or to connect to the MRT stations. Travel within the CBD can usually be done on one train or one change of train. Many buildings can have walkways to connect to the nearby LRT station.
We now have a LRT system in three towns in Singapore. The usage of the trains is low, due to the small population catchment and other factors. I expect that the LRT within the CBD will be more successful.
If more passengers uses the LRT to travel within the CBD, there will be less need for taxis.
Over the longer term, we need to improve the transport system within the Central Business District.
I suggest that an overhead light rail transport (LRT) be build. This will run along the major roads. It allows passengers to travel within the CBD or to connect to the MRT stations. Travel within the CBD can usually be done on one train or one change of train. Many buildings can have walkways to connect to the nearby LRT station.
We now have a LRT system in three towns in Singapore. The usage of the trains is low, due to the small population catchment and other factors. I expect that the LRT within the CBD will be more successful.
If more passengers uses the LRT to travel within the CBD, there will be less need for taxis.
Life assurance policies give poor return
Dear Mr. Tan
I have the following life insurance policies:
Plan: Life Plus
Sum Assured $100,000
Yearly premium $1,282
Insured for last 10 years
Cash value now: $10,300
Plan: Dynamic Prolife
Sum Assured: $50,000
Yearly Premium 1,519
Insured for last 10 years
Cash value now: $12,000
Should I keep the insurance or should I switch to low cost fund and term insurance? Based on my calculation, if I keep the cash value and subsequent premium in low cost fund, I can get a better return. If I keep the policies, I will have to wait for another 6 to 9 years for my cash value to breakeven. Pls advise.
REPLY
Please read this FAQ:
http://www.tankinlian.com/faq/existinglife.html
I hope that you find it useful for your decision.
I have the following life insurance policies:
Plan: Life Plus
Sum Assured $100,000
Yearly premium $1,282
Insured for last 10 years
Cash value now: $10,300
Plan: Dynamic Prolife
Sum Assured: $50,000
Yearly Premium 1,519
Insured for last 10 years
Cash value now: $12,000
Should I keep the insurance or should I switch to low cost fund and term insurance? Based on my calculation, if I keep the cash value and subsequent premium in low cost fund, I can get a better return. If I keep the policies, I will have to wait for another 6 to 9 years for my cash value to breakeven. Pls advise.
REPLY
Please read this FAQ:
http://www.tankinlian.com/faq/existinglife.html
I hope that you find it useful for your decision.
Simpler way to address a letter?
I have to send a letter to CPF. They asked me to mail it to the following address:
CPF Minimum Sum Topping-up Scheme (Retirement Services Dept)
CPF Board
79 Robinson Road
CPF Building
Singapore 068897
Here is a shorter way to address the letter:
CPF Retirement Services Dept
Singapore 068897
I wonder if my letter will arrive there?
I shall try to post a letter to myself as follows:
Tan Kin Lian
Singapore 809744
CPF Minimum Sum Topping-up Scheme (Retirement Services Dept)
CPF Board
79 Robinson Road
CPF Building
Singapore 068897
Here is a shorter way to address the letter:
CPF Retirement Services Dept
Singapore 068897
I wonder if my letter will arrive there?
I shall try to post a letter to myself as follows:
Tan Kin Lian
Singapore 809744
Poll: Retirement Housing in Singapre
Do you like the concept of retirement housing in Singapore, as described in my blog? (25 replies)
24% strongly support
44% worth considering
4% neutral
28% not feasible
24% strongly support
44% worth considering
4% neutral
28% not feasible
Retirement Housing in Singapore
1. Someone wrote to the Straits Times Forum proposing the development of retirement housing in nearby countries, where the cost of land is lower.
2. It is economically feasible to build the retirement housing in Singapore. The cost of land can be reduced by better utilisation of land. Here is my concept of a future retirement town to be build in Singapore.
a) Located in a corner of Singapore, say in Lim Chu Kang.
b) Comprise of 100 blocks of 100 units, i.e. total of 10,000 units
c) All internal transport by light rail transport (LRT) and personal automated transport (PAT)
d) LRT to connect to a nearby MRT station
e) Large car parks to be located outside of the town, for use by residentials and visitors
f) Medical facilities operated by private clinics to serve the residetials
g) Housing units to be owned by a residential REIT and rented to residents
g) Residents can invest their retirement savings in the residential REIT
g) Covered walkways to connect to parks, sports facilities, social clubs and food outlets
h) Easy for children to visit the elderly from other parts of Singapore and vice versa
i) Some blocks to be rented to foreigners interested in this lifestyle
j) Employment opportunities for the residents
h) The residential units and public areas are designed to be friendly to the elderly.
3. Employment opportunities. The residents can work in the social clubs, food outlets, care centers, call centers and remote work offices in the town to earn a supplementary income.
4. Residential REIT. The residents can invest a large part of their retirement savings in the residential REIT. The dividends from the REIT can be used to offset their rental payments, and leave a balance for their living expenses. They can also encash their units in the REIT gradually, during their lifetime, to provide a supplementary income.
5. The residents are encouraged to join a social club to meet friends, take part in social activities and also have their meals. This is similar to the lifestyle of the posh social club in London, but can be operated at low cost.
6. I hope that this idea will be taken up by the Government or a private consortium of sector sector developers.
2. It is economically feasible to build the retirement housing in Singapore. The cost of land can be reduced by better utilisation of land. Here is my concept of a future retirement town to be build in Singapore.
a) Located in a corner of Singapore, say in Lim Chu Kang.
b) Comprise of 100 blocks of 100 units, i.e. total of 10,000 units
c) All internal transport by light rail transport (LRT) and personal automated transport (PAT)
d) LRT to connect to a nearby MRT station
e) Large car parks to be located outside of the town, for use by residentials and visitors
f) Medical facilities operated by private clinics to serve the residetials
g) Housing units to be owned by a residential REIT and rented to residents
g) Residents can invest their retirement savings in the residential REIT
g) Covered walkways to connect to parks, sports facilities, social clubs and food outlets
h) Easy for children to visit the elderly from other parts of Singapore and vice versa
i) Some blocks to be rented to foreigners interested in this lifestyle
j) Employment opportunities for the residents
h) The residential units and public areas are designed to be friendly to the elderly.
3. Employment opportunities. The residents can work in the social clubs, food outlets, care centers, call centers and remote work offices in the town to earn a supplementary income.
4. Residential REIT. The residents can invest a large part of their retirement savings in the residential REIT. The dividends from the REIT can be used to offset their rental payments, and leave a balance for their living expenses. They can also encash their units in the REIT gradually, during their lifetime, to provide a supplementary income.
5. The residents are encouraged to join a social club to meet friends, take part in social activities and also have their meals. This is similar to the lifestyle of the posh social club in London, but can be operated at low cost.
6. I hope that this idea will be taken up by the Government or a private consortium of sector sector developers.
Advice to young people
If you have recently started work, here are a few tips:
a) Set aside 15% to 20% of your monthly income as your savings
b) The balance is to be used to meet your personal expenses, including contribution to your parents
c) Avoid buying a car, as it is too expensive and take away too much of your income
d) Do not borrow on credit card
e) Let your savings accumulate in your savings account to earn 1% interest
f) Later, Invest your savings in a low cost investment fund or the STI exchange traded fund.
g) Do not buy a high cost life insurance policy (as it gives a poor return).
h) Buy low cost term or accident insurance to cover your income.
Your savings will accumulate to a large sum over 5, 10 or more years. You may need it for your major financial commitments, e.g. wedding, buying a home, education and retirement. If you do not take a loan, you can save on the interest payments!
Read these FAQs:
http://www.tankinlian.com/faq/savings.html
http://www.tankinlian.com/faq/benchmark.html
a) Set aside 15% to 20% of your monthly income as your savings
b) The balance is to be used to meet your personal expenses, including contribution to your parents
c) Avoid buying a car, as it is too expensive and take away too much of your income
d) Do not borrow on credit card
e) Let your savings accumulate in your savings account to earn 1% interest
f) Later, Invest your savings in a low cost investment fund or the STI exchange traded fund.
g) Do not buy a high cost life insurance policy (as it gives a poor return).
h) Buy low cost term or accident insurance to cover your income.
Your savings will accumulate to a large sum over 5, 10 or more years. You may need it for your major financial commitments, e.g. wedding, buying a home, education and retirement. If you do not take a loan, you can save on the interest payments!
Read these FAQs:
http://www.tankinlian.com/faq/savings.html
http://www.tankinlian.com/faq/benchmark.html
Insurance premium for off-peak car
A blog reader called several insurance companies and obtained the following quote for his motor insurance:
Type: Off-peak car, after 20% NCD and excess $500:
India International: $599
Income: $618
China Insurance: $647
AIG: $889
AXA: $948
Call direct:
http://www.tankinlian.com/faq/motord.html
Type: Off-peak car, after 20% NCD and excess $500:
India International: $599
Income: $618
China Insurance: $647
AIG: $889
AXA: $948
Call direct:
http://www.tankinlian.com/faq/motord.html
Residential REIT
I wish to explain the concept of investing and living in a residential REIT:
a) As you investor, you own investment units in the residential REIT
b) You receive an annual dividend based on the net income of the REIT
c) You pay a rental for the use of a housing unit in the REIT
If you stay in the same size of housing unit as your invested sum, the net income should be slightly smaller than the rental, as there is a management charge of (say) 5%. You will benefit from the following:
a) It gives you the flexibility to rent a smaller housing unit (relative to your investment) and keep the excess income
b) You have the choice to sell off some investment units monthly to meet your living expenses. This is similar to a draw down annuity or reverse mortgage.
c) You can decide to live elsewhere and enjoy the full dividend from your investment units.
This concept is similar to timeshare, but avoids the high marketing cost, and most of the investors are likely to live in the property. I hope that this idea can be developed by a private sector developer.
a) As you investor, you own investment units in the residential REIT
b) You receive an annual dividend based on the net income of the REIT
c) You pay a rental for the use of a housing unit in the REIT
If you stay in the same size of housing unit as your invested sum, the net income should be slightly smaller than the rental, as there is a management charge of (say) 5%. You will benefit from the following:
a) It gives you the flexibility to rent a smaller housing unit (relative to your investment) and keep the excess income
b) You have the choice to sell off some investment units monthly to meet your living expenses. This is similar to a draw down annuity or reverse mortgage.
c) You can decide to live elsewhere and enjoy the full dividend from your investment units.
This concept is similar to timeshare, but avoids the high marketing cost, and most of the investors are likely to live in the property. I hope that this idea can be developed by a private sector developer.
Monday, March 17, 2008
Low cost funds
It is important to choose a low cost fund for your investment. If you invest in equities for the long term, you should be able to get an average yield of 3% to 4% above Government bonds. This should give a gross yield of about 6% to 7%.
If the expense ratio of the fund is 2.5% (which is quite typical), you will get a net yield of only 4% (after charges). If the expense ratio is 1%, you get a net yield of 5.5%.
The difference of 1.5% in the yield can amount to more than 15% over 10 years. It is important to invest in a low cost fund, so that you can keep most of the yield.
The experience of most investors is that the speculative funds incur high charges and do not produce a better yield over the long term. In fact, many speculative funds lost money for the investors.
If the expense ratio of the fund is 2.5% (which is quite typical), you will get a net yield of only 4% (after charges). If the expense ratio is 1%, you get a net yield of 5.5%.
The difference of 1.5% in the yield can amount to more than 15% over 10 years. It is important to invest in a low cost fund, so that you can keep most of the yield.
The experience of most investors is that the speculative funds incur high charges and do not produce a better yield over the long term. In fact, many speculative funds lost money for the investors.
Low cost insurance
Mr. Tan
I am reaching 30. Currently, I have a insurance ijfe plan of the insured amount of about $70,000. I am insured under the Health Shield and get the rider like the Pink Of Health.
I am now paying a premium of about 3% of my monthly income. I am thinking of getting additional cover of critical illness and term plan. What are the options of the insurance that I can choose from?
REPLY
You can read the FAQs in my website
www.tankinlian.com/faq
http://www.tankinlian.com/faq/choice.html
http://www.tankinlian.com/faq/benchmark.html
I am reaching 30. Currently, I have a insurance ijfe plan of the insured amount of about $70,000. I am insured under the Health Shield and get the rider like the Pink Of Health.
I am now paying a premium of about 3% of my monthly income. I am thinking of getting additional cover of critical illness and term plan. What are the options of the insurance that I can choose from?
REPLY
You can read the FAQs in my website
www.tankinlian.com/faq
http://www.tankinlian.com/faq/choice.html
http://www.tankinlian.com/faq/benchmark.html
High charges under ILP policy
Dear Mr. Tan,
I am insured for a sum assured of $100k and critical illness for 180k under a ILP since 2006. The cash value is about $300 now although I have a total premium of $3,600. Is this a good policy?
REPLY
The cash value is too low, compared to the premium that you have paid. The charges under the ILP policy is excessive and has taken away most of your savings. Read this FAQ:
http://www.tankinlian.com/faq/ilp.html
As you have already incurred most of the upfront charge, it is probably better for you to continue the ILP policy. After the second year, the charges should be quite low.
If you have to increase your savings in the future, do not buy a high cost ILP policy.
You can buy a term insurance policy to cover your protection needs. It is low cost and offers a large coverage. Read this FAQ:
http://www.tankinlian.com/faq/benchmark.html
I am insured for a sum assured of $100k and critical illness for 180k under a ILP since 2006. The cash value is about $300 now although I have a total premium of $3,600. Is this a good policy?
REPLY
The cash value is too low, compared to the premium that you have paid. The charges under the ILP policy is excessive and has taken away most of your savings. Read this FAQ:
http://www.tankinlian.com/faq/ilp.html
As you have already incurred most of the upfront charge, it is probably better for you to continue the ILP policy. After the second year, the charges should be quite low.
If you have to increase your savings in the future, do not buy a high cost ILP policy.
You can buy a term insurance policy to cover your protection needs. It is low cost and offers a large coverage. Read this FAQ:
http://www.tankinlian.com/faq/benchmark.html
Negative return from unit trusts
Hi Mr. Tan,
Your website is very useful to improve our financial awareness, especially for people living in Singapore. I visit your blog every day.
I read your article about Investing for the Long Term. I look forward to a Unit Trust that offers quite similar feature as ETF.
Currently, I have invested more than 60% of my savings into several unit trusts since mid 2006. (Details of funds removed). So far, my investment showed a loss of 20%. I consider my investment to be for the long term, and have not made any withdrawal.
Do you have any recommendation what I should do in the midst of current credit mess? Should I invest through a personal advisor from financial institution? I have been approached by an adviser who offers advice for an annual cost wrap of about 1%. Is it worth while?
REPLY
What are the upfront and annual charges of these funds? If you invest in 2006, you should have a period where you made a big gain (i.e. last year) and it should have broken even now, even with the market downturn.
I am surprised that you you have lost 20% of your investment. Perhaps you have invested in the more speculative funds, or the fund charges are too high?-
Your website is very useful to improve our financial awareness, especially for people living in Singapore. I visit your blog every day.
I read your article about Investing for the Long Term. I look forward to a Unit Trust that offers quite similar feature as ETF.
Currently, I have invested more than 60% of my savings into several unit trusts since mid 2006. (Details of funds removed). So far, my investment showed a loss of 20%. I consider my investment to be for the long term, and have not made any withdrawal.
Do you have any recommendation what I should do in the midst of current credit mess? Should I invest through a personal advisor from financial institution? I have been approached by an adviser who offers advice for an annual cost wrap of about 1%. Is it worth while?
REPLY
What are the upfront and annual charges of these funds? If you invest in 2006, you should have a period where you made a big gain (i.e. last year) and it should have broken even now, even with the market downturn.
I am surprised that you you have lost 20% of your investment. Perhaps you have invested in the more speculative funds, or the fund charges are too high?-
Motor insurance increase by 20%
Hi, Mr. Tan
I have insured my motor car with NTUC for the past many years, when you were CEO. I just received the renewal notice for my car insurance. Guess what! The premium increased by more than 20%.
I did not make any claim and have been enjoying 50% discount. Why should the premium increase by so much? Should I stay with NTUC?
REPLY
I recall that the motor insurance has lost money during the past year. But I agree that an increase of 20% is excessive, especially as you did not make any claim last year.
Perhaps you should call a few insurance companies and check their premium for your car. The telephone numbers are shown here:
http://www.tankinlian.com/faq/motord.html
Let me know the results of your survey.
I have insured my motor car with NTUC for the past many years, when you were CEO. I just received the renewal notice for my car insurance. Guess what! The premium increased by more than 20%.
I did not make any claim and have been enjoying 50% discount. Why should the premium increase by so much? Should I stay with NTUC?
REPLY
I recall that the motor insurance has lost money during the past year. But I agree that an increase of 20% is excessive, especially as you did not make any claim last year.
Perhaps you should call a few insurance companies and check their premium for your car. The telephone numbers are shown here:
http://www.tankinlian.com/faq/motord.html
Let me know the results of your survey.
Oil product
Dear Mr. Tan,
Is it safe to invest in oil product? It has a ROI of more than 8%.
www.oilpods.com
http://www.oilestates.com/faq.html
REPLY
I am not familiar with investing in this product. I advise you to avoid investing in a product that you are not familiar with.
Is it safe to invest in oil product? It has a ROI of more than 8%.
www.oilpods.com
http://www.oilestates.com/faq.html
REPLY
I am not familiar with investing in this product. I advise you to avoid investing in a product that you are not familiar with.
UK Traded Endowments
ORIGNALLY POSTED IN DECEMBER 2007
Dear Mr. Tan,
Recently, I was engaged in an online discussion about UK Traded Endowments. The other party suggested investing in UK Traded Endowments, which was able to give a better return than money market fund.
Are you familiar with this type of investment? What is your opinion?
REPLY
The fund manager buys the endowment policies from the customers and pay the premiums till maturity to collect the proceeds. You have to rely on the ability of the fund manager to manage the situation.
I do not know what charges are being taken away by the fund manager as their fees and expenses, and whether the remainder is a fair rate of return to the investor for the risk.
You have to study the following:
1. What is the underlying rate of return to the investor from the traded endowments?
2. What are the factors that could impact on the underlying return, e.g. reduction in bonus rates?
3. What are the fees taken away by the fund manager?
4. What is the net return to the investor?
5. What is the financial standing of the fund manager?
Dear Mr. Tan,
Recently, I was engaged in an online discussion about UK Traded Endowments. The other party suggested investing in UK Traded Endowments, which was able to give a better return than money market fund.
Are you familiar with this type of investment? What is your opinion?
REPLY
The fund manager buys the endowment policies from the customers and pay the premiums till maturity to collect the proceeds. You have to rely on the ability of the fund manager to manage the situation.
I do not know what charges are being taken away by the fund manager as their fees and expenses, and whether the remainder is a fair rate of return to the investor for the risk.
You have to study the following:
1. What is the underlying rate of return to the investor from the traded endowments?
2. What are the factors that could impact on the underlying return, e.g. reduction in bonus rates?
3. What are the fees taken away by the fund manager?
4. What is the net return to the investor?
5. What is the financial standing of the fund manager?
Keep the money in CPF retirement account
Dear Sir,
I am asking this on behalf of my mother. She has $60K in her retirement account. She is thinking of transfering the entire sum to the NTUC annuity. Is it wise?
REPLY
It is better to keep the money in the CPF retirement account and earn an return of 4%plus 1% bonus (on $40,000).
Your mother should buy the life annuity with savings that are outside of CPF.
I am asking this on behalf of my mother. She has $60K in her retirement account. She is thinking of transfering the entire sum to the NTUC annuity. Is it wise?
REPLY
It is better to keep the money in the CPF retirement account and earn an return of 4%plus 1% bonus (on $40,000).
Your mother should buy the life annuity with savings that are outside of CPF.
Exchange Traded Endowments
Dear Mr. Tan,
I've never heard you mention about Traded Endowment Policies (TEP). Well, I might have overlooked your articles. Is it true that TEPs are safe even when the market's down because they claim that one can still get average returns of 6-8% during times of uncertainty.
Here's the link.http://www.tradedendowment.com/index.php?option=com_content&task=view&id=29&Itemid=40
Your thoughts please
REPLY
I have written about traded endowment policies in my blog. You can search my blog for my articles.
I advise against investing in these products as the intermediary, who arranges the investment, takes a fee (which is usually not transparent). As the investor, you carry the risk.
I've never heard you mention about Traded Endowment Policies (TEP). Well, I might have overlooked your articles. Is it true that TEPs are safe even when the market's down because they claim that one can still get average returns of 6-8% during times of uncertainty.
Here's the link.http://www.tradedendowment.com/index.php?option=com_content&task=view&id=29&Itemid=40
Your thoughts please
REPLY
I have written about traded endowment policies in my blog. You can search my blog for my articles.
I advise against investing in these products as the intermediary, who arranges the investment, takes a fee (which is usually not transparent). As the investor, you carry the risk.
Bear Stearns
Dear Mr. Tan,
Did the Singapore Government invest in Bear Stearns?
REPLY
I recall that GIC and Temasek invested in UBS, Citigroup and Merrill Lynch. I do not recall that they invested in Bear Stearns.
Did the Singapore Government invest in Bear Stearns?
REPLY
I recall that GIC and Temasek invested in UBS, Citigroup and Merrill Lynch. I do not recall that they invested in Bear Stearns.
Sunday, March 16, 2008
Hedge Funds
Hedge funds take money from investors and make risky investments. They magnify the risk by borrowing short term funds. Some hedge funds borrow 20 times of their capital. This high leveraging is dangerous.
When their risky investments turn bad, they lost most of their investor's capital. They are not able to refinance the borrowings and had to repay them at short notice. They are required to liquidate their assets at depressed prices.
A few hedge funds had failed in this manner in recent months. This has caused the turmoil in the markets. It has become a financial crisis.
Lesson: Expect some regulatory controls over the use of leveraging by hedge funds in the future. In the meantime, expect the market to go through a lot of further turmoil, until the liquidity crisis is sorted out.
When their risky investments turn bad, they lost most of their investor's capital. They are not able to refinance the borrowings and had to repay them at short notice. They are required to liquidate their assets at depressed prices.
A few hedge funds had failed in this manner in recent months. This has caused the turmoil in the markets. It has become a financial crisis.
Lesson: Expect some regulatory controls over the use of leveraging by hedge funds in the future. In the meantime, expect the market to go through a lot of further turmoil, until the liquidity crisis is sorted out.
Options to invest retirement savings
1. If you have to invest your retirement savings, the following options are available:
a) Retirement account of CPF - 4% plus 1%
b) Government bonds - 3%
c) Bank deposits - 1.5%
d) Life Annuity -5% plus bonus
e) Unit trust - 5% (average for long term)
f) Foreign currency - 4% with currency risk
2. If you have limited savings, say less than $500,000, you should invest as follows:
a) Keep the maximum allowed in CPF (say $150,000 at 65)
b) Use $200,000 to buy a life annuity at 65 to pay about $900 plus bonus each month
c) Invest the balance in government bonds or a unit trust
Use the monthly income from CPF and the annuity to meet your regular expenses. You can draw down on your other investments for emergency cash needs, e.g. large medical bills or education expenses.
If the monthly income is not sufficient for your expenses, you can do part-time work basis to earn a supplementary income.
If the monthly income is more than sufficent for your expenses, you can save and re-invest the balance.
Lesson: choose investments that have low expense charges, so that you can keep most of the yield (instead of giving it away to the intermediary or financial institutions).
a) Retirement account of CPF - 4% plus 1%
b) Government bonds - 3%
c) Bank deposits - 1.5%
d) Life Annuity -5% plus bonus
e) Unit trust - 5% (average for long term)
f) Foreign currency - 4% with currency risk
2. If you have limited savings, say less than $500,000, you should invest as follows:
a) Keep the maximum allowed in CPF (say $150,000 at 65)
b) Use $200,000 to buy a life annuity at 65 to pay about $900 plus bonus each month
c) Invest the balance in government bonds or a unit trust
Use the monthly income from CPF and the annuity to meet your regular expenses. You can draw down on your other investments for emergency cash needs, e.g. large medical bills or education expenses.
If the monthly income is not sufficient for your expenses, you can do part-time work basis to earn a supplementary income.
If the monthly income is more than sufficent for your expenses, you can save and re-invest the balance.
Lesson: choose investments that have low expense charges, so that you can keep most of the yield (instead of giving it away to the intermediary or financial institutions).
Investing for the long term
If you are investing your savings for your retirement, you should look for the following:
a) A diversified fund
b) Blue chip investments, i.e. non-speculative
c) Low cost, i.e. less than 1% per annum
d) Low upfront fee, less than 1%
If you invest in equities for the long term, you should be able to get an average yield (net of expenses) of 2% to 3% above Government bonds. This should give a net yield of about 5% to 6%.
It is important to invest in a low cost fund, so that you can keep most of the yield.
Investing in equity has its risk. You will get a high yield in some years, and a low or negative yield in other years. If you invest for many years, you will average out the good and bad years and get an average yield that is better than Government bonds.
Currently, you can achieve this goal by investing in the STI exchange traded fund managed by StateStreet. I will try to look for a unit trust that offers similar features.
a) A diversified fund
b) Blue chip investments, i.e. non-speculative
c) Low cost, i.e. less than 1% per annum
d) Low upfront fee, less than 1%
If you invest in equities for the long term, you should be able to get an average yield (net of expenses) of 2% to 3% above Government bonds. This should give a net yield of about 5% to 6%.
It is important to invest in a low cost fund, so that you can keep most of the yield.
Investing in equity has its risk. You will get a high yield in some years, and a low or negative yield in other years. If you invest for many years, you will average out the good and bad years and get an average yield that is better than Government bonds.
Currently, you can achieve this goal by investing in the STI exchange traded fund managed by StateStreet. I will try to look for a unit trust that offers similar features.
Saturday, March 15, 2008
Benchmark premium rates for critical illness
A term insurance policy pays on death. A critical illness policy pays on the diagnosis of a critical illness or on death. The chance of making a claim on a critical illness policy is higher. A rule of thumb is that the premium payable for critical illness cover is 60% higher than for a death cover for a male. For a female, it is 140% higher.
Here are some specimen rates:
Here are some specimen rates:
Insure $300,000 level for 25 years
Age Male Female
Death CI Death CI
25 456 711 295 726
30 729 1161 431 1083
35 1211 1966 676 1586
40 1984 3212 1127 2304
Financial Crisis
The current financial crisis in USA is similar to the Asian Financial Crisis, exactly ten years ago.
In the Asian financial crisis (1998), corporates borrowed on short term loans in USD to fund long term property and business projects. When the USD increased sharply, they could not repay their debts.
In the current financial crisis (2008), many special investment vehicles and hedge funds borrowed money on the short term to invest in other assets, such as equities, to earn the margin between their cost of borrowings and the higher return on risky asssets.
The defaults of subprime mortgages started the crisis. It spread beyond the subprime mortgages. When the short term borrowings of the SIV and hedge funds fall due, the lenders refused to refinancing the loans. The borrowers could not refinance their debts. They had to sell equities and other assets to repay the loans. This caused the collapse of the stock markets.
Lesson: It is very risky to borrow on short term to invest for the long term, or to invest on borrowed money (i.e. leveraging).
In the Asian financial crisis (1998), corporates borrowed on short term loans in USD to fund long term property and business projects. When the USD increased sharply, they could not repay their debts.
In the current financial crisis (2008), many special investment vehicles and hedge funds borrowed money on the short term to invest in other assets, such as equities, to earn the margin between their cost of borrowings and the higher return on risky asssets.
The defaults of subprime mortgages started the crisis. It spread beyond the subprime mortgages. When the short term borrowings of the SIV and hedge funds fall due, the lenders refused to refinancing the loans. The borrowers could not refinance their debts. They had to sell equities and other assets to repay the loans. This caused the collapse of the stock markets.
Lesson: It is very risky to borrow on short term to invest for the long term, or to invest on borrowed money (i.e. leveraging).
Car Free Cities
I hope that more cities in the fugure will be designed to be car free. Here is a website that describes the concept of a car free city:
http://www.carfree.com
In Singapore, we can apply this concept to the new towns that are being developed. All movements within the town will be by walking or public transport. People should be encouraged to live, work and study within the same town.
Here is my idea of how the future town should be developed:
http://www.tankinlian.com/articles/housing.html
With the high price of oil and the damage to the environment, this concept becomes more urgent in all cities around the world.
http://www.carfree.com
In Singapore, we can apply this concept to the new towns that are being developed. All movements within the town will be by walking or public transport. People should be encouraged to live, work and study within the same town.
Here is my idea of how the future town should be developed:
http://www.tankinlian.com/articles/housing.html
With the high price of oil and the damage to the environment, this concept becomes more urgent in all cities around the world.
Friday, March 14, 2008
1,000 visitors
Over 1,000 visitors to my blog on Tuesday. It is the highest number for the past year. The average for the past week is 850.
Ask for three quotes
Dear Mr Tan,
I need to seek your advice. I am covered under a group policy basic term insurance. I want to increase my cover to $150K and take up a new critical illness term plan (until age 65). I declare that I am suffering from xxxx. The underwriter quoted a monthly premium of $x for the basic term and $y for the critical illness term. In your professional opinion, do you think that I should take up the new coverage? Is the premium fair?
REPLY
I suggest that you ask three insurance company to quote the premium on your coverage. You can make a better decision after you obtain the three quotes. Read this FAQ:
http://www.tankinlian.com/faq/termd.html
You can get the benchmark premium rate from this FAQ:
http://www.tankinlian.com/faq/benchmark.html
I need to seek your advice. I am covered under a group policy basic term insurance. I want to increase my cover to $150K and take up a new critical illness term plan (until age 65). I declare that I am suffering from xxxx. The underwriter quoted a monthly premium of $x for the basic term and $y for the critical illness term. In your professional opinion, do you think that I should take up the new coverage? Is the premium fair?
REPLY
I suggest that you ask three insurance company to quote the premium on your coverage. You can make a better decision after you obtain the three quotes. Read this FAQ:
http://www.tankinlian.com/faq/termd.html
You can get the benchmark premium rate from this FAQ:
http://www.tankinlian.com/faq/benchmark.html
Keep invested in CPF
Hi Sir,
I chance upon your site and need your advice regarding my investment. By end of March, the Government will be freezing our CPF account.
I am thinking of investing my ordinary account and special account into bonds (50%) and in AIA Growth Fund (50%). Is it wise?
My friends told me that the economy is not doing well, so better not invest in anything. I really don't know. This is the first time I am investing. Really hope to hear from you soon. I need to reply my agent by 15th March.
REPLY
It is better to keep your money in the CPF to earn the guaranteed interest rate of 2.5% for ordinary account and 4% for special account plus the bonus of 1%. If you do not need the money in the ordinary account, you can transfer it to the special account to earn a higher rate of interest.
Do not invest in high cost products sold by an insurance agent, as it gives you a poor return, after deducting the charges. High quality bonds do not give you an adequate yield. Low quality bonds give a higher yield, but is risky.
I chance upon your site and need your advice regarding my investment. By end of March, the Government will be freezing our CPF account.
I am thinking of investing my ordinary account and special account into bonds (50%) and in AIA Growth Fund (50%). Is it wise?
My friends told me that the economy is not doing well, so better not invest in anything. I really don't know. This is the first time I am investing. Really hope to hear from you soon. I need to reply my agent by 15th March.
REPLY
It is better to keep your money in the CPF to earn the guaranteed interest rate of 2.5% for ordinary account and 4% for special account plus the bonus of 1%. If you do not need the money in the ordinary account, you can transfer it to the special account to earn a higher rate of interest.
Do not invest in high cost products sold by an insurance agent, as it gives you a poor return, after deducting the charges. High quality bonds do not give you an adequate yield. Low quality bonds give a higher yield, but is risky.
Tolerance for mistakes
Hi Mr Tan,
I am an avid follower of your blog. I do notice that the entries you have written often draw responses, positive and negative, from the public. There were times when people wrote really nasty things about Income whenever Income makes mistakes here and there.
However, I hardly hear about the public complimenting about the extra mile that Income (or other insurance companies) do for their policy holders. Have we turned into a society where we respond with over-the-top reactions to mistakes, be it minor or major? Have we turned into a society where we cannot make room for mistakes? Must everything go strictly to what has been planned ahead? :(
Pardon me for sounding stereotypical. However, I do feel that society as a whole is becoming less tolerant towards people making mistakes. Patience seems to be in short supply these days and tempers flare too easily. It 'beggars belief' that society is opening up as a whole to welcome people from other parts of the world when minds are shrinking in size.
I apologise for this long email. However, I am not sure if I am the only one behaving in this way. Is it too much to ask for a little patience?
REPLY
Thank you for your useful observations. I agree with your thoughts.
I am an avid follower of your blog. I do notice that the entries you have written often draw responses, positive and negative, from the public. There were times when people wrote really nasty things about Income whenever Income makes mistakes here and there.
However, I hardly hear about the public complimenting about the extra mile that Income (or other insurance companies) do for their policy holders. Have we turned into a society where we respond with over-the-top reactions to mistakes, be it minor or major? Have we turned into a society where we cannot make room for mistakes? Must everything go strictly to what has been planned ahead? :(
Pardon me for sounding stereotypical. However, I do feel that society as a whole is becoming less tolerant towards people making mistakes. Patience seems to be in short supply these days and tempers flare too easily. It 'beggars belief' that society is opening up as a whole to welcome people from other parts of the world when minds are shrinking in size.
I apologise for this long email. However, I am not sure if I am the only one behaving in this way. Is it too much to ask for a little patience?
REPLY
Thank you for your useful observations. I agree with your thoughts.
Thursday, March 13, 2008
Top up spouse account to qualify for CPF Life annuity
Hi Mr Tan I am a housewife. I need your advice on the following options:
Option A - Ask my husband to top up my cpf account minimum sum to be eligible for the CPF lifelong annuity. For $50,000 I can get an estimated $438 monthly at age 65 (under R65).
The CPF website stated that this is an estimation and the payout amount can be changed over times. However once opt in, we cannot opt out should the payout amount changes. This statement bothers me. I feel that the payout amount is not guaranteed but act as a trap to get people to join in by inflating the payout amount to make it attractive.
Option B - Use the cash $50,000 to buy into annuity with NTUC at age 50 and starts the payout at age 65 for lifetime. How much will I get lifelong monthly payout commencing at age 65?
REPLY:
It is better to buy the CPF Life annuity. The CPF uses a good interest rate to calculate the payouts. They also have low expense charge, and are able to give an attractive return to the annuitant.
The CPF is not able to guarantee the payout, as it depends on future interest rate. I believe that it will continue to be better than market rate. You do not have to worry that the payout is not guaranteed.
Your first prioirty is to buy the CPF Life annuity. If you still have additional savings, you can use it to buy the life annuity from NTUC Income. You can ask them to quote you the payout and compare it with the payouts offered by other insurance companies for a similar plan.
Option A - Ask my husband to top up my cpf account minimum sum to be eligible for the CPF lifelong annuity. For $50,000 I can get an estimated $438 monthly at age 65 (under R65).
The CPF website stated that this is an estimation and the payout amount can be changed over times. However once opt in, we cannot opt out should the payout amount changes. This statement bothers me. I feel that the payout amount is not guaranteed but act as a trap to get people to join in by inflating the payout amount to make it attractive.
Option B - Use the cash $50,000 to buy into annuity with NTUC at age 50 and starts the payout at age 65 for lifetime. How much will I get lifelong monthly payout commencing at age 65?
REPLY:
It is better to buy the CPF Life annuity. The CPF uses a good interest rate to calculate the payouts. They also have low expense charge, and are able to give an attractive return to the annuitant.
The CPF is not able to guarantee the payout, as it depends on future interest rate. I believe that it will continue to be better than market rate. You do not have to worry that the payout is not guaranteed.
Your first prioirty is to buy the CPF Life annuity. If you still have additional savings, you can use it to buy the life annuity from NTUC Income. You can ask them to quote you the payout and compare it with the payouts offered by other insurance companies for a similar plan.
Give time to sort out the problem
Dear Mr. Tan
I log onto your blog everyday and learned a lot from your messages. Did you read the forum message "Delay after delay in Incomeshield claim" in ST on 12.03.08 and the online comments from readers?
I think I am not the only one to miss the good old days when you were the CEO of Income. Many of us bought policies because we had faith in you. It is possible that staff makes mistakes from time to time, but it is not fair if the customers have no recourse when their feedback is repeatedly ignored. Do you have any advice for people in similar situations?
REPLY
I believe that NTUC Income will find out the source of this problem, and will rectify it. Give them some time to sort it out.
I log onto your blog everyday and learned a lot from your messages. Did you read the forum message "Delay after delay in Incomeshield claim" in ST on 12.03.08 and the online comments from readers?
I think I am not the only one to miss the good old days when you were the CEO of Income. Many of us bought policies because we had faith in you. It is possible that staff makes mistakes from time to time, but it is not fair if the customers have no recourse when their feedback is repeatedly ignored. Do you have any advice for people in similar situations?
REPLY
I believe that NTUC Income will find out the source of this problem, and will rectify it. Give them some time to sort it out.
Benchmark rates for critical illness
Dear Mr. Tan,
Do you have the benchmark rates for critical illness cover. Is there an option to buy a decreasing cover or an income benefit, just like term insurance?
REPLY
As a rough rule of thumb, the premium for critical illness is about 50% higher than for term insurance, but the actual difference depends on age and gender. I will be able to provide the benchmark rates in one or two weeks' time.
The premium for short term cover will be much lower than for whole life cover. It does not accumulate any cash value.
Do you have the benchmark rates for critical illness cover. Is there an option to buy a decreasing cover or an income benefit, just like term insurance?
REPLY
As a rough rule of thumb, the premium for critical illness is about 50% higher than for term insurance, but the actual difference depends on age and gender. I will be able to provide the benchmark rates in one or two weeks' time.
The premium for short term cover will be much lower than for whole life cover. It does not accumulate any cash value.
Investing in Stocks
Someone posted in my blog that his father has invested in stocks for many years, and have made losses. After investing for a lifetime, he has not yet recovered his invested capital.
This is possible. If the investor bought the wrong stocks, it is possible to lose the entire capital.
Here are my tips for investing in stocks:
1. Invest in a well diversified fund
2. The fund should preferably be bencharked against the market index (comprising of the quality stocks).
3. Choose a low cost fund.
4. Invest for the long term (so that good and bad years are averaged out).
If you adopt this formula, you will make a good return. This will be higher than investing in bonds or an insurance fund.
If you make a study of the market index over the past 30 years, you will find an average return of about 6% to 8%. The capital gain shown on the stock market index may give a lower return, but you have to add about 3% to cover the dividend yield.
Generally, it is good to invest in an insurance fund, as it is well diversified. The drawback is the high upfront and annual charges that is taken away from the yield of the fund. This reduces the yield considerably. If you can find an insurance fund that operates on low expenses, it is also a good option.
This is possible. If the investor bought the wrong stocks, it is possible to lose the entire capital.
Here are my tips for investing in stocks:
1. Invest in a well diversified fund
2. The fund should preferably be bencharked against the market index (comprising of the quality stocks).
3. Choose a low cost fund.
4. Invest for the long term (so that good and bad years are averaged out).
If you adopt this formula, you will make a good return. This will be higher than investing in bonds or an insurance fund.
If you make a study of the market index over the past 30 years, you will find an average return of about 6% to 8%. The capital gain shown on the stock market index may give a lower return, but you have to add about 3% to cover the dividend yield.
Generally, it is good to invest in an insurance fund, as it is well diversified. The drawback is the high upfront and annual charges that is taken away from the yield of the fund. This reduces the yield considerably. If you can find an insurance fund that operates on low expenses, it is also a good option.
Whole Life
Dear Mr. Tan,
Is whole life a good plan?
REPLY
It depends on the pricing. If it has reasonable charges, it is a good plan.
Unfortunately, most of the plans in the market have high charges to pay agent's commission and advertising cost. They give poor value to the customer and lock the customer for many years. It take about 15 years to reach breakeven point.
For insurance proection, the best plan is a term insurance over 25 years. To reduce the cost, you can take a decreasing term or a income benefit plan.
Is whole life a good plan?
REPLY
It depends on the pricing. If it has reasonable charges, it is a good plan.
Unfortunately, most of the plans in the market have high charges to pay agent's commission and advertising cost. They give poor value to the customer and lock the customer for many years. It take about 15 years to reach breakeven point.
For insurance proection, the best plan is a term insurance over 25 years. To reduce the cost, you can take a decreasing term or a income benefit plan.
Wednesday, March 12, 2008
Poll: amount of critical illness coverage
How much should a person insure for critical illness coverage?
22% - one year's salary
25% - two years' salary
53% - five years' salary
22% - one year's salary
25% - two years' salary
53% - five years' salary
Poll: duration of critical illness insurance
Critical illness insurance is expensive at the older ages. How long should a person insure for critical illness?
9% - 20 years
35% - up to age 65
56% - for whole of life
9% - 20 years
35% - up to age 65
56% - for whole of life
Tuesday, March 11, 2008
Life insurance for your child
Before you take a life insurance or education policy for your child, read this FAQ:
http://www.tankinlian.com/faq/childlife.html
http://www.tankinlian.com/faq/childlife.html
Critical illness premium subject to revision
The premium for critical illness is not guaranteed. The insurance company can increase the premium, based on future claim experience. It will apply to existing critical illness policies taken during the past few years. Policies taken before do not have the adjustment clause.
If the claim experience is good, the insurance company does not reduce the premium. If you take a participating policy, you may enjoy a higher rate of bonus. This depends on whether the insurance company keep its expenses low and shares its surplus fairly with its policyholders.
If the claim experience is good, the insurance company does not reduce the premium. If you take a participating policy, you may enjoy a higher rate of bonus. This depends on whether the insurance company keep its expenses low and shares its surplus fairly with its policyholders.
Critical Illness - how to insure
Critical illness insurance for whole lfie is expensive. A male at 30 has to pay a monthly premium of about $630 to buy whole life critical illness cover for $300,000 (about 5 year's salary).
If this person buys a 25 year decreasing critical illness cover, he pays a premium of about $37 a month.
If the remaining $593 is invested in a low cost fund to earn an average of 5% per annum, the savings will accumulate to $300,000 in 23 years (i.e. at the age of 53 years). There is no need to wait for critical illness to collect $300,000. The regular investment plan will produce this amount.
At the end of 35 years, when he reaches age 65, the regular investment plan is projected to reach $643,000. This will be much more than the critical illness cover of $300,000 plus any bonus that is added to this amount.
Lesson: Buy critical illness cover for one year's salary only, on a short term basis. Insure five year's salary on a 25 year decreasing term plan. Invest about 10% to 15% of your salary in a low cost investment fund.
If this person buys a 25 year decreasing critical illness cover, he pays a premium of about $37 a month.
If the remaining $593 is invested in a low cost fund to earn an average of 5% per annum, the savings will accumulate to $300,000 in 23 years (i.e. at the age of 53 years). There is no need to wait for critical illness to collect $300,000. The regular investment plan will produce this amount.
At the end of 35 years, when he reaches age 65, the regular investment plan is projected to reach $643,000. This will be much more than the critical illness cover of $300,000 plus any bonus that is added to this amount.
Lesson: Buy critical illness cover for one year's salary only, on a short term basis. Insure five year's salary on a 25 year decreasing term plan. Invest about 10% to 15% of your salary in a low cost investment fund.
Where to buy term insurance?
Dear Mr. Tan,
You have been recommening to "buy term". Where can I buy term insurance? How much is the premium for insuring $300,000? I spoke to a few agents who recommended against it. They said that it is better to buy whole life as it has a cash value.
REPLY
You have to buy term insurance directly from the insurance company. You can telephone a few insurance company as follows:
http://www.tankinlian.com/faq/termd.html
Here are the benchmark premium rates for three types of term insurance:
http://www.tankinlian.com/faq/benchmark.html
A good combination is:
- level term insurance for one year's salary
- income benefit for 20 years based on 70% of current salary
You have been recommening to "buy term". Where can I buy term insurance? How much is the premium for insuring $300,000? I spoke to a few agents who recommended against it. They said that it is better to buy whole life as it has a cash value.
REPLY
You have to buy term insurance directly from the insurance company. You can telephone a few insurance company as follows:
http://www.tankinlian.com/faq/termd.html
Here are the benchmark premium rates for three types of term insurance:
http://www.tankinlian.com/faq/benchmark.html
A good combination is:
- level term insurance for one year's salary
- income benefit for 20 years based on 70% of current salary
Monday, March 10, 2008
Distribution channels
Currently, IFA can only sell insurance policies from most of the insurance companies expect AIA, Great Eastern and Prudential. Why is this so?
The road shows from these three insurance companies and also NTUC Income are everywhere. Moreover, their sales pitch is very aggressive, more like salesmen than financial adviser.
Should MAS only allow only IFA with CFP and CPA qualifications to provide financial advice and sell policies from any insurance company? The other insurance companies can sell their insurance through direct means, such as internet and phone hotline?
REPLY
The three companies wish to sell their life insurance products through their own agents. They do not wish to sell them through the IFAs. It is their business decision.
It is difficult for MAS to tell the insurance companies to stop selling throughtheir own agents. I hope that a new insurance company will be set up to sell low cost insurance through the internet and call center.
The road shows from these three insurance companies and also NTUC Income are everywhere. Moreover, their sales pitch is very aggressive, more like salesmen than financial adviser.
Should MAS only allow only IFA with CFP and CPA qualifications to provide financial advice and sell policies from any insurance company? The other insurance companies can sell their insurance through direct means, such as internet and phone hotline?
REPLY
The three companies wish to sell their life insurance products through their own agents. They do not wish to sell them through the IFAs. It is their business decision.
It is difficult for MAS to tell the insurance companies to stop selling throughtheir own agents. I hope that a new insurance company will be set up to sell low cost insurance through the internet and call center.
Whole life policy
Dear Mr Tan,
Your blog has mentioned so much about buy term invest the difference.
When I ask my friends and co-workers, most of them buy whole life policies and want to surrender the policy when they retire. Some said that the cash value will be reduced after age 65 and it will be better to surrender it. Why is this so? Is this defeat the purpose of having whole life insurance?
Is this the reason why you want to educate people to buy term insurance till age 65 and invest the difference? They can avoid the high distribution charges (at least 15 months of premium) and get a better return on their savings by investing in low cost funds, such as ETFs, unit trusts from online distributers?
REPLY
The sum assured under a whole life policy should continue at the same level, provided that the premium continue to be paid yearly. If the policyholder decide to stop the premium after age 65, the sum assured will be reduced.
A term insurance plan provides high coverage at low cost. The savings should be invested in a low cost investment fund to get a good return.
Your blog has mentioned so much about buy term invest the difference.
When I ask my friends and co-workers, most of them buy whole life policies and want to surrender the policy when they retire. Some said that the cash value will be reduced after age 65 and it will be better to surrender it. Why is this so? Is this defeat the purpose of having whole life insurance?
Is this the reason why you want to educate people to buy term insurance till age 65 and invest the difference? They can avoid the high distribution charges (at least 15 months of premium) and get a better return on their savings by investing in low cost funds, such as ETFs, unit trusts from online distributers?
REPLY
The sum assured under a whole life policy should continue at the same level, provided that the premium continue to be paid yearly. If the policyholder decide to stop the premium after age 65, the sum assured will be reduced.
A term insurance plan provides high coverage at low cost. The savings should be invested in a low cost investment fund to get a good return.
Travel to Jakarta
I will be in Jakarta for the next four days. The updates to my blog will be less frequent, as internet connection from Jakarta is slow and expensive.
Satisfactory return on Endowment Policy
Hi Mr. Tan,
In Mar 1994, I bought a 14-year endowment with compound reversionary bonus insurance policy from company X, paying an annual premium of $2,390. The policy provides a basic sum assured of $30,000.
Today, this policy has matured. The company has now given a cheque of $45,350, comprising $30,000 sum assured, $12,792 accumulated bonus and $2,558 special maturity bonus. Do you think this is a reasonable return?
REPLY
The return is 4.0% per annum (based on annual premium, payable in advance). It is quite satisfactory.
In Mar 1994, I bought a 14-year endowment with compound reversionary bonus insurance policy from company X, paying an annual premium of $2,390. The policy provides a basic sum assured of $30,000.
Today, this policy has matured. The company has now given a cheque of $45,350, comprising $30,000 sum assured, $12,792 accumulated bonus and $2,558 special maturity bonus. Do you think this is a reasonable return?
REPLY
The return is 4.0% per annum (based on annual premium, payable in advance). It is quite satisfactory.
Insuring against critical illness
I recommend coverage of $50,000 for critical illness up to age 65 or earlier. Some people think that this is not adequate. Insurance agents have advised them to insure for $200,000 or more.
Here are the reasons for my recommendation:
a) The cost of treatment should be covered by a medical insurance policy.
b) The loss of income should be for a period of up to 2 years. If the illness is serious, it is likely to lead to death. If not, the patient is likely to recover.
c) There is no need to insure for loss of income beyond age 65. By that time, the person is likely to have retired from work.
The cost of critical illness coverage, based on my recommendation, is quite low. This allows the bulk of the savings to be invested in a low cost investment fund, to earn a high yield. This money is needed for retirement. There is a stronger need for adequate savings for retirement (simply because more people are expected to retire, than to suffer a critical illness).
There is high cost in buying a whole life critical illness product. About two years of the savings goes to pay the marketing expenses. This should be avoided. I shall be working out a FAQ to explain the cost structure.
Here are the reasons for my recommendation:
a) The cost of treatment should be covered by a medical insurance policy.
b) The loss of income should be for a period of up to 2 years. If the illness is serious, it is likely to lead to death. If not, the patient is likely to recover.
c) There is no need to insure for loss of income beyond age 65. By that time, the person is likely to have retired from work.
The cost of critical illness coverage, based on my recommendation, is quite low. This allows the bulk of the savings to be invested in a low cost investment fund, to earn a high yield. This money is needed for retirement. There is a stronger need for adequate savings for retirement (simply because more people are expected to retire, than to suffer a critical illness).
There is high cost in buying a whole life critical illness product. About two years of the savings goes to pay the marketing expenses. This should be avoided. I shall be working out a FAQ to explain the cost structure.
A new product: BTID
1. Introduction
This is the code name of a new life insurance product called “Buy term and invest the difference”.
I hope to get a new insurance company to offer this product to the public. I am publishing the details, so that some of the existing large companies can copy it and introduce it to the public.
2. Features
The key features of this new product are:
- Good yield on the savings
- Flexible
- Adequate coverage at low cost
This can be achieved by designing simple products that
- Fair to consumers
- Easy to understand
- Have low operating cost
- Reduced marketing cost
3. Yield
The savings are invested in a diversified investment fund that have an expense ratio less than 1% per annum. It is invested in quality investments, comprising of equities and bonds, that can earn an average gross yield of 6% over the long term. After deducting expenses, the net yield should be at least 5%.
This yield will give a higher return, compared to life insurance products that currently earn 3% to 4% for consumers.
4. Flexible
The product offers the following flexibility:
- To increase or reduce the savings rate
- To make withdrawals at minimal cost
An important feature of this product is that there is no front-end load to pay for the marketing expenses. The transaction cost is low and covers the actual expenses. This makes it possible for people to make withdrawals at minimal cost or penalty.
5. Insurance Coverage
The insurance coverage will be bought in a separate policy. It covers a selected period of 20 or 25 years to provide the following payments on death or critical illness during the period of insurance:
- A lump sum payable on death
- A monthly income benefit payable on death for the remainder of the term
- A monthly income payable for the period of recovery from a critical illness
This insurance coverage should be adequate to meet the financial needs. To reduce the cost, the coverage should be taken for a period of 20 or 25 years. It should not extend beyond the age of 65, where most people are expected to retire.
These products are fairly priced, based on the actual cost of benefits plus a margin to cover expenses and profit. The cost is much lower than similar products now offered in the market.
Beyond the period of 20 or 25 years, there is no need for the insurance coverage as the invested savings will accumulate to a sufficient amount.
6. Low marketing cost
This product can be marketing at low cost through the following strategy:
- The product is easy to understand
- It offers good value to consumers
- Consumers are educated about the product
- Many consumers are willing to buy the product directly
- The product can be purchased through the internet, call center or sales office
With low marketing expenses, consumers do not have to pay a hefty front-end load.
7. Conclusion
This product will give great value to consumers. I hope that more insurance companies will offer this product, so that consumers can benefit from it.
Tan Kin Lian
This is the code name of a new life insurance product called “Buy term and invest the difference”.
I hope to get a new insurance company to offer this product to the public. I am publishing the details, so that some of the existing large companies can copy it and introduce it to the public.
2. Features
The key features of this new product are:
- Good yield on the savings
- Flexible
- Adequate coverage at low cost
This can be achieved by designing simple products that
- Fair to consumers
- Easy to understand
- Have low operating cost
- Reduced marketing cost
3. Yield
The savings are invested in a diversified investment fund that have an expense ratio less than 1% per annum. It is invested in quality investments, comprising of equities and bonds, that can earn an average gross yield of 6% over the long term. After deducting expenses, the net yield should be at least 5%.
This yield will give a higher return, compared to life insurance products that currently earn 3% to 4% for consumers.
4. Flexible
The product offers the following flexibility:
- To increase or reduce the savings rate
- To make withdrawals at minimal cost
An important feature of this product is that there is no front-end load to pay for the marketing expenses. The transaction cost is low and covers the actual expenses. This makes it possible for people to make withdrawals at minimal cost or penalty.
5. Insurance Coverage
The insurance coverage will be bought in a separate policy. It covers a selected period of 20 or 25 years to provide the following payments on death or critical illness during the period of insurance:
- A lump sum payable on death
- A monthly income benefit payable on death for the remainder of the term
- A monthly income payable for the period of recovery from a critical illness
This insurance coverage should be adequate to meet the financial needs. To reduce the cost, the coverage should be taken for a period of 20 or 25 years. It should not extend beyond the age of 65, where most people are expected to retire.
These products are fairly priced, based on the actual cost of benefits plus a margin to cover expenses and profit. The cost is much lower than similar products now offered in the market.
Beyond the period of 20 or 25 years, there is no need for the insurance coverage as the invested savings will accumulate to a sufficient amount.
6. Low marketing cost
This product can be marketing at low cost through the following strategy:
- The product is easy to understand
- It offers good value to consumers
- Consumers are educated about the product
- Many consumers are willing to buy the product directly
- The product can be purchased through the internet, call center or sales office
With low marketing expenses, consumers do not have to pay a hefty front-end load.
7. Conclusion
This product will give great value to consumers. I hope that more insurance companies will offer this product, so that consumers can benefit from it.
Tan Kin Lian
Sunday, March 09, 2008
Car Loan
Hi Mr. Tan,
I have just booked a new car and am shopping for a loan. I found that over the past few years, banks & finance companies have outsourced their car loans to car dealers. This produced an unhealthy situation in which buyers cannot get good advice from the car dealers because they
are not held responsible for the advice they give and commission bias their advice towards longer & higherloans.
My calls to banks and finance companies draw blanks as call centre staff don't have details of the deals struck with the various car dealers and are afraid of getting intoany details.
Do you know of any place that can offer a fairer simple interest loan secured by the car. Is there a government body that could look into this situation as car buyers end upbeing ill-advised.
REPLY
I am not aware that the banks and finance companies do not deal with the public anymore.I suggest that you bring this matter up with the MAS. I will ask my blog readers to tell us if they know of any financier wiling to provide a car loan.
I have just booked a new car and am shopping for a loan. I found that over the past few years, banks & finance companies have outsourced their car loans to car dealers. This produced an unhealthy situation in which buyers cannot get good advice from the car dealers because they
are not held responsible for the advice they give and commission bias their advice towards longer & higherloans.
My calls to banks and finance companies draw blanks as call centre staff don't have details of the deals struck with the various car dealers and are afraid of getting intoany details.
Do you know of any place that can offer a fairer simple interest loan secured by the car. Is there a government body that could look into this situation as car buyers end upbeing ill-advised.
REPLY
I am not aware that the banks and finance companies do not deal with the public anymore.I suggest that you bring this matter up with the MAS. I will ask my blog readers to tell us if they know of any financier wiling to provide a car loan.
Invest in Foreign Currency
Hi,
I have no experience or knowledge about investing in financial product but was keen in doing so. I wish to invest in foreign currency and like to ask you how it works and how can I start?
I have around 10k for investment and hope to have a decent return every month. Is it possible?I dont mind taking some risk if find that is worth doing it.
REPLY
Please read these FAQs
http://www.tankinlian.com/faq/foreign.html
http://www.tankinlian.com/faq/duali.html
I suggest that you attend the 2 day workshop that is mentioned in my blog. You can ask the lecturer to deal with your question of investing in foreigh currency.
I have no experience or knowledge about investing in financial product but was keen in doing so. I wish to invest in foreign currency and like to ask you how it works and how can I start?
I have around 10k for investment and hope to have a decent return every month. Is it possible?I dont mind taking some risk if find that is worth doing it.
REPLY
Please read these FAQs
http://www.tankinlian.com/faq/foreign.html
http://www.tankinlian.com/faq/duali.html
I suggest that you attend the 2 day workshop that is mentioned in my blog. You can ask the lecturer to deal with your question of investing in foreigh currency.
Existing Life Insurance Policy
Mr. Tan,
I have an existing life insurance policy (details deleted). I do not need the insurance cover any more, as I have bought a large term insurance policy. Should I continue with this policy as an investment?
REPLY
You should ask your insurance company to tell you the cash value now, the cash value in (say) 5 years time and the premium payable for the next 5 years. If the yield on the policy is more than 3% p.a. you can keep the policy as an investment.
Here is a simple way to check if the yield is more than 3%.
Take the cash valuw now and muliply by the factor of 1.1593
Multipy the monthly premium by 64.6650 or the annual premium by 5.4684.
The total of the two figures is the "target value".
If the cash value is more than the "target value", you can keep the policy.
Here is an example:
Cash value now $5,000
Monthly premium: $90
$5,000 X 1.1593 = $5,796
$90 X 64.6650 = $5,820
Total = $11,616
If the cash value is more than $11,616, you can keep the policy. If it is less, you can cancel the policy.
If you wish, you can also deduct the cost of the term insurance from the monthly premium. For example, if the cost of the term insurance is $10 a month, the calculation will now be:
$5,000 X 1.1593 = $5,796
($90 - $10) X 64.6650 = $5,173
Total = $10,969
You can get the term insurance premium from my FAQ below. I think that it is all right to ignore this item, as you are using only 3% (which is somewhat low) to calculate the target value.
http://www.tankinlian.com/faq/benchmark.html
Some people think that they should take a different period (instead of 5 years) or use a different yield (instead of 3%) to calculate the target value. They are also right. It is a matter of judgement. I have adopted 5 years and 3% for simplicity.
I shall be writing a separate FAQ to give the factors for different periods and different yields.
I have an existing life insurance policy (details deleted). I do not need the insurance cover any more, as I have bought a large term insurance policy. Should I continue with this policy as an investment?
REPLY
You should ask your insurance company to tell you the cash value now, the cash value in (say) 5 years time and the premium payable for the next 5 years. If the yield on the policy is more than 3% p.a. you can keep the policy as an investment.
Here is a simple way to check if the yield is more than 3%.
Take the cash valuw now and muliply by the factor of 1.1593
Multipy the monthly premium by 64.6650 or the annual premium by 5.4684.
The total of the two figures is the "target value".
If the cash value is more than the "target value", you can keep the policy.
Here is an example:
Cash value now $5,000
Monthly premium: $90
$5,000 X 1.1593 = $5,796
$90 X 64.6650 = $5,820
Total = $11,616
If the cash value is more than $11,616, you can keep the policy. If it is less, you can cancel the policy.
If you wish, you can also deduct the cost of the term insurance from the monthly premium. For example, if the cost of the term insurance is $10 a month, the calculation will now be:
$5,000 X 1.1593 = $5,796
($90 - $10) X 64.6650 = $5,173
Total = $10,969
You can get the term insurance premium from my FAQ below. I think that it is all right to ignore this item, as you are using only 3% (which is somewhat low) to calculate the target value.
http://www.tankinlian.com/faq/benchmark.html
Some people think that they should take a different period (instead of 5 years) or use a different yield (instead of 3%) to calculate the target value. They are also right. It is a matter of judgement. I have adopted 5 years and 3% for simplicity.
I shall be writing a separate FAQ to give the factors for different periods and different yields.
Regular premium investment-linked policy
Mr. Tan,
My insurance agent advised me to invest monthly in an ILP policy, as I can benefit from dollar averaging. He said that if I invest a lump premium, which does not benefit from averaging. Is this a correct approach?
REPLY
The agent is probably telling you only one side of the story. You should ask the agent the following question:
"If I invest a regular premium, how much of my premium is invested? How much is taken away to pay expenses?"
"How much commission do you earn from a regular premium policy, compared to a single premium policy?
Most regular premium ILP in the market takes away up to 24 months of your savings. During the first year, a small proportion of your premium is invested, and the rest is taken away to pay commission to the agent and other expenses. The agent usually avoid explaining this charge to you, but is is disclosed in the policy illustration.
If you save $300 a month, the charges of 24 months amount to $7,200. This is a lot of money to give away, just by investing in a regular premium ILP. This is the most expensive part of an ILP policy.
Some insurance companies have a lower front-end charge. You should ask the insurance agent about it.
If you wish to do dollar averaging, it is better to invest in a unit trust. You do not have to incur this heavy front-end charge.
Read this FAQ:
http://www.tankinlian.com/faq/ilp.html
My insurance agent advised me to invest monthly in an ILP policy, as I can benefit from dollar averaging. He said that if I invest a lump premium, which does not benefit from averaging. Is this a correct approach?
REPLY
The agent is probably telling you only one side of the story. You should ask the agent the following question:
"If I invest a regular premium, how much of my premium is invested? How much is taken away to pay expenses?"
"How much commission do you earn from a regular premium policy, compared to a single premium policy?
Most regular premium ILP in the market takes away up to 24 months of your savings. During the first year, a small proportion of your premium is invested, and the rest is taken away to pay commission to the agent and other expenses. The agent usually avoid explaining this charge to you, but is is disclosed in the policy illustration.
If you save $300 a month, the charges of 24 months amount to $7,200. This is a lot of money to give away, just by investing in a regular premium ILP. This is the most expensive part of an ILP policy.
Some insurance companies have a lower front-end charge. You should ask the insurance agent about it.
If you wish to do dollar averaging, it is better to invest in a unit trust. You do not have to incur this heavy front-end charge.
Read this FAQ:
http://www.tankinlian.com/faq/ilp.html
Large increase in motor insurance premium
Dear Mr. Tan,
Last year, I insured my new car with NTUC as the premium is cheaper. I have just received the renewal notice, and found that the premium increased by about 20%. This is a shock to me. Why should the premium increased by so much? Is NTUC still trying to keep the premium lower than the market, or will it be more expensive, due to the big advertising expenses?
I do not want to stay with NTUC. Can you recommend any other insurance company that charge lower premium?
REPLY
I read that the claims on motor insurance have gone up last year, not only for NTUC Income but for other insurance companies as well. I am not sure if the increase for NTUC Income is due to higher expenses and lax claim control.
I suggest that you telephone a few insurance compamies directly and see if you can get a lower premium rate. Read this FAQ:
http://www.tankinlian.com/faq/motord.html
Someone sent me an e-mail a few days ago. By telephoning a few insurance companies for a quote, he was able to get a premium that was 30% lower. He said that it was time consuming but worth the trouble.
Last year, I insured my new car with NTUC as the premium is cheaper. I have just received the renewal notice, and found that the premium increased by about 20%. This is a shock to me. Why should the premium increased by so much? Is NTUC still trying to keep the premium lower than the market, or will it be more expensive, due to the big advertising expenses?
I do not want to stay with NTUC. Can you recommend any other insurance company that charge lower premium?
REPLY
I read that the claims on motor insurance have gone up last year, not only for NTUC Income but for other insurance companies as well. I am not sure if the increase for NTUC Income is due to higher expenses and lax claim control.
I suggest that you telephone a few insurance compamies directly and see if you can get a lower premium rate. Read this FAQ:
http://www.tankinlian.com/faq/motord.html
Someone sent me an e-mail a few days ago. By telephoning a few insurance companies for a quote, he was able to get a premium that was 30% lower. He said that it was time consuming but worth the trouble.
Friday, March 07, 2008
Poll: Preferred type of term insurance
If you have young children and can afford only $30 a month for life insurance, which do you refer as the benefit payable on premature death during 25 years ? (31 replies)
9% - $150,000
35% -$360,00 reducing by $14,400 yearly
54% - monthly income of $1,500 payable for remainder of 25 years
9% - $150,000
35% -$360,00 reducing by $14,400 yearly
54% - monthly income of $1,500 payable for remainder of 25 years
Subprime losses could reach USD 400 billion
I saw a few estimates that put the subprime losses as USD 400 billion.
Here is my guess about how this number is arrived:
number of houses in USA - 100 million
proportion that are subprime, say 20%
number of subprime mortgages: 20 million
proportion in default: 50%
defaulted mortgages: 10 million
average loss per default: USD 40,000
total subprime losses: USD 400 million
My guess could be wrong. For example, it may be fewer mortgages with a larger average loss, or more mortgages with a smaller average loss.
The large financial institutions have reported losses under subprime mortges in the magnitude of USD 10 million. If this is the average loss, a total of 40 financial institutions would make up the total of USD 400 billion.
Here is my guess about how this number is arrived:
number of houses in USA - 100 million
proportion that are subprime, say 20%
number of subprime mortgages: 20 million
proportion in default: 50%
defaulted mortgages: 10 million
average loss per default: USD 40,000
total subprime losses: USD 400 million
My guess could be wrong. For example, it may be fewer mortgages with a larger average loss, or more mortgages with a smaller average loss.
The large financial institutions have reported losses under subprime mortges in the magnitude of USD 10 million. If this is the average loss, a total of 40 financial institutions would make up the total of USD 400 billion.
High charges
Dear Mr. Tan,
In my foolishness, I bought an ILP from company X. After paying premiums for a few years, I was surprised to find out that my investment is still way below the invested amount.
I asked the agent for an explanation. He pointed out to me, from the policy contract, that the percentage of my premiums that was invested during the first few years, only a certain percentage was invested (starting at 20% for the first year). This was not explained to me when I bought the policy.
Why should the insurance company take away so much of my premiums? I wish to get out of this policy, but I will have to lose more nearly two years of my savings. What is your advice? Should I cancel the policy?
REPLY
If you have not been property informed about the charges, you can make a complaint to this organisation,
http://www.fidrec.com.sg/website/faq.html
The insurance adviser is required to explain to you about the key points of the contract and to recommend a financial product that suits your needs. If he or she has failed in this duty, you should make a complaint.
If more consumers are willing to come forward, this will help other consumers from being misled.
In my foolishness, I bought an ILP from company X. After paying premiums for a few years, I was surprised to find out that my investment is still way below the invested amount.
I asked the agent for an explanation. He pointed out to me, from the policy contract, that the percentage of my premiums that was invested during the first few years, only a certain percentage was invested (starting at 20% for the first year). This was not explained to me when I bought the policy.
Why should the insurance company take away so much of my premiums? I wish to get out of this policy, but I will have to lose more nearly two years of my savings. What is your advice? Should I cancel the policy?
REPLY
If you have not been property informed about the charges, you can make a complaint to this organisation,
http://www.fidrec.com.sg/website/faq.html
The insurance adviser is required to explain to you about the key points of the contract and to recommend a financial product that suits your needs. If he or she has failed in this duty, you should make a complaint.
If more consumers are willing to come forward, this will help other consumers from being misled.
Credit card debt
Dear Mr Tan,
I have huge credit card debts of up to $55k. I am facing a lot of stress and have made my parents very upset. Right now, I am waiting to file for bankruptcy. Is this the right way?
REPLY
I suggest that you approach this non-profit organisation to seek their advice and assistance:
http://www.ccs.org.sg/ccs.html
I have huge credit card debts of up to $55k. I am facing a lot of stress and have made my parents very upset. Right now, I am waiting to file for bankruptcy. Is this the right way?
REPLY
I suggest that you approach this non-profit organisation to seek their advice and assistance:
http://www.ccs.org.sg/ccs.html
Earnings of Global Insurers
From Economist Magazine
There were more poor earnings from the insurance industry. Swiss Re's quarterly net profit fell by 87%, compared with a year ago, because of subprime losses. And AIG posted a $5.3 billion quarterly loss on the back of write-downs it flagged last month. It was the biggest-ever such loss at AIG, which traces its history back to 1919.
There were more poor earnings from the insurance industry. Swiss Re's quarterly net profit fell by 87%, compared with a year ago, because of subprime losses. And AIG posted a $5.3 billion quarterly loss on the back of write-downs it flagged last month. It was the biggest-ever such loss at AIG, which traces its history back to 1919.
Growth Policy
Dear Mr Tan,
Should I invest in the NTUC growth policy using my CPF special account?
REPLY
CPF special account pays interest of 4% plus 1% bonus. It does not have any risk. The Growth policy gives a return of 3% to 4% (not guaranteed) and has to be invested for 10 years or more. It is better to keep your money in the CPF special account.
Should I invest in the NTUC growth policy using my CPF special account?
REPLY
CPF special account pays interest of 4% plus 1% bonus. It does not have any risk. The Growth policy gives a return of 3% to 4% (not guaranteed) and has to be invested for 10 years or more. It is better to keep your money in the CPF special account.
Selamat Datang
My friend visited Johore. He was sure that Mas Selamat is in Johore. He saw a sign all over Johore that says "Selamat Datang". "Datang" means "come" in Malay.
Thursday, March 06, 2008
Term insurance with income benefit
Dear Mr. Tan,
I am 32 years old (male) and have 2 children aged 2 and 5. I like your suggestion to have a term insurance, combined with a monthly income of $2,000, in the event of premature death. How much do I have to pay?
REPLY
I suggest that you insure for 25 years. The annual premium is:
Term insurance for $50,000 for 25 years: $154
Family income benefit of $2,000 monthly for 25 years: $606
Total $760 or approx $65 per month
These are my benchmark rates. They do not represent the actual rates charged in the market.
You can calculate the benchmark rates for other ages by referring to this FAQ. In your case, I have to work out the premium for age 32 by estimating from the rates for 30 and 35.
http://www.tankinlian.com/faq/benchmark.html
If you reduce the cover to 20 years, your cost will be reduced by about 30%.
I am 32 years old (male) and have 2 children aged 2 and 5. I like your suggestion to have a term insurance, combined with a monthly income of $2,000, in the event of premature death. How much do I have to pay?
REPLY
I suggest that you insure for 25 years. The annual premium is:
Term insurance for $50,000 for 25 years: $154
Family income benefit of $2,000 monthly for 25 years: $606
Total $760 or approx $65 per month
These are my benchmark rates. They do not represent the actual rates charged in the market.
You can calculate the benchmark rates for other ages by referring to this FAQ. In your case, I have to work out the premium for age 32 by estimating from the rates for 30 and 35.
http://www.tankinlian.com/faq/benchmark.html
If you reduce the cover to 20 years, your cost will be reduced by about 30%.
Taxis Stands in Central Business District
There were several complaints by taxi drivers and commuters on the new rules regarding taxi stands in the Central Business District. The taxis are required to pick up commuters only at the designated stands. The taxi drivers complained that the stands do not have sufficient space for waiting taxis.
The underlying problem is the imbalance between the supply and demand of taxis. At some times, there are too many taxis waiting for commuters. At other times, commuters could not catch a taxi (during which time, the taxis are hiding somewhere waiting for a telephone booking).
The solution? Improve the feeder services to take commuters to the MRT stations. If the feeder services are convenient clearly marked at bus stops, more people will be willing to take these services, instead of relying on taxis during the busy hours.
I hope that the Land Transport Authority will take early steps to make it convenient for commuters to use the feeder services. The current bus services can perform this function, if people understand how to use them.
Any views?
The underlying problem is the imbalance between the supply and demand of taxis. At some times, there are too many taxis waiting for commuters. At other times, commuters could not catch a taxi (during which time, the taxis are hiding somewhere waiting for a telephone booking).
The solution? Improve the feeder services to take commuters to the MRT stations. If the feeder services are convenient clearly marked at bus stops, more people will be willing to take these services, instead of relying on taxis during the busy hours.
I hope that the Land Transport Authority will take early steps to make it convenient for commuters to use the feeder services. The current bus services can perform this function, if people understand how to use them.
Any views?
Finance Your Passion Workshop
Winston Ng approached me to help them to market this workshop which is being conducted by his young company.
After speaking to him, I believe that his workshop may be of useful to the visitors to my blog. The workshop is for 2 full days and does cost a modest fee. If you attend, give your feedback to me.
FINANCE YOUR PASSION WORKSHOP
The Finance Your Passion Workshops are created with the intention of teaching core Financial, Retirement and Protection Strategies to the masses at an affordable price. We are independent from any financial product company and neither endorse nor are against any products.
We teach the key "questions" that individuals should ask themselves before buying any product. The basic knowledge they need to know, rather than being blind-sided by all the sales gimmicks.
Our study of the best systems in the world found that Retirment Planning is a multi-faceted process that includes:
1) Increasing Earnings
2) Finding Your True Purpose in Life
3) Mastering Spending Patterns
4) Adequate Protection
5) Safe Investing
6) Charity Giving
In our Finance Your Passion Workshops, we teach all these to people at an affordable rate, so that when they approach their insurance advisors/ fund managers. They know the right questions to ask, rather than paying unnecessary hefty fees and worse still get biased advice.
During the workshop, they will also build their very own retirement plan - something which most singaporeans do not have!
More details can be found at:
http://www.financeyourpassion.com/
http://www.financeyourpassion.com/fyp-cpf.htm
They provide a series of reports on their website when you sign up for their free mailing list.
Consumers are dissatisfied with financial institutions
Dear Mr. Tan,
A consumer survey conducted by MAS showed that only 33% are satisfied with the financial product that they have bought. 67% are neutral or dissatisfied.
In your opinion, does this reflect a general state of unhappiness among consumers?
REPLY
Consumers have been unhappy with the low interest rate paid by the banks for the past years. The interest rate is insufficent to offset inflation. The large increase in inflation rate this year has worsened the situation.
Many consumers switched to structured financial products and obtained an equally low return. Life insurance and investment linked products also incur high charges and will take a long time to reach the break-even point.
The negative experience of consumers on financial products has been reflected in their answers to the consumer survey.
MAS has now issued a proposed guideline to make the board and senior management of financial institutions to be more accountable for giving fair dealing outcomes to consumers.
A consumer survey conducted by MAS showed that only 33% are satisfied with the financial product that they have bought. 67% are neutral or dissatisfied.
In your opinion, does this reflect a general state of unhappiness among consumers?
REPLY
Consumers have been unhappy with the low interest rate paid by the banks for the past years. The interest rate is insufficent to offset inflation. The large increase in inflation rate this year has worsened the situation.
Many consumers switched to structured financial products and obtained an equally low return. Life insurance and investment linked products also incur high charges and will take a long time to reach the break-even point.
The negative experience of consumers on financial products has been reflected in their answers to the consumer survey.
MAS has now issued a proposed guideline to make the board and senior management of financial institutions to be more accountable for giving fair dealing outcomes to consumers.
Buying life insurance in Singapore
Dear Mr. Tan,
I came to know you from your useful financial tips in MyPaper.
I am a Malaysian working in Singapore. My wife and I currently maintain some insurance plans, previously bought in Malaysia, as shown below: (details deleted).
We later found that the insurance policies available in Singapore provide greater value. As a result, we are now thinking of terminating some of our existing Malaysia insurance policies and buy insurance policies from Singapore insurance companies, as shown below: (details deleted).
Do you foresee any problems for Malaysians who buy insurance policies (life and medical) from Singapore? Is this advisable? Are the coverage sufficient for us? Are the premiums reasonable?
REPLY
I am not able to give specific advice for your situation. I suggest that you talk to a financial adviser (find one whom you can trust).
My general advice is set out in my FAQ, as follows:
a) Existing Policies:
http://www.tankinlian.com/faq/exist.html
b) Investing your savings
http://www.tankinlian.com/faq/savings.html
I do not forsee any problem for Malaysians buying life insurance in Singapore. I believe that many people have done it. The only disadvantage is that it is not recognised for income tax relief in Malaysia, but this is probably not important for you.
I came to know you from your useful financial tips in MyPaper.
I am a Malaysian working in Singapore. My wife and I currently maintain some insurance plans, previously bought in Malaysia, as shown below: (details deleted).
We later found that the insurance policies available in Singapore provide greater value. As a result, we are now thinking of terminating some of our existing Malaysia insurance policies and buy insurance policies from Singapore insurance companies, as shown below: (details deleted).
Do you foresee any problems for Malaysians who buy insurance policies (life and medical) from Singapore? Is this advisable? Are the coverage sufficient for us? Are the premiums reasonable?
REPLY
I am not able to give specific advice for your situation. I suggest that you talk to a financial adviser (find one whom you can trust).
My general advice is set out in my FAQ, as follows:
a) Existing Policies:
http://www.tankinlian.com/faq/exist.html
b) Investing your savings
http://www.tankinlian.com/faq/savings.html
I do not forsee any problem for Malaysians buying life insurance in Singapore. I believe that many people have done it. The only disadvantage is that it is not recognised for income tax relief in Malaysia, but this is probably not important for you.
Speculative investment
Dear Mr. Tan
I am thinking of investing in Citigroup Inc in the USA. Do you think that this is a wise move?
REPLY
Investing in Citigroup is speculative. You should do it only with money that you can afford to lose. But, I agree that it is quite tempting and there is a good prospect of an attractive gain.
I am thinking of investing in Citigroup Inc in the USA. Do you think that this is a wise move?
REPLY
Investing in Citigroup is speculative. You should do it only with money that you can afford to lose. But, I agree that it is quite tempting and there is a good prospect of an attractive gain.
Computing the yield
1. You can compute the yield accurately by using a financial calculator.
Example:
Period: 5 years
Amount now: $5,000
Annual saving: $1,200 for 5 years
Accumlated amount in 5 years now: $12,000
Annual saving invested at beginning of year
Computed yield: 2.23% p.a.
Annual saving invested at end of year
Computed yield: 2.58% p.a.
2. If you do not have a financial calculator, you can use a rough method.
Total invested at start of period: $5,000
Total invested at end of period: $11,000
Average amount invested: ($5.000 + $11.000) / 2 = $8,000
Gain for period: $12,000 - $11,000 = $1,000
Yield = $1,000/ $8,000 / 5 years = 2.5% per year
This method works for short durations, i.e. up to 5 years. The difference
betweens larger for longer duration.
Tan Kin Lian
Example:
Period: 5 years
Amount now: $5,000
Annual saving: $1,200 for 5 years
Accumlated amount in 5 years now: $12,000
Annual saving invested at beginning of year
Computed yield: 2.23% p.a.
Annual saving invested at end of year
Computed yield: 2.58% p.a.
2. If you do not have a financial calculator, you can use a rough method.
Total invested at start of period: $5,000
Total invested at end of period: $11,000
Average amount invested: ($5.000 + $11.000) / 2 = $8,000
Gain for period: $12,000 - $11,000 = $1,000
Yield = $1,000/ $8,000 / 5 years = 2.5% per year
This method works for short durations, i.e. up to 5 years. The difference
betweens larger for longer duration.
Tan Kin Lian
How to invest in this environment?
Interest rate from bank deposit and Government bonds are at a low level.
The investment choices are:
1. Keep the money in the bank and accept a return of 0.5%
2. Invest in the stockmarket for the long term, and accept the volatility.
Do not invest in a high cost financial product (such as a structured product or an investment-linked policy) as the charges will reduce your yield further.
Read this FAQ about charges:
http://www.tankinlian.com/faq/ilp.html
The investment choices are:
1. Keep the money in the bank and accept a return of 0.5%
2. Invest in the stockmarket for the long term, and accept the volatility.
Do not invest in a high cost financial product (such as a structured product or an investment-linked policy) as the charges will reduce your yield further.
Read this FAQ about charges:
http://www.tankinlian.com/faq/ilp.html
Yields on Singapore Government bonds
Here are the yields of government bonds, obtained from
www.fundsupermart.com.sg
The yield is about 1% for durations up to 3 yrs, 1.5% for duration of around 5 years, 2.5% for 10 years and 3% for 15 years and longer.
The yields are low.
www.fundsupermart.com.sg
The yield is about 1% for durations up to 3 yrs, 1.5% for duration of around 5 years, 2.5% for 10 years and 3% for 15 years and longer.
The yields are low.
Bond Name Year IYld
NX98100H; Coupon 5.625%; Maturity 01/07/2008 0.32 1.47
NX99100S; Coupon 4.375%; Maturity 15/01/2009 0.86 0.93
N504100Z; Coupon 2.375%; Maturity 01/10/2009 1.56 1.04
N505100F; Coupon 2.625%; Maturity 01/04/2010 2.07 1.28
NX00100T; Coupon 4.625%; Maturity 01/07/2010 2.32 1.07
NX01100H; Coupon 3.625%; Maturity 01/07/2011 3.32 1.16
NX02100S; Coupon 3.500%; Maturity 01/07/2012 4.32 1.46
NX03100Z; Coupon 2.250%; Maturity 01/07/2013 5.32 1.68
NX04100F; Coupon 3.625%; Maturity 01/07/2014 6.32 1.89
NY01100F; Coupon 3.750%; Maturity 01/09/2016 8.48 2.31
NY03100A; Coupon 4.000%; Maturity 01/09/2018 10.48 2.50
NY05100N; Coupon 3.250%; Maturity 01/09/2020 12.48 2.79
NY07100X; Coupon 3.125%; Maturity 01/09/2022 14.48 3.01
NZ07100S; Coupon 3.500%; Maturity 01/03/2027 18.99 3.25
YrTM: Years to maturity
IYld: indicative yield based on offer price
Fundsupermart
I opened an account with Fundsupermart. The process was easy. The website is well designed. I intend to buy low cost unit trust and government bonds through this account. I will share my experience of this platform in this blog.
Wednesday, March 05, 2008
How To Maximize our R & D Investments
R & D in Science & Technology is important and good for Singapore. There are many aspects to these activities. Many students, parents, professionals, managers/project leaders and policy makers would like to know how they can participate and contribute to this important adventure of ours.
Based on his experience Dr. Lee Kum Tatt has written a number of articles on this subject in his blog http//:leekumtattblogspot.com
Read his latest articles where he and his wife share their experiences in developing
R & D in Science & Technology with us.
www.leekumtatt.blogspot.com
Based on his experience Dr. Lee Kum Tatt has written a number of articles on this subject in his blog http//:leekumtattblogspot.com
Read his latest articles where he and his wife share their experiences in developing
R & D in Science & Technology with us.
www.leekumtatt.blogspot.com
Questions on existing life insurance policies
1. I have paid the premiums under my life insurance policy for more than 10 years. The cash value is still less than the total premiums paid. Why does the policy give such a poor yield?
The insurance company has paid a high rate of commission to the agent in selling the policy to you. The commission and other marketing expenses take up about 24 months of your premium (for most cases). This money has been spent and is taken away from your savings.
The company has also incurred cost in providing the life insurance cover to you under the policy. This cost is relatively small. The company has also taken away some of your premiums as a profit margin for their shareholders.
After deducting the charges, the balance of the premium that is invested is quite small in the initial years.
For a company with high expenses, it usually takes more than ten years for the policy to reach its break-even point, i.e. the cash value is more than the premiums paid. If the expenses are low, the break-even point may be reached before ten years.
2. I have an existing life insurance policy. It provides a poor return on my premiums. Should I continue to keep this policy?
You should as the insurance company to quote the following figures for you:
cash value, if you surrender the policy now
cash value, if you surrender the policy in 5 years time
premium payable for the next 5 years
You can compute the yield for the next five years. If the yield is more than 3%, it is better to keep the policy, as you enjoy the life insurance cover and still get a modest yield. You can get a fairly satisfactory yield, as you have already incurred the high charges during the earlier years of the policy.
If it is less than 3%, you can consider terminating the policy. You can take up a term insurance policy and invest the difference in premium in a low cost investment fund.
3. Should I continue with my investment-linked policy? Does it give good value?
You have to study the charges under the investment-linked policy. Some of the charges are:
the spread taken from each premium that is invested
the expense ratio taken from the fund
additional administrative fee charged on the policy
mortality charges
distribution cost
The distribution cost is usually hidden from the policyholder. It is the difference between the premium that you pay and the amount that is invested for you. This difference is used to pay commission to the agent and marketing expenses. It is usually taken from your policy during the initial years. After this initial period, here is no more distribution cost.
You have to compare these charges with the charges for similar plans in the market. Usually, if the distribution cost has already been fully deducted, it is better for you to keep the investment-linked policy.
4. I have retired from work. I find it a burden to continue paying the premium under my life insurance policy. Some policies require me to pay premiums for my entire life. What should I do?
You have the following options for these policies:
· continue to pay the premium using your past savings
· stop paying premium, and enjoy a lower coverage under the paid-up policy
· terminate the policy and receive its cash value
If you have sufficient savings, you can study the yield over the next five years, to decide if you should continue the policy. You can adopt the approach mentioned in paragraph 1 above.
If you do not have past savings, you have to consider the paid-up policy or to cancel the policy entirely for its cash value.
The insurance company has paid a high rate of commission to the agent in selling the policy to you. The commission and other marketing expenses take up about 24 months of your premium (for most cases). This money has been spent and is taken away from your savings.
The company has also incurred cost in providing the life insurance cover to you under the policy. This cost is relatively small. The company has also taken away some of your premiums as a profit margin for their shareholders.
After deducting the charges, the balance of the premium that is invested is quite small in the initial years.
For a company with high expenses, it usually takes more than ten years for the policy to reach its break-even point, i.e. the cash value is more than the premiums paid. If the expenses are low, the break-even point may be reached before ten years.
2. I have an existing life insurance policy. It provides a poor return on my premiums. Should I continue to keep this policy?
You should as the insurance company to quote the following figures for you:
cash value, if you surrender the policy now
cash value, if you surrender the policy in 5 years time
premium payable for the next 5 years
You can compute the yield for the next five years. If the yield is more than 3%, it is better to keep the policy, as you enjoy the life insurance cover and still get a modest yield. You can get a fairly satisfactory yield, as you have already incurred the high charges during the earlier years of the policy.
If it is less than 3%, you can consider terminating the policy. You can take up a term insurance policy and invest the difference in premium in a low cost investment fund.
3. Should I continue with my investment-linked policy? Does it give good value?
You have to study the charges under the investment-linked policy. Some of the charges are:
the spread taken from each premium that is invested
the expense ratio taken from the fund
additional administrative fee charged on the policy
mortality charges
distribution cost
The distribution cost is usually hidden from the policyholder. It is the difference between the premium that you pay and the amount that is invested for you. This difference is used to pay commission to the agent and marketing expenses. It is usually taken from your policy during the initial years. After this initial period, here is no more distribution cost.
You have to compare these charges with the charges for similar plans in the market. Usually, if the distribution cost has already been fully deducted, it is better for you to keep the investment-linked policy.
4. I have retired from work. I find it a burden to continue paying the premium under my life insurance policy. Some policies require me to pay premiums for my entire life. What should I do?
You have the following options for these policies:
· continue to pay the premium using your past savings
· stop paying premium, and enjoy a lower coverage under the paid-up policy
· terminate the policy and receive its cash value
If you have sufficient savings, you can study the yield over the next five years, to decide if you should continue the policy. You can adopt the approach mentioned in paragraph 1 above.
If you do not have past savings, you have to consider the paid-up policy or to cancel the policy entirely for its cash value.
Low Cost Life Insurance Policy
Dear Mr. Tan,
Is it possible to have a low cost life insurance policy, other than term insurance? Can a whole life or endowment policy be designed to be sold directly, without the high charges for commission to be paid to agents?
REPLY
This is possible to design a "no-load" life insurance policy. It will combine the protection and savings and give a good rate of return to the customer. The customer may have to pay a flat fee of say $100 towards the cost of issuing the policy.
The advantage of this "no-load" life insurance policy is that the cash value can be more than 80% of the premiums paid, from the first year onwards. The remaining 20% will be used to pay the premium for the insurance cover, and some expenses.
I hope that some new insurance company will work on this type of policy design. This will offer a good option for the public.
Is it possible to have a low cost life insurance policy, other than term insurance? Can a whole life or endowment policy be designed to be sold directly, without the high charges for commission to be paid to agents?
REPLY
This is possible to design a "no-load" life insurance policy. It will combine the protection and savings and give a good rate of return to the customer. The customer may have to pay a flat fee of say $100 towards the cost of issuing the policy.
The advantage of this "no-load" life insurance policy is that the cash value can be more than 80% of the premiums paid, from the first year onwards. The remaining 20% will be used to pay the premium for the insurance cover, and some expenses.
I hope that some new insurance company will work on this type of policy design. This will offer a good option for the public.
Accumulate short term savings in a bank account
Dear Mr. Tan,
What is the best way to invest $200 a month?
REPLY
You can accumulate the savings in a bank account. If you join a monthly savings plan, you may be able a higher interest rate on your savings.
After you have accumulated sufficient savings, you can use it to buy Government Bonds or invest in the STI exchange traded fund. or a low cost investment fund.
The advantages are:
1. 100% of your savings is intact
2. You can earn a better return from the investment fund or government bonds.
Do not invest in an insurance product where 18 to 24 months of your savings are taken away as charges to pay the agent and other expenses.
Do not pay high charges for your investments. Read this FAQ:
http://www.tankinlian.com/faq/ilp.html
What is the best way to invest $200 a month?
REPLY
You can accumulate the savings in a bank account. If you join a monthly savings plan, you may be able a higher interest rate on your savings.
After you have accumulated sufficient savings, you can use it to buy Government Bonds or invest in the STI exchange traded fund. or a low cost investment fund.
The advantages are:
1. 100% of your savings is intact
2. You can earn a better return from the investment fund or government bonds.
Do not invest in an insurance product where 18 to 24 months of your savings are taken away as charges to pay the agent and other expenses.
Do not pay high charges for your investments. Read this FAQ:
http://www.tankinlian.com/faq/ilp.html
Poll: Saving for a child's education
How do you like to save for your child's education (21 votes)
19% - In an education policy (i.e. life insurance)?
57% - in a low cost investment fund (separate for the child)
23% - together with the parent's savings
19% - In an education policy (i.e. life insurance)?
57% - in a low cost investment fund (separate for the child)
23% - together with the parent's savings
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