Cheating

Cheating is an act of lying, deception, fraud, trickery, imposture, or imposition. Cheating characteristically is employed to create an unfair advantage, usually in one's own interest, and often at the expense of others. Cheating implies the breaking of rules. The term "cheating" is less applicable to the breaking of laws, as illegal activities are referred to by specific legal terminology such as fraud or corruption.

Unjustified increase in premium for motor insurance

Insurance companies have increased their premium rates by about 20% this year. Dr. Money said that the increase is not justified, as these companies have made a lot of profit from their investments. Here is his article:

http://newpaper.asia1.com.sg/columnists/story/0,4136,168843,00.html

http://www.tankinlian.com/drmoney/

Invest in Foreign Currencies

Dr. Money gives some tips on how to invest in foreign currencies to get a higher return:

http://newpaper.asia1.com.sg/columnists/story/0,4136,166429,00.html

http://www.tankinlian.com/drmoney/

Complain about a poor deal

An insurance agent in Indonesia sold a large investment-linked policy to a senior government official. The annual premium was SGD 15,000 a year. The policyholder was angry when he learned that 15% of the premium was deducted as first year charge. He was not told about this deduction by the agent. He lodged a complaint with the insurance company.

The insurance company was worried that this official could give a lot of problem. They asked the agent to accept a lower commission of, so that only 5% was deducted, allowing 95% of the premium to be credited to the policyholder's investment. The agent agreed. Although this deduction was probably mentioned in the benefit illustration, the policyholder was able to get this special treatment because of his high position.

Actually the deduction of 15% was quite reasonable. In Singapore, 80% of the first year's premium is deducted, leaving only 20% to be invested. Most policyholders were probably not aware about this high deduction. When they found out, they are probably to ashamed or reluctant to lodge a complaint.

Policyholder given a misleading figure

A young man bought an investment linked policy with a saving of $200 a month. He was mistaken that the premium payable for 42 years was $33,600 when the actual premium was $100,800.

He realised that the policy did not give an attractive return. He sent this message to me:

"I think the figure I received were a bit misleading and I have asked and confirmed to the advisor. I have now terminated the ILP. I have paid S$6400 and will only get back around $3,100. I guess this is a lesson learned for me. Anyway, I hope that you will keep educating people from your blog and site so that the public will be more aware about their financial planning. "

Unethical conduct of insurance agent

Hi Mr. Tan,

Last week, I went to an insurance company to terminate my regular investment link policy. It was only purchased last December and I had considered carefully about the huge financial loss that I will incurr upon closing it. I had decided to close it despite incurring huge losses as I feel that this is in my best interest that I do not have any dealing with this company anymore.

I put up a request through my agent to reduce my monthly premium as I found the premium rather heavy for me as im currently funding my own part time studies. This delay has been dragged for more than 2 months and despite assurance from my agent,i did not receive any official writing from the company either. He told me that his admin dept was having some problems and will take some time to process my application. But I did remember filling up a form when I met him earlier to reduce the premium,he did not give me a copy either, I found it strange that he did not gave me a copy of the application form. I didn't probe much as i trusted him but..

My agent called me up shortly after I terminated my polices, he was agitated and said that I was rash in my decision and did not respect him by informing him beforehand. He wants me to reinstate my policies as my withdraw will affect his promotion and he still assure me that he had submitted my application. I told him that it was taking too long to process my reduction of premium and I do not wish to carry on any dealing with his company anymore. I was disappointed.

I called up the insurance company to check this morning and found out that there was no record of any pending application form from my account to reduce any premiums for the past 4 months. I also asked if there was any manpower shortage for the processing dept for the past few months, the Customer Service officer replied 'No'. He has been lying to me all these while, I thought that he is a responsible agent and is sincere in helping clients to plan for their future. I try to help him initally by introducing my friends to him, lucky they did not buy from him else I will feel guilty.

I paid a total of $X and only got back less than 10%. Can I get his company to compensate me as this is largely due to their agent manipulation. Can I claim for personal disappointment? I also withdraw my CPF OA investment account with this company as I was ready annoyed with them, I lose about $X in total for this account.

Who can I seek to redress my grievences and personal damages? I want to teach this agent a lesson, can I file a complaint against him?

I have written an email to them last night asking them to explain why my application was not processed and asked them for an compensation as this incident was largely due to their incompetence and insincerity. They replied by saying that they will look into this matter and give me a reply soon.

Hope you can give me your advice on this as this is causing much inconvenience and frustation to me

REPLY

I suggest that you write a complaint to the Insurance Department of the Monetary Authority of Singapore. They have a section that is responsible for market conduct, which includes the conduct of insurance agents. MAS will bring this matter officially to the insurance company. Your complaint is likely to be acted on promptly.

More uncertainty with private Shield

Dear Mr. Tan,

I understand from MOH website that "Since 1 July 2005, each of these Medisave-approved plans have been integrated with MediShield to form a single integrated plan."

I bought a private Shield plan in 2002. I think at that time, the insurer will cancel the CPF medishield for me. Since the medisave-approved plan has been integrated with medishield from 1 July 2005, does it mean I am covered under the private Shield while retaining the benefits of MediShield membership? Or only people who signed up after 1 July 2005 for the private shield plan will benefit from the changes on 1 July 2005.

If I am retaining the Medishield membership though I signed for a private shield plan in 2002, does the medical underwriting for this medishield component starts from 2002 after I signed up for the private Shield (which may include exclusions imposed by the private insurer) or does it starts from the first day I had my Medishield which is many years ago before 2002 which has no exclusion?

REPLY

When you bought the private Shield in 2002, you are subject to the underwriting requirements at that time. If you have any pre-existing conditions that are not disclosed, the insurer is likely to reject your claim. A few people have approaced me on the rejection of this claim under a private Shield plan.

The "integration" exerise is a private arrangement between the insurer and CPF. It does not have any bearing on the contract between you and your Shield insurer, regarding the disclosure and exclusion of pre-existing conditions.

This is my understanding of the likely practice. It is best that you confirm with your insurer on this matter.

ADDITIONAL NOTE:
I understand that some private Shield policy has a clause that read as follows: "For the avoidance of doubt, any Pre-existing illnesses, Diseases or Impairment that have been covered under Medishield shall continue to be covered under this Policy up to the Medishield policy limit .... etc."

If you have this clause, you will continue to be covered for the conditions previously covered under the Medishield policy.

Low cost insurance and investment funds

I am now working as a consultant to a life insurance company in Singapore. It intends to launch low cost insurance and investment funds in early 2009.

Details of suitable products are set out in these FAQs:

http://www.tankinlian.com/faq/low.html

http://www.tankinlian.com/faq/btid.html

http://www.tankinlian.com/faq/termassurance.html

http://www.tankinlian.com/faq/finplan.html

http://www.tankinlian.com/faq/age65.html

Generally, my advice is:

1. Buy low cost term life and medical insurance to protect your earnings
2. Invest your savings in a low cost fund to get an attractive return
3. Avoid high cost and complicated financial products
4. Educate yourself to make the right choice
5. Buy directly, to avoid paying the high commission insurance agents

Business ethics

We need strong business ethics, to operate business honestly and give fair value to consumers. I am speaking on this topic at a dinner of the alumni of an American university.

Here are some points contained in my speech:

In Ancient China, the “four categories of the people” was a hierarchic social class structure developed by scholars as far back as the late Zhou Dynasty (c. 1046–256 BCE). In descending order, these were the shi (gentry scholars), the nong (peasant farmers), the gong (artisans and craftsmen), and the shang (merchants and traders).

Why are the merchants and traders treated at the lowest rank?

The merchants, traders, and peddlers of goods were viewed by the scholarly elite as essential members of society, but were placed on the lowest of the four grades in the social hierarchy. The scholars in their writings denounced the merchant class as greedy and lacking moral character. Merchants were seen as somewhat parasitic to the needs of all other groups in society, since they used the goods that others produced and made their own profits from them. In essence, they were seen as business savvy, but not morally cultivated enough to be venerated representatives of Chinese culture.

I wonder if our business community of today fall into the same description of "greedy and lacking moral character?"

Identity card - lost & found

I lost my identity card last month. I applied for a new card, but was advised to wait for two weeks, in case the card was found.

After four weeks, I received a letter from the relevant department. Someone found my identity card and returned it to them. The letter asked me to collect the card from their office.

What a wonderful service!

Car insurance - where to get lower premium

Dr. Money wrote this article about car insurance:
http://newpaper.asia1.com.sg/columnists/story/0,4136,170194,00.html

You can find more articles from Dr. Money at:
http://www.tankinlian.com/drmoney/

Non-disclosure and medical insurance

Someone asked me to explain about the impact of non-disclosure of pre-existing condition on medical insurance.

Under the contract, the insurance company has the right to reject a claim due to the non-disclosure of a pre-existing condition. They are likey to reject the claim, even if the non-disclosure was unintended, namely the policyholder was not aware about it.

What is pre-existing is also a matter of judgement. Most medical conditions can be traced to be pre-existing. For example, if the patient has a high cholesterol and does not disclose it, the insurance company may reject a claim that is related to this condition.

As a person grows older, most illnesses are likely to have some pre-existing connection. It is quite unfair for the insurance company to reject a claim on flimsy grounds. From my experience, many insurance companies in Singapore are quick quick to find a reason to reject a claim.

Hence, it is very important that you choose an insurance company that you can trust, and take act fairly in the interest of their policyholders. Unfortunately, many insurance companies are too driven by their profits and are willing to sacrifice the trust of their policyholders.

Consumer protection in Singapore is weak. Consumers are not willing to fight for their right in a court of law, as the legal cost is high.

Poor cash value

I find the practice of life insurance companies in giving low cash values to be most unfair to policyholders.

Here is an example. The policyholder took an endowment policy 15 years ago, and paid an annual premium of $5,925. After 15 years, the cash value of $86,299 represents a yield of 0% on the premiums that have been invested.

The insurance company projected a maturity value of $166,622. This would give a yield of about 5% per annum for 18 years.

If the insurance company had indeed earned a net yield of 5% for the past 15 years, the "asset share" should have been $127,000. The payout of $86,299 represents a penalty of $40,000 from the "asset share".

How can the insurance company justify this large penalty on a customer who has entrusted the CPF savings for 15 years?

The policyholder, who has now retired, is forced to find the premium to pay for the next three years, to avoid this huge penalty.

I advise the policyholder to lodge a complaint with the Monetary Authority of Singaore on the poor cash value that is being offered by this life insurance company.

I advice the public to avoid all life insurance products that offer low cash value and project a large terminal bonus on maturity. If you are not able to pay the premium to the maturity date, a large part of your savings will be confiscated. Even if you continue to the maturity date, you can never be sure that the terminal bonus will be paid.

I hope that the Monetary Authority of Singapore will take action to enforce payment of cash value that is close to the "asset share" - a practie which has been adopted in Malaysia. Do not let the ordinary people be deprived of a fair return on their savings.

Many policyholders give up their whole life policies

COMMENT POSTED IN MY BLOG

Whole life product advocates and especially insurance agents argue that a whole life policy is useful during old age, a time when one is most likely to contract dread illnesses.

Apart from other economic reasons, I want to show that whole life policies are hardly kept beyond age 65. Why is it not kept beyond this age, the obvious reason is many don't believe that it is necessary and many believe in self insurance, a wise idea because liquidity at a time like this is more flexible and better choice.

What if you get and what if you don't get a disease , the probability seems 50/50 but I bet it is more than 80% chance you don't get. If you do, have an H&S is enough plus what you provided for in cash as self insurance will adequately address this problem.

Maintaining a whole life policy at this age is expensive and a waste of money and self insurance is a better option.

Therefore the case for a whole life policy is weak and you are better off if you have a term insurance plus investment with better return. The chances of having a better life and retirement are best via "buy term and invest the rest".

I want to show you statistics from MAS website to corroborate my argument and my findings. If you look at the life insurance persistency from 2001 to 2007 you see a pattern. You see high decline immediately in first 2 years and henceforth persistency declines at a rate of about 4%. This pattern is seen in all the last 5 years.

If I extrapolate the rate of decline to next 20 to 30 years I can see that only about about 10% or less of life policies will in force.

Assuming a 30 year old man buys a policy, by the time he is 60 or 65, he would have terminated or surrendered his policy. This phenomenon is supported by another statistics, the surrender statistics and it has been a whopping high of about 65% compared to maturity of about 35%. In other words a lot of people surrendered their policies earlier.

What do these figures tell you? Very few kept their policies beyond 65 years old. Why buy whole life insurance if you don't keep till old age? Let me tell you, it is burdensome; cash return too low.

I have done another research earlier and posted somewhere on death claim. I found no claim beyond the magical age 65, not that no one died or no one got dread disease but no one or very few kept whole life insurance beyond this age.

Death claim median age is 45 and average claimed amount is only a miserable $45K and the highest of $200k was from a term insurance.

Conclusion: insurance is most needed during time when your responsibility is the highest and you should have enough to address the needs at that point in time. Term is the best instrument, cheap and efficient.

Do not believe what the insurance agents tells you about whole life insurance. Their argument is obvious, it is high commission for themselves and life long source of revenue and income for the insurer.

zhummmeng

Bus services - express and feeder services

Read my suggestions in:
http://theonlinecitizen.com/2008/07/improving-public-transport-%e2%80%93-an-express-alternative/#comment-15330

Ownership of a life policy

Dear Mr. Tan,

My uncle (as policy holder) bought a life policy for his wife (as insured). If the policy holder passes away, does it mean that the ownership of the policy automatically transfers to his wife (the insured)? Or does it become a 'no ownership policy'. If it is the latter, who has the rights to deal with the policy, for instance, to take a policy loan/terminate it?

REPLY
Your uncle is the owner of the policy. On his death, the policy becomes part of his estate and the administrator of the estate (which is usually his wife) can deal with the policy in any suitable way, such as taking a loan or terminating it.

Your uncle has the choice of transferring the policy to his wife now and write in his will to transfer the policy to the wife on his death.

Unforgettable sight in Beijing

My friend saw an unforgettable sight during his recent visit to Beijing - something that he has not seen before, and will never see again in the future.

He looked up and saw a blue sky. In preparation for the Beijing Olympics which will start soon, the authority has asked the factories to stop or reduce their production within a large part of Beijing. This reduces the pollution and makes the air clean.

He expects that, after the Olympics, things will get back to normal in Beijing - and that is a polluted environment.

Cost of Private Shield

A reader asked how it is possible for the cost of a private Shield plan to be more than $100,000 for ages 30 to 85.

You can add up the total cost from the websites of the insurance companies. Here is an example from NTUC Income:

For the enhanced plan (subject to deductible and co-insurance):
http://income.com.sg/insurance/incshield/premium.asp

For the plus rider (to cover the deductible and co-insurance)
http://income.com.sg/insurance/incshieldplus/

Add up the premium rate for plan P (which covers private hospital) for the ages from 30 to 85. Remeber to muliply by the number of years in each category. I got a total of $102,344.

This does not include the cost beyond age 85, and also for future increases in premium rates due to medical inflation. These rates are not guaranteed at the current level and can be adjusted in future years.

You can find out the premium rates charged by the other insurance companies for their private Shield plan. I believe that the total cost will be higher, i.e. more than NTUC Income.

How banks lose the trust of their customers

An elderly person told me, "Long ago, many people can trust their bank to give them a fair return on their savings. Nowadays, the banks make a lot of profit by selling bad financial products to their customers. Many customers now distrust the banks".

What has happened during the past ten years, that makes the banks lose the trust of their customers?

Long ago, the banks are tightly controlled by the regulator. They have a few common products that their customers can understand, such as a saving account, a current account and fixed deposits. The customers can compare the interest rate paid on these savings and deposits. The banks have to offer competitive terms to attract and retain their customers.

The situation changed in the past decade. Banks started to offer complicated financial products. They employ marketing officers to sell these products, such as high cost life insurance products. Later, they sell structured investment products.

There is a change in the role of the regulator. They are not concerned about ensuring fairness to the consumers, and decide to leave this matter to the market. The consumers are left at the mercy of the issuers of these products. The issuers have the objective of maximising their profit and do not mind "ripping off the consumers". Business ethics disappeared.

The banks market these products to their consumers. They make a handsome profit from the commissions paid by the product issuers. But the poor consumers are given poor financial products. They only realise it after 3 to 5 years, but by then, it is too late.

This is how banks lose the confidence of the customers.

Advice to the young - save 15% of your earnings

I gave an advice to young people - to save 15% of your earnings. Someone commented that this is not possible. Young people do not earn enough, and will find it difficult to save 15%.

I believe that this goal is possible, and here are my reasons. Many young people stay with their parents and do not have to pay for housing and other expenses. Due to their low expenses, they can have savings, if they wish to.

Their priorities should be:
1. Essential expenses for travelling and food
2. Contribute a monthly allownane for household expenses
3. Repay their education loan
4. Set aside money for their savings
5. Use the remainder for other expenses, such as luxury items and holidays.

If they save now, the can use their savings for future expenses. They do not have to take a consumer loan and pay a high interest rate. By avoiding interest payment, they have more money to save and spend.

A fair premium for private Shield plan

Are you paying a fair premium for your private Shield plan? Are you being over-charged? How can you find out?

You can look at the ratio of claims to premiums, as reported by the insurance company for this plan, in their return to MAS.

Take this example. If an insurance company has 100,000 policyholders and pays a total claim of $10 million each year, the average cost of claim is $100 per policyholder. The insurance company needs to incur expenses and to have a reasonable margin of profit. As a rule of thumb, the loading should be about 50% over the cost of claim. A reasonable premium should be $150.

The actual premium charge will differ according to the age of the policyholder and other relevant factors, but the average for all the policyholders should be $150.

If the average premium paid by the policyholder is $500, it can be considered to be excessive. Why should the policyholder pay an average premium of $500, when the average cost of claim is only $100? This means that $400 is taken away to pay commission to the agent, and profit to the insurance company.

Why is this insurance company able to get away with charging such a high premium rate to its policyholders? Here are the ways:

1. It makes it product different from its competitors, so that the policyholders cannot compare the prices.

2. It provides some special features that make the product look very attractive, but the actual claim cost is small. This is a way to mislead customers.

3. It pays high commission to incentive its agents and train the agents on how to market the product aggressively.

As a consumer, you should avoiding paying far too much for a private Shield plan. The money is taken from their Medisave savings. If you spend too much money now on unnecessary insurance, or is overcharged, you will have inadeqaute savings to pay for the medical expenses in your old age.

Invest in an indexed fund

Hi Mr. Tan,

1) I read in many reviews that index funds such as the STI usually outperforms managed funds on average. Is this true and would you advise me investing in the STI at this time and who do you advise I manage and adjust on a regular basis?

2) I am looking for a good financial advisor and institution. So far, I have talked to a few financial planners but none has given me the confidence that I will really get my returns over the long term. I am at a loss on how to ensure I have a robust portfolio and where to seek reliable and effective help from. Do you have any specific suggestions on how I can go about it myself or seek advise from?

3) I cannot assess the link in your blog regarding "Financial Planning tips", can you send it to me or have any books i can self educate myself with?

REPLY
I advise my readers to invest in an indexed fund for 10 years or longer. A suitable index fund is the STI ETF. As the index is now 25% below the peak, it is at a good level for investing. Even if the market goes down from here, it will recover in6 to 12 months time (just my opinion).

You can buy the STI ETF through your stock broker. It is quoted on the stock exchange. Read this FAQ:
http://tankinlian.com/faq/savings.html

If you need a financial planner, who is willing to give advice for a fee, you can contact X (details deleted).

The link for Tips on Financial Planning in my blog is working. It leads you to this webpage:
www.tankinlian.com/faq

Unfair rejection of Shield claim

A policyholder upgraded into an expensive private Shield plan. He had to undergo angioplasty. The insurance company rejected this claim on the grounds for non-disclosure of high cholesterol. The policyholder was not aware that this condition was serious to be disclosed, as his doctor did not ask him to take medication. He asked the insurance company to justify their decision for non-disclosure.

After one month, the insurance company replied that the policyholder did not reply to a question that ask if he has "suffered from any other illness". They consider that the high cholesterol should be answered under this question. This was the position taken by a senior management of the company.

I consider this rejection to be unfair and advised the policyholder to lodge a complaint to CASE or FIDREC.

Returned E-mail

I received a few questions each day from readers of my blog. I usually give a reply within the same day or the following day. Quite often, the replies are returned to me, as the server could not deliver the e-mail. It could be due to a wrong e-mail address or other reasons.

Sometimes I post the questions on my blog, after removing personal details. I hope that my person who ask the question will be able to get the reply through this channel.

Keen to work for an honest insurance company

Hello Mr.Tan,
I am an avid reader of your blog and find the information you have shared with your visitors well written.

I understand from reading your blog, you are starting a new insurance company.I am keen to explore a potential employment with your new company.

Currently, I am working in the IT industry in the private sector.Although I do not have the necessary experience in the financial industry, I am keen to explore the potential and believe in serving the interests of the people.

Hi Mr.Tan,
Thank you for taking the time to go through my resume. The insurance industry is in need of honest and capable people. I will look forward to hearing from you.

Impact of market drop on long term yield

If you have invested in Singapore or Global equity over the past 10 to 20 years, your average yield (computed up to 2007) would have been 8% to 9% per annum. The stockmarkets had dropped by 25% from its recent peak.

If you allow for this drop, the impact on the average yield would be 1% to 2.5%. The average yield would have dropped to 5.5% to 8% per annum. It is still an attractive yield, compared to other asset classes.

The secret: invest for the long term (10 to 20 years) and select a low cost investment fund (which takes away 1% or less). Better still, find the right time to invest - when the market has dropped 25%. This is a good time. Even if the market drops further, it will recover within the next 6 to 12 months.

Paying the right price

Many people are worried about suffering from a critical illness. The insurance agent scare them about the high cost of this event.

Let us take this example. The chance of making a critical illness claim before 65 is probably 10%. The average cost of the illness is $50,000. You should pay a total premium of only $5,000 to cover this risk. Allowing for interest earned from investing your premium, your actual could be much lower, say $2,000, spread over many years.

But, you are asked to pay a premium that is 5 to 10 times of the actual cost, say $10,000 to $20,000. Why should you pay so much? Why should it be so costly?

Although some part of the premium is returned to you as a cash value, the yield is so low. It takes up to 20 years just to break even. The selling expenses and profit margin of the insurance company are too high.

It is better to buy a short term cover for critical illness and pay the right price for it. You can invest the rest of your savings in a low cost investment fund. After 20 years, your savings will be more than the sum assured. You do not need any critical illness cover at that time, as it can be paid from your savings.

A low cost investment fund

You are not familiar with investing your money. You appoint a trusted person to handle your money and take care of investing it.

Thirty years later, you found whom you have trusted had taken away 65% of the investment gains, and left you with only 35% of the gain. Do you feel that you have been cheated?

If you invest $200,000 over 30 years and your total gain is $600,000, your trusted friend has taken away $400,000 and leave you with a gain of only $200,000.

What type of product is this? It is a high-charge investment linked policy.

Would you prefer to have chosen a more trusted person who takes away 20% of your gains (to cover his expenses and earnings) and leave you with 80% of the gains? This person took away $120,000 and return your savings of $200,000 plus a gain of $480,000.

What type of product is this? It is a low cost investment fund.

Read this FAQ:
http://www.tankinlian.com/faq/savings.html

Buy critical illness for 20 years only

Hi, Mr Tan

I'm currently 34 years old (male). I am interested to obtain a $200k coverage in critical illness for life as I'm concerned about the rising medical costs as I grow older.

My financial adviser has advised me to buy LifeSecure (Limited pay plan) that requires me to pay 20 years' of premium. Thereafter, I need not pay anymore premium.

I would be grateful if you could advise if there are term plans in the market that would provide coverage for critical illness for life. And what is the premium like?

REPLY

In my view, critical illness cover for a lifetime is very expensive and unnecessary. You should buy this cover for 20 years. If you save the remainder of the premium in a low cost investment fund, your accumulated savings can be more than the sum assured at the end of 20 years.

Read this FAQ
http://www.tankinlian.com/faq/choice.html

Buy the right product

Someone told me, "If you are not insured, you stand a 5% chance of being poor. This is the chance of suffering from an uninsured event. If you are insured, you stand a 95% chance of being poor. This is the likelihood of buying an expensive product that takes away too much money from the customer and gives a good commission to the agent. "

If you buy the right insurance product, e.g. low cost term insurance, you avoid the 95% chance of being poor, and avoid the 5% chance of suffering an uninsured loss.

MAS Guidelines on Fair Dealing

18 May 2008

MAS Guidelines on Fair Dealing
Submission by Tan Kin Lian

1. The Monetary Authority of Singapore (MAS) is seeking views on proposed Guidelines on Fair Dealing – Board and Senior Management Responsibility for Delivering Fair Dealing Outcomes to Consumers (Guidelines).

2. The Guidelines emphasise the responsibility of the Board and Senior Management of financial institutions (FIs) to deliver fair dealing outcomes when FIs provide financial advisory (FA) services to retail consumers. The fair dealing outcomes that FIs should strive to achieve are:
(a) Consumers have confidence that financial institutions put consumers’ interests first in the conduct of their business;
(b) Financial institutions offer products and services that are suitable for the consumer segments they target;
(c) Financial institutions appoint competent representatives who provide consumers with advice that meet their financial objectives and suit their personal circumstances;
(d) Consumers receive clear, relevant and timely information to make informed financial decisions; and
(e) Financial institutions handle consumer complaints promptly and in a consistent manner.

3. I agree with the goal to ensure that the consumers are given fair dealing outcomes. I believe that the board and senior management should be made responsible to achieve these outcomes. However, in my view, this requirement is not sufficient.

4. It is difficult for the board and senior management, who are responsible to achieve the “best shareholder value” for the financial institution, to be able to “put consumers’ interest first in the conduct of their business”. We must recognise and address this serious conflict of interest, in order to achieve the desired goal.

5. “Put consumers’ interest first” must be defined clearly. In my view, the financial products must be designed to give good value to the customers and a fair profit margin to the financial institution. If the product contains excessive expense charges and profit margins and are not fairly and clearly disclosed to the public, it will not pass the test of “good value”.
A good test is, “will a knowledgeable person, with no vested interest, buy the product for his own use or recommend it to a friend?”

6. As it is almost impossible for the board and senior management to exercise this responsibility adequately, we need a more effective channel to achieve the results.
In many countries, this responsibility falls on one or both of the following:
(a) Regulator
(b) Consumer advocates

7. Some financial products introduced in Singapore in recent years are complicated. It is not realistic to expect the consumer to be sufficiently well informed about the product to make the right decision, especially if they are pitted against the financial experts working for financial institutions, who have the freedom to design products aimed at maximising profits for the financial institutions.

8. There is a similar situation regarding the approval of drugs for consumption by the public. The regulator, such as the Food and Drug Administration of the USA and the Health Science Authority of Singapore, takes the responsibility to check that new drugs are suitable for consumption by the public. A drug cannot be sold without the approval of the regulator. The regulator does not expert the consumer to be sufficiently educated to make the judgement on their own.

9. It is equally important to ensure the financial health of Singaporeans. They work hard to earn an income and have to save part of the income for their future needs. If they are offered products that do not offer fair value, they are being unfairly exploited by the financial institutions.

10. Over the past ten years, Singaporeans have invested billions of dollars in complicated financial products, including structured financial products and more traditional financial products that give poor value. Most of these products have the following features:
(a) Excessive expense charges
(b) High profit margins
(c) Complex – difficult for consumers to understand

These excessive charges and high profit margins reduce the return to the consumer. Many of them get a poor return relative to the risk that they have to bear. They would have obtained a better return by investing in government bonds, for people who look for risk free returns, or leaving their savings in the Central Provident Fund.

For investors willing to take risk, they would have obtained a higher return by investing in fairly priced unit trusts.

11. Life insurance products, such as whole life, endowment and regular premium investment linked policies have high sales charges that take away more than 150% of the annual premium. These high charges reduce the return to the consumer considerably, and are not justified by the value of the product given to the consumer. The competition appears to be on the recruitment of the right type of agents who are able to “convince” customers to buy these products. There is no attempt to offer more appropriate, lower cost products to the consumers.

12. If MAS were to make a study of the innovative financial products that were sold to consumers in recent years and compare the actual return earned by the consumers against the return on “fair products” offering similar risks, the study will probably show that the investing public had been deprived of at least several hundred of millions of dollars of fair return from their investments.

13. I recommend the following approach:
(a) All complex financial products should be reviewed by two independent experts appointed by the regulator. These experts can ask relevant questions from the product issuer and study the answers to form an opinion on whether the product provides “fair dealing outcome” to the consumer. The experts can study if the charges, profit margin and penalty (to get out of a long term contract) are fair to the consumer. The experts can submit their recommendations to the regulator.
(b) Based on the recommendations of the independent experts, the regulator can disallow the product from being marketed, or be marketed with the views of the independent experts, posted in an easily accessible website.
(c) The regulator can specify the classes of simple and transparent products, such as bank accounts and products traded on the stock exchange, that are excluded from this requirement. These products may require certain guidelines to be observed, such as disclosing the effective rate of interest in a suitably prominent manner.

14. Conclusion
I support the move by MAS to make the board and senior management of financial institutions responsible to deliver fair outcomes to consumers. I recommend that this should be strengthened by an additional measure to get independent experts to review the financial products that are offered to the public.

Tan Kin Lian

Rejection of claim on grounds of non-disclosure

A policyholder switched from Medishield to a private Shield plan. He was not asked about his cholesterol level. He did not declare this condition as the doctor did not advice on the need to take medication.

He had to carry an angioplasty operation. The insurance company rejected the claim on the ground of non-disclosure. They even refused to pay the claim that would have been allowed under Medishield.

The policyholder wrote to the insurance company to ask for the grounds of rejection. There was no reply for one month. He intends to lodge a complaint with Fidrec.

Lesson: There is no point to pay a higher premium under a private Shield plan, if you are not sure about the practice of the insurance company in rejecting a claim on the grounds of unintended non-disclosure.

ERP charges displayed on gantry

The ERP charges are now displayed on the gantry. It shows the charge for the various types of vehicles, i.e. cars, motor cycles, taxis, bus and goods vehicle. The charges change according to the time slots.

Well done to Land Transport Authority.

Price of a product or service

In the free market economy, the price is set by the market. The business decide on the price and sell the product or service to the market.

In my view, there is a better way to set the price. It should be based on the cost plus a reasonable margin for profit. This is a fair way to set the price, and avoids exploiting the consumers.

A cooperative operate on this model. It is an ethical model. I hope that this concept can be applied to many types of businesses.

Some companies make excessive profits by misleading the consumers. They design complicated products, and get marketing people to sell these products to consumers through misleading means.

School should not be a business

The head of a junior college has the title of Principal and CEO. Why should a school be treated as a business, and to have the head carry the title of CEO?

It will be better for our soceity, if a head of a school is the principal and is not a CEO. The school should have the aim of educating students at a specified cost per student, and not be runned as a business to maximise the surplus or to reduce the cost of education (as this can be done by reducing the quality of the teaching).

Find out about the charges

Hi Mr. Tan,

I have bought 2 Regular Premium ILP in year 2002 and I do not know if I should continue or teminate both insurance plans.

IPL 1
Total premium paid is $9K plus and the value of investment is $7k plus. Fund purchased are GreatLink Enhancer and ASEAN Growth Fund.

IPL 2
Total Premium paid is $7500 and value of investment is only $3k. Fund purchased is Golden International Bond.

Should I still continue with both plans or terminate them and incur loses? Can you please advise me?

REPLY

You have to find out about the charges in these two policies. Generally, if the policy has been in force for more than two years, most of the upfront charges have already been spent - so you should continue the policies.

Read this FAQ:
http://www.tankinlian.com/faq/ilp.html

Advice for young people

A junior college student asked me to give a talk on financial planning to her school. My points will be quite simple:

1. Save 15% of your earnings.
2. Keep the money in a bank account to earn interest rate at 1% or 2%.
3 Do not invest the money in financial products that offer poor value
4. When you have sufficient savings, invest in a low cost unit trust (after you learn about the principles of long term investments.
5. When you get married and have family responsiblilities, but a term insurance policy to cover you for 3 to 5 years of your income.

Business ethics

If you know that the cost of your product is $100, and you decide to add a reasonable margin to cover your expense and profit, you will sell it for $150. This is the ethical way to do business.

If you mislead your customer about the true value of your product, you may be able to sell your product for $500. This is taking advantage of your customer and is unethical.

It is quite sad that the business world now finds it acceptable to take advantage of the customer and sell a product at an exorbitant price to make a big profit margin.

Joke: Establish the fact

A man met a pretty girl in a holiday resort and asked her, "Will you sleep with me, if I give you $5,000". She smiled and replied, "yes".

The man continued, "Will you do it for $50". The girl got angry. "What do you take me for?"

He replied, "We have already established the fact. We are now negotiating the price."

Courtesy in use of mobile phone

When I was overseas, I received several calls on my mobile phone from one unidentified caller. As it is expensive to take a roaming call, I rejected these calls. The calls also arrived when I was busy with a meeting.

On my return to Singapore, I returned a call to this number. My call went into a voice mail. There was no clue of the party that made the call to me. I left a voice message for this person to call me back. I learnt later about the identity of the party and the company that made the call to me on a business matter.

I suggest the following telephone courtesy:

1. Do not a person on his mobile phone - unless that person knows you personally and is able to recognise your telephone number.

2. Send a SMS to the recipient to identify yourself and state the purpose and time of your intended call.

3. Make sure that your name is indentified in your voice mail.

Joke: Telling the truth

The priest told the congregation, "Next week, my sermon will be about truthfulness. When you get home from church, you should read chapter 29 of Leviticus."

The following week, the priest asked, "Can those who have read chapter 29 of Leviticus raise your hands?" Most of the congregation raised their right hands.

The priest said, "Just as I expected. And this is why my sermon is about truthfulness. Leviticus has 27 chapters only!"

I hope that the business world tells the truth to their customers and do not keep changing their stories.

Weakness of the Global Financial System

During the Asian Financial Crisis, the fund managers created havoc in the Asian financial markets. It caused high volatility and sound companies to be bankrupted, due to a liquidity crisis.

The same situation is now happening in the US financial markets. Many fund managers are short selling the shares of Fannie Mae and Freddie Mac, causing great stress to the financial markets. The Securities Exchange Commission is introducing measures to stop the short selling of these shares.

A report said that the traders are creating rumours on Leyman, so that they shares can be beaten down.

My reading is that this credit crisis reflects a severe weakness of our current global financial system, which is subject to excessive speculation and manipulation. It is not reflective of the real economy. I hope that the lessons can be learnt and that shortcomings can be fixed.

Large profit margin on Shield plan

One large insurance company collected $100 million on its private Shield plan and pays only $20 million in claims. It is making a huge profit margin.

If you pay $500 a year on a Shield policy to this company, you will get back about $100 in claim from this company. If the average claim payout is $100, a fair premium is $150 and not $500.

This company is able to make its Shield plan looks very attractive, but in reality the payout is poor. The consumers are not able to know about the reality until the time of making a claim.

You can buy another medical insurance plan that offers a higher claim to premium ratio, for example basic Medishield. You will pay a much lower premium. You can keep the rest of the premium in Medisave to earn 5% interest. You will need the savings for your future.

Switch to basic Medishield

Dear Mr. Tan,

My wife and I are both retirees. We both have Enhanced Incomeshiled & Plus Rider.

For the coming insurance year, we will be paying premiums $517 & $311 (payable by Medisave) for Enhanced Incomeshield and $304 & $224 (payable by cash) for Plus Rider for myself & my wife respectively.

I shall be grateful for your advice whether we need such insurance which I consider rather expensive. Or alternatively should we switch to the basic Medishield offered by CPF. If so, how do we go about doing that?

REPLY

I think that basic Medishield is adequate for retirees, provided that you are willing to be treated in B2 ward. The premium is much lower than a private Shield plan. You can pay the Deductible out of Medisave. Read this FAQ:

http://www.tankinlian.com/faq/shield.html

You can contact CPF to switch to basic Medishield.

Shop around to get a competitive rate

Dear Mr. Tan,
I had just got a quote from the insurance agent, the sum assured for $200,000 decreasing term of 20 years, the monthly premium is $50 (female). Please advise whether it is expensive.

REPLY

The premium rate quoted is very expensive. You can get the benchmark premium rate from this FAQ.
http://www.tankinlian.com/faq/term.html

It is best for you to get a few insurance companies to quote the premium rate, rather than depend on one agent to quote you an expensive rate. Do shop around.
http://www.tankinlian.com/faq/termd.html

Global recession

Many people are worried that there will be a global recession. For people with savings, a global recession may be all right. With a recession, prices will come down. People will work less, as there is reduced demand. They can spend the time with the family or take a holiday.

For people without savings, it may be difficult. The lesson here - do keep some spare savings for a future emergency. Do not over-stretch and spend all of your earnings. Do not borrow on your future earnings.

I hope that, in the future, the global economy can come out with a new model. People do not need to work for long hours. They can work less and enjoy their leisure time. There is no need to produce more and more goods, which are not really needed.

Why should people change their mobile phones every one or two years, or upgrade their personal computers frequently? Why should they change their cars within a few years? These are wasteful.

SAFRA insurance

Mr. Tan,
I plan to increase my cover for critical illness. To the best of your knowledge, what're the currently available plan in the market with $50 per mth? My agent told me CI plan do not come as a "main policy", instead, i must buy a "main plan" (usu a Whole life policy) & attach a CI rider-true?

REPLY

I suggest that you insure under the SAFRA scheme, if you are a SAFRA member. Please ask SAFRA.

Choose a low cost term insurance plan

Dear Mr. Tan,

I wanted to buy a term insurance for my husband who is 42 years old. He is currently covered with $80,000. My agent recommend me the below 2 plans.

1. Term Plan (Up to Age 85)
This term plan covers sum assured $50,000 for an annual premium of $786. There is no cash value for term plan.

2. Whole Life Plan (Ltd-Pay 20 Yrs)
Based on sum assured of $50,000 payable for 20 Yrs, the annual premium is $1,938.

Which is better?

REPLY
I do not like the two policies recommended for your husband as the premium is rather high. I suggest that you ask for a term insurance plan that expire at ag 60 or 65.
Read this FAQ:
http://www.tankinlian.com/faq/term.html

A fair rate of return

If someone takes your money and promises to return them to you, and breaks the promise, you will consider that this person has cheated you.

If you invest in a life insurance company and expects to get a certain rate of return, depending on the future investment yield of the Life Fund, and you get less than the fair rate of return, would you feel that you have been cheated? It seems that many life insurance policies give a lot of leeway to the insurance company to decide on how much you can get and how much they can keep!

Joke: Inflation and wages

Twenty years ago, I used to dream about the time when I would be living in fantastic luxury on the same wages that are now keeping me below the poverty line.

Excellent Public Transport in Hong Kong

Read the views of a Singaporean living in Hong Kong:

http://singaporepublictransport.blogspot.com/

Tips on personal insurance

1. How much life insurance do I need?

It depends on your personal circumstances. If you have dependents, you should aim to insure for 5 to 10 years of your earnings. If you have accumulated savings, the insurance cover can be reduced by this amount.

For example, if you earn $40,000 a year, you should have life insurance for $200,000 to $400,000. If you have accumulated savings of $50,000, this can be reduced from the amount of your insurance.

As a minimum, you should insure for 5 years of earning. If you are able to afford it, you can increase your coverage to 10 years of earning.

The sum assured is payable on death and permanent total disability.

2. What type of life insurance should I buy?

You should buy decreasing term insurance that covers you up to your retirement age, say 65 years.

If you are now 35 years old, you can buy a decreasing term insurance to cover you for 30 years.

If your sum assured is $300,000, you will be covered for $300,000 during the first year. The sum assured will reduce by $10,000 for each subsequent year, until it disappears completely at the end of 30 years.

The reduction in the sum assured each year will be offset by your savings for the year. As your savings grows, you need less coverage for your life insurance.

The premium that you pay for decreasing term insurance is about 50% of the cost of level term insurance. It is about 20% of the cost of a whole life insurance.

By paying a lower premium for your decreasing term insurance, you have more money to save in a low cost investment fund to earn a higher return for your future needs.

3. Do I need medical insurance?

If your employer covers your medical expenses, you do not need any personal medical insurance.

If you wish to buy a personal insurance now, so that you are assured of continuing coverage after your retire from work, you should choose a low cost Medishield plan provided by the Central Provident Fund.

There are many Shield plans in the market. They cover different classes of wards in restructured and private hospitals.

In selecting your plan, you should consider the total lifetime cost. You should add the premium for the various ages from now until you reach age 85 years. As the premium rate increases with age, you must take the higher cost into account, when you select your plan.

There is no need for you to buy an expensive plan, unless you have a high income. If you enter into a subsidised ward, your medical expenses will be quite affordable and can be covered by Medishield or a lower priced private Shield plan.

Do not spend too much premium on your Shield plan when you are young. You need the savings to cover your insurance premium and medical expenses when you grow old.

The Shield plan has a Deductible and a co-insurance portion, which have to be paid by you. Some insurance company offer a rider to cover these items. As the amounts are not large, you do not need to buy the rider. You can pay them from your Medisave account.

4. How much should I spend on insurance?

You should spend not more than 2% of your earnings on the life and medical insurance on your life. If you include your family, you should spend not more than 3% of your earnings.

By spending less on insurance, you can set aside more savings for your retirement. This should be 10% to 15% of your earnings.

World class transport system

I have given five suggestions on how to improve the transport system in Singapore in
www.singaporepublictransport.blogspot.com/
Do you agree with the suggestions?

Visit to Manila 14-16 July 2008

I will be visiting Manila from Monday to Wednesday of next week. I am conducting the Business Simulation Game (BEST) in Manila.

I have created a few postings that will appear on the scheduled dates and times over the next few days.

Existing Life Insurance Policies

Some people asked for my advice on whether they should continue their existing life insurance policies, or should terminate them and buy a term insurance policy.

Here are the general rules of thumb:

1. If the policies have been in force for more than 2 years, you should continue the policies as most of the upfront charges have already been incurred.

2. If the policies are taken for less than 6 months, it is generally advisable to terminate the policies and take a loss. However, you should buy a term insurance policy first.

3. You should avoid buying a new whole life, endowment or investment-linked policy as the charges are too high. It is better to buy term insurance for your insurance protection and to invest in a low cost investment fund.

Read this FAQ:
http://www.tankinlian.com/faq/savings.html

Joke: Amputed the wrong leg

A diabetic was admitted into hospital for amputation of a leg. He woke up on the day after surgery. The doctor said, "I have good news and bad news".

The patient wanted to hear the bad news first. The doctor said, "The bad news - we cut off the wrong leg. Now the good news. Your other leg is getting better."

Joke: Planning for retirement

My friend sent this joke to me. "Your insurance agent sells life insurance to help you plan for your retirement. However, the policy gives such a poor return that you cannot afford to retire. Actually, the agent is planning for his own retirement from the high commission that he earns from the policy."

Note: This joke does not apply to term insurance policies and life insurance policies that pays low commission.

Insurance for a child

Dear Mr. Tan,

I am planning to buy an insurance plan for my younger boy of age 7. I am looking at either the LUV plan which is $12 per month for $100K as compared to the Legacy Life CI plan recommended by my agent.

I am in favour of buying LUV, but my agent told me below:

""I have deviated from the basic & giving wrong emphasis and that I have made the 7 common insurance mistakes parents make. No doubts term policies are a lot more affordable & more cost-effective to buy a portion that will last almost as long as you live and the rest to cover just your working years. When come to insurance for minor, health insurance focus is on both CI & H&S & the aim is to lock-in insurability & gifts of love. ""

I am confused. He is right in the above statement? Thanks very much for your time

REPLY
There is no need to buy insurance for your child, except for medical insurance. It is more important that you should adequate term insurance on your life, to cover your earning capacity.

Read this FAQ:
http://www.tankinlian.com/faq/childlife.html

Complaint to the regulator

A friend asked me for the reason why I decided to set aside the Collective Protest. He said that there was a rumour that I was threatened by Mr. Lim Boon Heng and Mr. Matthias Yao.

I replied that the main reason for my action was the assurance that I have received from Mr. Lim and Mr. Yao on fair treatment of policyholders. This was subsequently stated by Mr. Ng Kee Choe in his address in his address to the Annual General Meeting.

The first two assurances relate to the restructuring of the bonus. I felt that the assurance was adequate in ensuring that policyholders would not be placed in a worse off position. The third assurance, which I asked for, was more important - that "policyholders will receive bonuses that reflect the actual experience".

I have subsequently pointed out to Mr. Lim and Mr. Matthias Yao that the bonuses declared were too low, and did not reflect the actual experience. Mr. Ken Ng (the chief actuary) replied to me that this will be adjusted in 2009 and later years.

I pointed out to Mr. Ken Ng that policies maturing in 2008 would be receiving a maturity value that was far less than the "actual experience". This would be unfair to the policyholders. I quoted the specific case of the Growth policy taken by my wife. I asked for this matter to be reviewed to give a fair payout on the policies that are maturing this year.

After two weeks, I have not received a satisfactory reply from NTUC Income. I intend to lodge a complaint on this matter with the regulator. I am quite disappointed that, after receiving the assurance that the bonuses will reflect the actual exprience, nothing is being done for the policyholders of the maturing policyholders.

I have two policies affecting by the bonus restructuring. The bonuses declared in the past and the cash values are significantly less than the values that reflect "the actual experience". As these policies will not be maturing this year, I am prepared to wait for one or two more years for the bonuses and cash values to be adjusted to reflect "the actual experience". So far, I have not received any indication that this will be done.

Insuring against critical illness

If you are 30 years old, and you wish to insure against critical illness for $100,000, you have the following choice:



1. Buy a "whole life" critical illness policy and pay $200 a month

2. Buy a 30 year critical illness cover and pay $40 a month



If you choose option 2, you can invest $160 a month in a low cost fund to earn an average of 5% per annum, you will get give you $128,000 in cash at the end of 30 years. (This is not a guaranteed return, but it is the likely return).



If you pay $20 a month on a decreasing critical illness cover, you will get $144,000 (estimated)



If you put $200 a month in the critical illness cover, you are likely to get a cash value at the end of 30 years of around $100,000 (plus or minus $10,000).

Regulation of financial products

Read the debate in this blog:

http://kwayteowman.blogspot.com/2008/05/to-regulate-or-not-to-regulate.html

Blog on public transport in Singaore

The Straits Times Review section published my article about the "world class transport system". the article can be located here:

http://news.asiaone.com/News/the%2BStraits%2BTimes/Story/A1Story20080712-76200.html

The article mentioned that my blog on public transport can be found in this website. The actual website is:

www.singaporepublictransport.blogspot.com

Low yield for policies with restructured bonuses

FIRST POSTED ON 10 MAY 2008

NTUC Income earned an investment yield of 10.7% on the participating fund in 2007. The average long term yield (computed over the past 10 years) is 7.8% per annum.

I have two policies that are affected by the restructuring of the bonues. I calculated the yields on these policies as follows.

1. GROWTH (LG SERIES)
This policy commenced in December 2003 with a single premium of $75,000. The estimated cash value at December 2008 (5 year duration) is $85,127, giving a policy yield of 2.5%. There is a gap of 5.3% compared to the fund yield of 7.8%.

If I keep the policy to the maturity date in December 2013, the projected maturity benefit is $112,795 giving a yield of 4.2%. This is still somewhat low, giving a gap of 3.6% compared to the fund yield.

This single premium policy has low expenses and low cost of insurance. I estimate that a fair reduction in yield should be 1%. The actual gap is somewhat high.

2. LIVING (LW SERIES)
This policy commenced in October 1996 with an annual premium of $2,567. The estimated cash value in October 2008 (12 year duration) is $28,383, giving a negative yield of -1.5%. There is a gap of 9.3% compared to the fund yield.

Although a Living policy has higher expenses and a bigger cost of insurance protection, the gap appears to be excessive.

Over the next 3 years, the cash value grows by only 1.8% per annum. This is low compared to the fund yield.

I have three other policies not affected by the restructuring of the bonus. The cash value for two policies increase by more than 4% per annum over the next 3 years and by 2.8% for the Living policy.

CONCLUSION
I believe that the policies affected by the bonus restructuring have not been given a fair rate of annual and special bonuses. This has resulted in a poor policy yield, compared to the long term average yield.

False advertising

I passed by a shop in Toa Payoh. They were playing a recorded advertisement, announcing that the shop is closing down and they have to sell the products at a low price. I looked at the price labels and found that they were actually charging more than other shops. This is false advertising and amounts to cheating.

There is a similar situation with financial products sold by agents. The agents are able to make mis-representation on the products that are not backed by the printed materials. The printed materials are quite confusing, so the buyer needs an agent to explain the product. The agent has the opportunity to make a mis-representation and get away with it.

Many types of high cost, poor value financial products are sold in this way. You should avoid these products.

Human Organs for Sale

Read my views in
http://www.theonlinecitizen.com/
http://theonlinecitizen.com/2008/07/human-organs-for-sale-%e2%80%93-let-the-donors-decide/#comment-14653

Regulation of insurance

Insurance is highly regulated in the United States. The intent is to protect consumers against the unfair practices of insurance companies.

Some of the areas that are regulated include:

* Licening of insurers and agents
* Approval of rates
* Content of policy forms
* Contract interpretation and enforcement
* Sales practices and information disclosure

Some of these requirements are already practiced in Singapore. In other areas, there is a need (in my view) for the regulatiron to be tightened.

For example, our regulators should ensure that the wordings of the policy forms are clear, to avoid future disputes between the insurer and the policyholder. The terms should also be fair to the policyholder.

Reduction of 4% in yield

I met an independent financial adviser. I told him about an investment-linked plan which projects a gross yield of 9% and a net yield of 5%. The reduction in yield was 4%. If the gross yield was 5%, the net yield was around 1%.

He was shocked. How can an investment product take away so much of the yield? He sells unit trusts, and is not able to recommend any investment fund that have an annual charge of 2% or more.

He asked, "How can insurance advisers sell products that take away 4%? Do they take care of the interest of their clients?"

Note: These high charges apply to most regular premium investment-linked products sold in the market. There are some exceptions, with lower charges. You should ask about the reduction in yield.

Avoid being cheated

If a salesman sells you a product and charges you a higher price compared to a similar product of the similar quality, you will feel that you have been cheated. You will probably avoid doing any more business with this salesman or his shop.

Does the same situation apply for financial and insurance products? Do you feel cheated, if you are offered a bad product and charged an excessive price? Can you avoid doing business with the salesman or his company?

The problem with a life insurance product is that you will be stuck with a bad product for 20 years or longer.

How to identify a bad product? Ask this question. Is this an investment product? If so, how much do I have to pay for the first 1 and 3 years. What do I get back if I stop the investment plan? If you do not get back your savings, it is a bad product.

Lesson: Avoid financial products that has high charges, lock you up for a long term, and imposes a high penalty on early termination.

Win $3 million on the Big Sweep

An old lady was nearly ninety years of age when she won $3,000,.000 in the Big Sweep. Her family were extremely worried about her heart and feared that the news of her large win would come as too much of a shock to her.

They decided to call the doctor and explained the situation to him. The doctor said, "Now, you don't have to worry about anything. I am fully trained in such delicate matters. I can break the news to her gently. Everything will be quite safe, if left to me."

The doctor went to see the old lady and gently brought up the subject of the Big Sweep. He said, "Tell me, what would you do if you have a large win on the Big Sweep, say 3 million dollars."

"Why, " replied the old lady. " I would give half of it to you, of course!"

The doctor fell down, dead from shock!

How to drive to your destination

You will find an excellent website mentioned in:

http://singaporepublictransport.blogspot.com/

Additional charges under the fund

Dear Mr. Tan,
I just found out that Y is offering funds, which invest into low cost ETFs. The management fee is 0.75% p.a. and the sales charge is 1.00%. I think this is sufficiently low cost.
http://invest.avivadirect.sg/SG/index.cfm?current=fasttrack/index

HK

REPLY
My colleague did an analysis and found that there are other charges. His observations are set out below:

a. There is a 1% upfront sales charge by Y
b. Annual management fee of 0.75% (for passively managed funds) and 1.2% (for activately managed funds)

However, if we read more deeply into the prospectus, there are more charges as follow:

a. An additional 3% charge (one time), placed under "Initial Service Charge". This amt can be as much as 4% in the future.
b. Up to 0.1% of NAV as Annual Trustee feec.

A separate annual fee of 0.09% to 1.25% to pay for the fund's operating expenses. Realization and switching is free for now but can go as much as 1% in the future.

Ideal plan (ID2)

Dear Mr. Tan,
Could you advise me on the two Ideal ILPs I have taken up for my children? I have lost trust in my agent after he started to criticize you and sing praises about the new management.

The primary objective of the two plans is savings for their education. Both are invested in equal proportions of Growth and Singapore Equity funds.

Should I continue with them, terminate them and take up ID7, or terminate them and invest in STI ETF?

Ideal (ID2) taken in 2002
Ideal (ID2) taken in 2007

Thank you sincerely for your advice, Mr Tan.
J

REPLY
You should continue with these two policies. You have already incurred the front end charge, so there is no need to switch now. Anyway, the charge under the ID2 is much lower than similar policies offered by other insurers.

Low Wage in Singapore

The average monthly earnings in Singapore in the first quarter of 2008 is $4,316. In the USA and a few other countries, the minimum wage is about one-third of the average wage. If this concept is applied in Singapore, our minimum wage should be $1,430 a month.

In Korea, the minimum wage is 27% of the national average. In France, it is 66%. In Taiwan, it is 34%. In Singapore, our low income workers earn about $750 a month. This represents 17% of the national average, and is much lower than Korea.

My friend told me that three jounalist from Taiwan visited Singapore to see how the poor live. He brought them to visit some rental flats. The flats were dark as the occupants did not want to spend money on electricity and do not watch television. The journalists said, "The poor in Singapore are poorer than the poor in Taiwan. In Taiwan, the poor can afford to watch television".

Education Loan

Dear Mr. Tan
I would like to apply for education loan from NTUC Thrift. Currently, I have some credit cards debts and my scoring with the banks are not good. My credit bureau report are effected by this.
I would like to ask whether do I stand any chance of applying this loan?
P

REPLY
I am not familiar with the credit assessment of NTUC Thrift. You can give it a try. But, as you suspect, it is likely to be difficult.

I sugggest that you pay off the credit card loan first and save a lot of interest charges, before you apply for this education loan.

Buy term and invest in a low cost fund

Hi Mr. Tan,
I am thinking of purchasing a whole life plan, but my insurance advisor has advised me to go with an endownment plan. Can you advise me?
L

REPLY
My advice is contained in these FAQs:
http://www.tankinlian.com/faq/choice.html
http://www.tankinlian.com/faq/savings.html

I prefer to avoid whole life or endowment plans, as they give a poor return to policyholders.

Improve the public transport in Singapore

Share your views in this blog:

http://singaporepublictransport.blogspot.com/

Minimum wage in other countries

Taiwan's minimum wage since October 1997 was US$487 per month. This works out to a daily minimum wage of US$16 or around US$2 per hour.

In 2005, it was proposed that the domestic minimum wage could be raised to 40 percent of the average wage of US$1,357 per month. This would give a revised minimum wage of US$543 and would benefit up to 2 million domestic workers as well as 160,000 foreign workers in the manufacturing sector.

The ratio of minumum wage to average wage was:
France - 66.4 percent
Canada - 39.4 percent
Taiwan - 36.3 percent
United States 32 percent.
South Korea - 27 percent

People will buy insurance

Hi Mr. Tan,


I stumbled on your blog a few months back while searching for financial blogs and have since been a regular reader. It has been very interesting to know about your views since I am also involved in the industry.


I agree with your view that 'People will buy insurance', especially so as the public gets more educated and financial savvy. Technology provides a easily accessible platform for consumers to compare insurance products. I am looking forward to more insurance insights on your blog.

Asset Share Methodology

LIFE INSURANCE ASSOCIATION OF MALAYSIA
http://www.liam.org.my/cms/layout/Printer.asp?ProductID=237&catid=13

By 1 July 2005, all new participating life insurance policies are required to use the asset share methodology in computing the surplus to policyholders.

What is asset share methodology? Following are the FAQs on asset share:

1) What are the new guidelines on asset share methodology all about?

The asset share methodology is a method currently used in UK, Australia and South Africa to calculate the distribution of surplus to policyholders for participating life insurance plans (par plans).

This methodology allows for a share of the accumulated premiums plus investment earnings to be returned to the policyholder after allowing for deductions for cost of providing insurance coverage, acquisitions costs and other expenses incurred by the insurer.

2) What type of life insurance products are affected by this new guideline?

The new guidelines are only applicable to par plans. A par plan is one in which the policyholder will receive extra surplus in the form of non-guaranteed bonus or dividend, in addition to the contractual sum assured, which is guaranteed to be paid on death or maturity.

The new guidelines are, therefore, not applicable for insurance policies which only provide protection coverage (e.g. non-participating life insurance, medical, general insurance products) endowment products with only guaranteed benefits and investment-linked products.

3) How do the new guidelines affect the payment of surrender values?

Under these new guidelines, policyholders may receive surrender benefit in the first year. In the past, policyholders who terminate their policies before three years may not receive any cash value. This is because, traditionally, life insurance products being primarily longer term protection and savings purposes, are structured in such a way as to reward more to policyholders who continue to pay their premiums and keep their policies in force.

4) Do I have to pay more premiums on participating life insurance policies under the new guidelines?

The use of the asset share methodology may require some life insurers to revise the premium rates of their existing par plans. This is because life insurers will now have to pay higher surrender values in the earlier years compared to the old products. This additional cost will result in lower surrender and claim values in the later durations compared to the past. If a life insurance company intends to maintain the surrender values and claim values at the longer duration, it may have to increase the level of premiums to pay for the higher early cash surrender values.

5) Are the policy benefits similar for life insurance plans that are designed under the new guidelines?

Life insurer may maintain the same level of projected bonus/dividend for policies designed under the asset share guidelines compared to the old products. This will usually result in an increase in premiums. Since life insurance companies are required to pay out surrender values in the earlier policy years under the new guidelines, they have to maintain a higher percentage of their assets in shorter term and more liquid assets e.g. fixed deposits. The investment returns on these shorter term assets, which are low risk assets, are usually lower than other longer term investment instruments. Therefore the bonuses/dividends projected over the longer term may be revised to provide a realistic projection to policyholders.

6) Will I receive less bonus/dividends under the new guidelines?

Bonus and dividends are not guaranteed in advance. They are distributed from surplus generated from investments and operating profits from the participating fund. The actual amount paid out will depend on the investment performance of the life insurance company, operating experience and overall economic environment. You may receive more or less than the projected bonuses/dividends illustrated to you when you purchase your insurance policy. The distribution of surplus between policyholders and shareholders are governed by the Insurance Act 1996, in the ratio up to 90:10. This means that policyholders receive 90% of the surplus distributed from the life fund.

7) Will the new guidelines discourage policy holders to maintain their policies over a long duration?

Although the new guidelines may bring about higher surrender values in the early years, policyholders should be fully informed of the disadvantages of terminating their life insurance policies early. This is because the surrender value that they receive will be much lower compared to the premiums which they have paid, even under the asset share basis.

Consumers should always note that the purchase of a life insurance policy is a long term commitment and policyholders who hold their policies till maturity will continue to enjoy better values than those who surrender early. Policyholders have to bear in mind that when their life insurance policies are surrendered, they will lose their life insurance protection immediately.

*Issued by LIAM - 4 July 2005

FAQ: Traded Endowment Policies

1. What is a traded endowment policy?

A traded endowment policy is a policy that is sold by the policyholder to an investor. The investor pays a sum that is higher than the surrender value offered by the insurance company.

The investor will continue to pay the premium under the policy and will collect the death or maturity benefit on the policy.

The investor expects to get a good rate of return on the amount paid to buy over the policy, and the future permiums paid.

2. Is it advisable to invest in a fund of traded endowment policies, where the fund manager undertakes to manage these policies?

It depends on the following:

> Is the fund manager reliable and trustworthy?
> What are the charges taken away by the fund manager?
> What is the underlying gross and net yield of the fund, after deducting the charges?
> What is the underlying risk of the traded endowment policies?

3. What is the underlying risk of the traaded endowment policies?

These traded endowment policies carry the following risks:

> The future bonuses paid under the policies may be reduced.
> The insurance company may become insolvent
> The fund manager may overlook to keep the policy in force, leading to its termination

These risks have to be factored in considering the net yield on the fund.

4. What is a satisfactory rate of return, considering the risk?

If the investment is in the UK, you should compared the expected yield on the traded endowment fund with the yield from UK Government Bonds.

You should expect to get at least 2% to 3% higher than the bond yield of similar duration, to compensate for the higher risk.

If the fund has a duration of 5 years and the UK bond yield for 5 years is 5%, you should expect to get a net yield (after deducting the fund manager’s fees) of 7% or 8% from the traded endowment fund, to make it worth the risk.

5. Do you invest in traded endowment policies?

I avoid investing in this type of policy as I am not familiar with the risk, the yield and the integrity of the fund manager.

I prefer to invest in Government bonds or equities, as these products are traded on the exchange and there is liquidity. flexibility and price transparency.

Tan Kin Lian

Universal Life

Dear Mr. Tan,

What is your opinion on the use of "universal lifeinsurance" as a retirement tool. It is highly recommended if the objectives of retirement is to be able to maintain a comfortable lifestyle during retirement and to also preserve wealth to pass it on. Let me have your comments. Thanks



REPLY

Universal life in a life insurance product. It is likely to have high charges taken away from your savings to pay commisison to the agent. You should ask the agent about the charges.



You can read about the charges on investment-linked plan from this FAQ

http://www.tankinlian.com/faq/ilp.html A universal life policy is likely to have similar charges.

Defamation

Source: Wikipedia.

In law, defamation (also called slander, and libel) is the communication of a statement that makes a false claim, expressively stated or implied to be factual, that may give an individual, business, product, group, government or nation a negative image.

Slander refers to a malicious, false, and defamatory statement or report, while libel refers to any other form of communication such as written words or images. Most jurisdictions allow legal actions, civil and/or criminal, to deter various kinds of defamation and retaliate against groundless criticism.

Related to defamation is public disclosure of private facts which arises where one person reveals information which is not of public concern, and the release of which would offend a reasonable person. Unlike libel or slander, truth is not a defense for invasion of privacy.

How to reduce petrol and gas price..Egg logic

SENT TO ME BY A FRIEND:

A man eats two eggs each morning for breakfast. When he goes to the grocery store he pays 60 cents a dozen. Since a dozen eggs won't last a weekhe normally buys two dozens at a time. One day while buying eggs he notices that the price has risen to 72 cents. The next time he buys groceries, eggs are 76 cents a dozen.

When asked to explain the price of eggs the store owner says, 'The price has gone up and I have to raise my price accordingly'. This store buys 100 dozen eggs a day. He checked around for a better price and all the distributorshave raised their prices. The distributors have begun to buy from the huge egg farms. The small egg farms have been driven out of business. The huge eggfarms sell 100,000 dozen eggs a day to distributors. With no competition, they can setthe price as they see fit. The distributors then have to raise their prices to t hegrocery stores. And on and on and on.

As the man kept buying eggs the price kept going up. He saw the big egg trucks delivering 100 dozen eggs each day. Nothing changed there. He checked out the huge egg farms and found they were selling 100,000 dozen eggs to thedistributors daily. Nothing had changed but the price of eggs.

Then week before Thanksgiving the price of eggs shot up to $1.00 a dozen. Again he asked the grocery owner why and was told, 'Cakes and baking forthe holiday'. The huge egg farmers know there will be a lot of baking going on andmore eggs will be used. Hence, the price of eggs goes up. Expect the samething at Christmas and other times when family cooking, baking happen.

This pattern continues until the price of eggs is 2.00 a dozen. The man says, ' There must be something we can do about the price of eggs'. He starts talking to all the people in his town and they decide tostop buying eggs. This didn't work because everyone needed eggs.

Finally, the man suggested only buying what you need. He ate 2 eggsa day. On the way home from work he would stop at the grocery and buy two eggs. Everyone in town started buying 2 or 3 eggs a day.

The grocery store owner began complaining that he had too many eggsin his cooler. He told the distributor that he didn't need any eggs. Maybe wouldn't need any all week. The distributor had eggs piling up at his warehouse. He told thehuge egg farms that he didn't have any room for eggs would not need any for at least two weeks.

At the egg farm, the chickens just kept on laying eggs. To relieve the pressure, the huge egg farm told the distributor that they could buy the eggs at a lower price. The distributor said, ' I don't have the room for the eggs even if they were free'.

The distributor told the grocery store owner that he would lower the price of the eggs if the store would start buying again. The grocery store owner said, 'I don't have room for more eggs. Thecustomers are only buying 2 or 3 eggs at a time. Now if you were to drop the price of eggs back down to the original price, the customers would start buying by the dozen again'.

The distributors sent that proposal to the huge egg farmers but theegg farmers liked the price they were getting for their eggs but, those chickens just kept on laying. Finally, the egg farmers lowered the price of their eggs. But only a few cents. The customers still bought 2 or 3 eggs at a time. They said, 'when the price of eggs gets down to where it was before, we will start buying by the dozen.'

Slowly the price of eggs started dropping. The distributors had toslash their prices to make room for the eggs coming from the egg farmers. The egg farmers cut their prices because the distributors wouldn't buy at a higher price than they were selling eggs for. Anyway, they had fullwarehouses and wouldn't need eggs for quite a while. And those chickens kept on laying.
Eventually, the egg farmers cut their prices because they were throwing away eggs they couldn't sell.

The distributors started buying again because the eggs were priced to where the stores could afford to sell them at the lower price. And the customers starting buying by the dozen again.

Now, transpose this analogy to the gasoline industry. What if everyone only bought $10.00 worth of gas each time they pulledto the pump? The dealer's tanks would stay semi full all the time. Thedealers wouldn't have room for the gas coming from the huge tank farms. The tank farmswouldn't have room for the gas coming from the refining plants. And therefining plants wouldn't have room for the oil being off loaded from the hugetankers coming from the oil fiends.

Just $10.00 each time you buy gas. Don't fill it up. You may have to stop for gas twice a week but, the price should come down. Think about it.

As an added note...When I buy $10.00 worth of gas that leaves my tanka little under quarter full. The way prices are jumping around, you can buygas for $2.65 a gallon and then the next morning it can be $2.15. If you have yourtank full of $2.65 gas you don't have room for the $2.15 gas.

You might not understand the economics of only buying two eggs at atime but, you can't buy cheaper gas if your tank is full of the high priced stuff. Also, don't buy anything else at the gas station; don't give the many more of your hard earned money than what you spend on gas, until the prices comedown.' Just think of this concept for a while.

Avoid high charges of investment-linked plans

Hi Sir,
May I know if these plans are good or not? (details of plans provided)

REPLY
I suspect that the charges are high and take away a large part of your savings and potential returns.

Read this FAQ:
http://www.tankinlian.com/faq/ilp.html

And my blog:
http://tankinlian.blogspot.com/2008/07/benefit-illustration-for-investment.html

Avoid policies with high terminal bonus

An independent financial adviser shared this view with me. Most insurance plans now have a high terminal bonus that is not guaranteed.

He finds it difficult to recommend this plan, as the policyholder can not be sure if he will get a fair return on the policy. The percentage of terminal bonus vary from one policy to another. The policyholder may wonder why some other policies are given a higher terminal bonus than his policy.

He has decided that he will not sell any life insurance policy. He prefers to sell unit trust, as it is more transparent and fair to the policyholder, and more flexible.

I agree with his views. It is best for the consumer to avoid all life insurance policies with high terminal bonus, unless the cash and maturity payouts are required to follow the "asset share" method, as adopted in Malaysia.

Avoid private Shield plan

Dear Mr. Tan,
I am currently under a private Shield program with Plus Rider (the premium has gone up quite a lot as compare to last year) with one exclusion condition. I am also cover under my company's hospitalisation scheme. Do you think I should downgrade to Assist Rider with a lower premium but have to co-pay of up to $2,000 - or should I move back completely to Medishield.

REPLY
It is better to move back completely to Medishield. there is no need to pay a lot of premium for a private Shield plan, when you are covered by your employer.

If you are healthy when you retire, you can upgrade to a private Shield plan at that time. If you are not healthy, you can stay on Medishield. For older people, Medishield is quite satisfactory. Private Shield is very costly.

Negligence and insurance

Hi Mr. Tan

Kindly advise me on the following :-

(a) Under S'pore Insurance laws, is payment made out of Medisave of a plaintiff (pedestrain) claimable against the Insurer of a defendent motorist?

(b) What if payment is paid out of any Medishield / Healthshield policy of the patient first, is it claimable against the Insurer of a defendent motorist?

(c) In the above cases, which Insurer is the first party to bear the claim? Insurer of the defendent motorist or Medishield insurer of the pedestrain?

(d) If the a company has a welfare scheme and paid a sum to assist an employee (pedestrain) due to the accident due to financial hardship, and that sum is used to pay part of hospital costs first, can that employee still claim against the insurer of the motorist ? Any implication if the welfare assistance is paid direct to the hospital instead of direct payment to that employee?

Hope you can clarify.

CH

REPLY

This is a legal issue. I am not familiar with this matter. In my view, and I am not a legal expert, the position will be as follows:

> You are entitled to claim for your loss, due to the negligence of the other party
> You are certainly allowed to claim for payment made from Medisave (which is your own savings)
> You can also claim for expenses that are paid by your insurance policy (e.g. Medishield) or by the company's welfare scheme
> The liability for the payment by the negligent party applies to the total expenses (regardless of the status of insurance)
> I do not know if the insurer (of Medishield) or employer will ask you to repay back the expenses that have been successfully claimed from the negligent party - but it is a separate matter.

Who's really looking after your money?

There is an excellent article by John Bittlestone in Today paper, 7 July. It shows a list of improvements that should be made by the finance industry. Although the suggestions are made to the banking sector, they apply to the insurance sector as well.

The topics are:
> Drop the jargon
> Cut the "products" by 95 percent
> If a bank wants to act as a broker
> Treat us as customers
> Be transparent
> Make your charges realistic
> Re-examine your "relationship manager" practice
> Reduce your paper chase
> Look at your bonus system
> You are already over-regulated

Here is the soft copy of the article:
http://www.todayonline.com/articles/263596.asp

Logic Quiz

Try the logic quiz:

http://www.tankinlian.com/logicquiz/quiz.html#B1

It is challenging and fun.

Politician and accountant

It is easy for a beggar to tell the difference between a politician and an accountant. If he asks a man for money for a meal saying that he hasn't eaten all day and the man replies, "Sorry, no. But things will be better for you tomorrow" - that man must be a politician.

If the beggar asks the same question and the man replies, "Sorry, no. But I am interested to know how your financial situation compares with the same period last month" - that man must be an accountant.

A Gracious Society and Dr. Chee Soon Juan

I met Dr. Chee Soon Juan at a BBQ organised by the Online Citizen, and had a nice conversation with him. Read about my views in item 47 of:

http://theonlinecitizen.com/2008/07/important-to-build-a-gracious-society/#comments