Sad experience of a Minibond investor

Hi, Mr Tan
I have just started reading your blogs and find them very useful. I regretted not reading your blogs earlier.

I am also one of the unfortunate 'victims' in the Lehman Brothers case. I have bought some Mini Bond Series 6 from X last year. I did not know that my principal amount is not protected. I am actually quite careful with my money. I have always placed whatever money I have in the local banks' Fixed Deposits. This is the first time I bought a Mini bond and I may not have understood completely the nature of the Bond and that there are heavy risks involved. If I had known that, I will not have invested my hard earned money there.

I read your blog this morning and think your suggestion that more people like us should get together to lodge a complaint. I wonder will you be able to help us get in touch with common 'victim', maybe create a platform so that we can work together to 'fight' this battle, to get our hard earned savings back?

I just spoke to CASE and the officer was helpful to provide me this contact number to call for advice: FIDREC: tel: 6327 8878. I have just spoken to the officer in FIDREC and she advised me to lodge a formal complaint to X, with proofs of my allegations. I will have to go home and check out any documentary proofs before I can do that. I think it may be difficult because it could have been verbal only.

REPLY
I have spoken to a lawyer and see if they are able to take up a case on behalf of the investors who were misled into investing in these products.

My wish is that MAS will take action on behalf of the investors, to see if the financial institutions had failed in their duty to ensure that the products are suitable for the investors.

TV program on credit linked securities

An international TV station wish to interview investors who have invested in the structured products affected by the collapse of Lehman Brothers (i.e. the credit linked securities). They wish to know if the investor had been given the right advice by the financial adviser or bank officer who sold the product.

If you are affected and wish to be interviewed on TV, send your name, telephone number to me at kinlian@gmail.com.

Investor in Minibond can seek redress

Dear Mr. Tan,
I read your blog everyday to see if there is any good news about Minibonds. I invested in this product on the advice of the bank officer. She told me that the risk is very small. I did not want to take risk.

I am told now that the Minibond may be worth nothing. I have a lot of my savings invested in this bond. Can I ask the bank to compensate me for my loss?

REPLY
There are many people in a similar situation as you are. I understand that the Financial Adviser Act require the adviser (i.e. the bank officer who sold the product to you) to ensure that the product is suitable to your needs. Clearly, a risky product of this type is not suitable.

You have a case to bring up against the bank officer. I suggest that you get many people in similar situation as you are and take up this matter collectively to the MAS or Consumer Association or other body. You can also take up a legal case.

Lack of transparency in terminal bonus

Dear Mr. Tan,
With the problem facing AIG, is it better for me to buy insurance from NTUC? Will my savings be safe?

REPLY
It is better to buy term insurance and invest the difference in a low cost fund. Read this FAQ:
http://www.tankinlian.com/faq/fptips.html

NTUC now declares a low rate of annual bonus with a large part of the maturity benefit in the form of non-guaranteed terminal bonus. This is similar to the practice of the commercial insurance companies.

It is better not to rely on the non-guaranteed bonus, as there is a high chance that it will not be paid, even in good times. There is lack of transparency in the distribution of terminal bonus. The insurance company gets away with paying less than what is fair to the policyholder.

A expert view about Structured Products

Hi Mr. Tan,
Structured products are essentially investment instruments engineered by so called "financial engineers" using complex mathematical models (models which works 9 out of 10 years, and the other 1 year, it blows up spectacularly).

These products almost always results in the investor underwriting/selling an financial options or insurance in exchange for an small fixed premium, (e.g. dual currency account, mini-bonds insuring credit events). This is the main reason I have been avoiding RMs (i.e relationship managers) marketing their structured products, i.e. I don't want to underwrite a huge risk for a small premium.

Let me elaborate on why individual investors should never sell/"underwrite" financial options/insurance:

- the losses can be catastrophic to the investor in return for a small fixed return eg something happens, your losses are very high and nothing happens, your return is just 3% more.. individuals simply do not have the capacity to take on such risks (evidently even AIG don't)

- the general public simply do not have the neccesary training/finance knowledge to understand these products and the risks involved.. those that do, probably won't invest in them..

- financial markets have a very high correlation during extreme events, diminishing the effects of diversification

- banks also have an incentive to push these products, because there is a lot of demand for financial options/insurance from hedge funds, banks, investment-banks. Effectively, these financial insurances are underwritten by the unsuspecting public and subsequently passed to the bank's clients. The bank made a spread or fee from both sides and the RM made a nice commission.

MAS failed in regulating these practices, and the banks and RMs put the life savings of investors at risk because of their own fat pockets.

I urge the financial journalists to find out:
- what proportion of bankers, RMs actually invested in these structured products (putting their own money where their mouth is)?
- where has the losses gone too?

Come on, guys at ST put your journalist professionalism and critical thinking to use!!

ym

Loss of hard earned money

Dear Mr. Tan
I am also hit by DBS High Notes 5 (ST Sept 18 news). My relationship manager persuaded me to have lunch and showed me the product. He reinterated that it was a very safe investments as all the fund principals are all A rated.

I signed for $X. As I was busy, I trusted him and signed on the form. When Lehman's bankruptcy appeared in the news, I immediately called the relationship manager and was shocked to be informed that there will be zero payout.

I was not told about this and was only shown a copy of the prospectus but not given one. I would be grateful if you could advise me where can I make a complaint.

REPLY
You can lodge a complaint with MAS.Your complaint is about the conduct of the adviser (i.e relationship manager of the bank) for failing to disclose proper explanation about the product. Read my blog:
http://tankinlian.blogspot.com/2008/09/monetary-authority-of-singapore.html

Dear Mr. Tan,
I applaud your determination to help us, the helpless and disappointed investors who have dumped in thousands of dollars of our hard earned money into High Note 5. I hope MAS will take actions against the bank and its employees.

A flawed global financial system

During the Asian Financial Crisis in 1998, the global fund managers had a great time in selling short in the equity and currency markets. They made huge profits. The leaders in the developed countries said that the Asian economies deserve to be punished for their lax economic policies.

Now, the table has turned. It is the developed countries that are now suffering from short selling. What do the leaders say now? Short selling is bad and has to be stopped.

Wow. Double standard! What a hypocritical world.

My conclusion is that the global financial system is flawed and need to be changed. I agree with the posting by "ym" on the flaws of the "fractional banking system". Banks should not be allowed to create money on their own.

Book on Financial Planning

I will try to find the time to write a book on Financial Planning. The topics in this book are:

Chapter
1 Introduction
2 How much life insurance do you need?
3. What type of life insurance policy?
4. How to invest savings?
5. Investing in a unit trust
6. Investing on your own
7. Why avoid high commission products?
8. Saving for a child’s education
9. Insuring against medical expenses, disability
10. Structured investment products
11. Investment tips for a retiree
12. Life annuity
13. Government sponsored insurance schemes
14. Use of credit cards
15. Loans (mortgage, car, study)
16. Investing in property
17. Taxation
18. Leaving assets for your descendents
19. Conclusion

Biggest gamble in history - Credit default swaps

http://www.time.com/time/business/article/0,8599,1723152,00.html

Size of market
Credit default swap - USD 45 trillion
Stock market - USD 22 trillion
Housing market (mortgages) - USD 7 trillion
US Treasuries - USD 4 trillion

Singapore banks and short selling

Dear Mr. Tan,
I always thought that putting my lifetime savings in a bank to earn interest is safe. The recent crisis in US and news about Lehman Bros and AIG is disturbing. I begin to wonder how safe is our Singapore banks and which of the three banks is the safest of all? Why are we protected only on $20,000 on each account?

The Straits Times article about the Minibond series 3 is enlightening. I was offered this product which was sold as a bond. I stayed clear because I had a bad experience of structured deposit sold by bank. What worries me is that the bank and financial adviser also claimed that they were also mislead.

Retail customers transact with a bank based on trust that they are reliable and expert in financial product. Can anyone enlighten me what is the role and ethic of the bank?

In US, the government has banned short selling in their stock market to salvage the crisis. The relevant authorities acknowledge the negative effect of short selling. In Singapore short selling is allowed too.

The financial adviser told me that buying equities is about investment. The unfolding of the recent event in US and our stock market make me think otherwise. Buying equities is not an investment when short selling is involved. SGX has tried to take measures by allowing short sell on borrowed shares. Short-sell will make the price go up or down. Can thus be considered as genuine market force of supply and demand?

Let me try to visualise the Lehman scenario as a layman. For example, there are 1 million genuine Lehman share, but because of short selling, 10 million Lehman share were artificially created in the stock market and sold down. I hope in the near future all forms of short selling should be banned from sensitive equities, such as financial, banking and insurance equities.

I would appreciate if you can comments how safe and resilent is our local bank to the recent unfolding crisis in US.

REPLY
I think that the Singapore banks are quite safe. Even in America, the large banks dealing with the public are quite safe. They are monitored by the Fed.

The banks that got into trouble are the investment banks, which were highly leveraged and not controlled by the Fed.

Credit Default Swaps (CDS)

AIG lost a few tens of billions in Credit Default Swaps. Here is an explanation in Wikipedia.

A credit default swap (CDS) is a contract between two counterparties, whereby the "buyer" or "fixed rate payer" pays periodic payments to the "seller" or "floating rate payer" in exchange for the right to a payoff if there is a default or "credit event" in respect of a third party or "reference entity".

If a credit event occurs, the typical contract either settles by delivery by the buyer to the seller of a (usually defaulted) debt obligation of the reference entity against a payment by the seller of the par value ("physical settlement") or the seller pays the buyer the difference between the par value and the market price of a specified debt obligation, typically determined in an auction ("cash settlement").

A credit default swap resembles an insurance policy, as it can be used by a debt holder to hedge, or insure against a default under the debt instrument. However, because there is no requirement to actually hold any asset or suffer a loss, a credit default swap can also be used for speculative purposes and is not generally considered insurance for regulatory purposes.

http://en.wikipedia.org/wiki/Credit_default_swap

Call to MAS to take pro-active action

Two months ago, the New York State Attorney took action against several financial institutions for marketing the "auction rate securities" to retail investors on the representation that they are liquid investments and can be redeemed at any time. The financial institions had to buy back these securities at no loss to the investors.

I hope that the Monetary Authority of Singapore or the Attorney General can take similar action on behalf of retail investors who had been misled into investing in the Mini-Bonds and similar structured products by their bank's relationship managers in the belief that these investments are safe.

It is time to hold the financial institutions accountable for their mis-selling activities and for our regulators to be pro-active.

Minibond Series 6

This blog was first posted on 16 July 2007

Dear Mr Tan
My risk-adverse retired father has always placed his funds in fixed deposits as they are risk-free.

I saw the advertisement in today's papers for the minibonds series 6 which pays 5.1% for 5 3/4 yrs.

These bonds seem to be relatively low risk and the returns appears good. Is there any catch? I'm considering asking my dad to transfer his funds to buy this since his fixed deposit is maturing. Can you advise?

-----------------------------

REPLY:

The Minibond series 6 pays 5.1% p.a. for 5 3/4 years. This payment comes from the principal invested in the fund, and is NOT the same as the actual return earned on the fund.

Here are the information obtained from the advertisement.

1. The fund is invested in credit-linked securities that are rated AA at the time of issue. These credit-linked securities have a high risk than bonds with the same rating.

2. The Notes are not principal guaranteed or principal protected. There is a likelihood that the investor may not get 100% of your principal on the maturity date. This is likely to happen, as the fund pays out more than what it earns and has to incur heavy expenses (not disclosed) for distributing and managing the fund.

3. If there is a Credit Event happening to any of the 6 financial institution before the maturity date, the investor may lose part or substantially all of the invested amount.

You need to read the prospectus carefully to understand the definition of the Credit Event and the likely amount that can be lost. (I believe that this is difficult to assess, even for an expert like me).

4. There is a provision for the Issuer to redeem the Notes earlier, on or after 3 years from the Issue Date. This right is likely to be exercised, if interest rate has fallen. The investor will have to re-invest the money to earn a lower interest rate.

5. You are advised to read the prospectus and understand the investment risks and the terms. If you do not, you cannot complain later if the investment turn out to be bad.

My views: Do not invest in this product, as it has much uncertainty and the return is not attractive. It is better to invest in a government bond to earn about 3.5% per annum over the next 5 years.

You can read the following:

Structured Products - how they work
Avoid Structured Products
Ask Mr Tan

Pinnacle Notes and MiniBonds

This blog was first posted on 16 July 2007

COMMENT POSTED IN MY BLOG:

Maybe you like to comment on the Minibonds and Pinnacles. Both recieved overwhelming response from the public. What I know they are products designed for people who want streams of income. The tenor is 3-5 years with step up options with higher returns.
Since they are well received they must be good. Investors don't throw away $150 mil. for each tranche for nothing. There had been quite a few tranches already.

--------------------------------

REPLY:

Can you give specific examples of the earlier series of the Minibonds and Pinnacle Notes. What price are they trading now? How well have they performed? Did they provide a good return to the investors?

I have highlighted some of the current features of these products. They contain an element of speculation and carry a risk that has not been properly assessed.

Avoid complicated products

This blog was first posted on 17 July 2007

I have made an analysis of the recently launched structured products (i.e. Pinnacle Notes, Minibonds) based on their advertisements. The information is not sufficient to make an investment.

To understand the product, the investor has to read a detailed prospectus with supporting documents. It can come to more than 100 pages, and may take more than 10 hours to read.

After spending this time, the investor will still have more questions. There are still so much uncertainty.

If you ask the marketeer who sell the products, they will not be able to give you the correct answer. Some of them give misleading answers, similar to some of the anonymous postings in my blog.

For example, they will tell you that the risk of a credit event is small, that your investment is safe.

Is this correct? You are warned, in writing, that in when a "credit event" occurs, you may lose part or all of your investment.

What is a "credit event"? It is not clearly spelled out. It is not the same as "bankrupcy". It could mean "failure to make payment on time".

I am not prepared to spend a lot of time, and take an unspecified risk, to earn a small increase in yield (which is not commensurate with the risk). There is a large cost in designing, advertising and marketing the product, and a large profit margin for the product issuer, which have to be borne by the investors.

Lesson: Do not invest in complicated products, that you cannot understand.

If you want to understand how the structured product works, read this article. It is just 1 page (not 100 pages). And it is clear (not confusing).

Foreign currency exchange rates

Do not trust your bank to give you a fair exchange rate. They don't. They like to increase their profits, and that is done by charging a high spread on their customers.

If you change from foreign currency X to foreign currency Y, the bank changes your money from X to SGD and from SGD to Y. At each change, they charge a spread of about 1%. You have to pay a spread of 2% for changing from X to Y. This is too high. If you do not ask, the bank does not tell you how it is done. It applies the two spread automatically and send a statement to you. When you realise it, it is too late.

In the past, I trust my bank. Now, I don't. I always ask my bank to quote the exchange rate or interest rate to me. With the quoted rate, I can compare with the rates charged by other banks. My bank automatically gives me a competitive rate, as they are afraid when I move my business to another bank. Later, they will lose me as a customer.

You should always your bank to quote the rate to you. The relationship manager will give you the "excuse" that the rate changes every minute. This is partly true. But the real reason is that, if you do not ask, they can charge you a large spread and you will not realise it.

I hope that the Consumer Association or Monetary Authority of Singapore get the bank to adopt a code of practice that is transparent and fair to consumers.

Pinnacle Notes

Hi Mr. Tan,
I invested in Pinnacle notes series 6. The arranger is Morgan Stanley and the 6 reference entity are Bank of America, Citigroup Inc, DBS, Singtel, OCBC and UOB.

Should I continue to hold on to the notes or cash out? If I cash out now, I will get only 34.07% of our total principal. I know that the health of Morgan Stanley is crucial to the survival of this Note. With so much uncertainty in the market, is it better to take a loss now?

REPLY
In my view, and it is just my guess, Morgan Stanley will not face the same fate as Lehman Brothers. The six reference entitles appear to be all right. The rescue package being arranged by the Fed and Treasury in USA is likely to prevent other big failures. It is not worth while to sell the Pinnacle Notes at a loss of 65% at this time.

Mini-bonds - ask MAS to investigate

Hi Mr. Tan,
Last year due to some unfortunate series of events, my parents and I decided to invest in the minibonds, which is already gone as Lehman Brother is undergoing liquidation. It is very sad, but we have to accept the loss.

REPLY
It is unfortunate that Lehman Brothers went into bankrupcy, triggering a credit event. If they had been rescued like AIG, the credit event could have been avoided.

You should write to ask MAS to investigate what happen to the mini-bonds. Although a credit event has been triggered, you should ask what really happened to the money. Who took the money when a credit event is triggered?

It seems that many investors lost their money, and someone must have made a big gain. I undersand that the money raised from the mini-bonds are actually invested in other assets and are not invested in Lehman Brothers. So, somebody must have made a big gain at the expense of the small investors.

Please ask MAS to investigate this structure on behalf of the small investors.

DBS High Notes

Dear Mr Tan,
You were always very critical on structure products from Bank.
And you are right!
Thanks for the previous posts on such structure products.

Sep 18, 2008, The Straits Times
DBS High Notes investors at risk
Bank warns they may lose entire stake in Lehman-linked product
By Francis Chan

SOME local investors of a product linked to bankrupt investment giant Lehman Brothers have received late-night phone calls from DBS Bank warning them that their entire stake may be wiped out. The investors have their cash in a product called DBS High Notes 5 that the bank offered wealthier clients last year. It came with a promised annual return of about 5 per cent.

But Lehman's collapse on Monday means the product will be unwound and investors may only get a portion of their investment back - or none at all.

REPLY

Thank you for sending this news article to me. I am now in Jakarta and was not aware about this event. It is so sad that many people have lost their money in this "credit event".

Perhaps the small investors who lost their savings should ask MAS to look into the structure of this product, and why should the "credit event" cause a lose of their entire savings? Where did the money go?

FAQ on Structured Investment Products
http://www.tankinlian.com/faq/sinvest.html

True cost of life insurance

Does a life insurance policy provide good value for a person to plan for the future?

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

Fake Money

Hi, Mr. Tan,

I have been taking about fake money very often in your blog, but I suspect not many people understand me..

Below is a link to an instructive cartoon about the fractional reserve banking system

> how it creates money out of thin air
> how it skews the wealth distribution, making the bankers richer and richer over time
> why this system is a ponzi scheme and will eventually collapse

http://video.google.com/videoplay?docid=-9050474362583451279

After watching the video, people should realise nearly all money is actually fake, created out of debt.. and we will need more and more fake money to keep the economy going (exactly like a ponzi scheme)..

When the amount of debt gets too big and balks at creating more fake money, the system will collapse and cause a severe recession/depression.

I believe we are really close to this point of collapse now.... and we should welcome the collapse and take the chance to adopt a different banking system, one where is sustainable and money not controlled by bankers/central bankers.. one such system is a free banking system proposed by most Austrian economists.. but which government is willing to give up the power to create money?

ym

Poor conversion rate for Foreign Currency

Dear Mr.Tan,
I gave instructions that on maturity of my FD to convert GBP to NZ$. I got a poor exchange rate. I checked the conversion on the Internet and, in my opinion, a fair value is 2.3% higher.

I made numerous calls to the bank to ask how their rate was derived. They have not replied to me. As guideline. I understand that direct conversion GBP to NZ$ will give a higher figure than converting GBP to SGD and then changing to NZD.

So I want to get redress from MAS. Who shall I address to?

REPLY

Read these pages:
http://tankinlian.blogspot.com/2008/09/monetary-authority-of-singapore.htmlhttp://www.moneysense.gov.sg/contact_us/Consumer_Portal_Contact_Us.html

You probably have to take the following steps:

1. Write to CEO of the bank
2. File a complaint with FiDREC.
3. At last stage, approach MAS

Double standards

During the Asian Financial Crisis in 1998, the currency and stock markets in South East Asia dropped sharply. It was caused by short selling and aggravated by the accounting rule of "mark to market". The hedge funds made a lot of money by pressing down the markets. The global fund managers said that the weaknesses were due to "lack of transparency" and other factors.

This time, the financial crisis originated from the markets in USA. To address these problems, the following actions are being taken:

> restrict short selling
> use of Government funds to support the market

The following measures are being considered:
> suspend "mark to market"
> suspend the credit rating

These measures were frowned up during the Asian Financial crisis. Now they are being considered. This is a world of double standards.

How far more for the ST Index to fall?

Someone asked me, "What is the lowest point that the ST Index can go down to?"

I do not know the answer. I don't think that anybody knows. But I can make a guess. And I wish to caution that this is just an opinion.

Here are the high and low points of the ST Index during the past two crisis.

Asian Financial Crisis - 1998: drop from high of 2,400 to low of 800
Corporate scandals - 2002: drop from high of 2,400 to low of 1,200

I consider the "fair value" of ST Index in 1998 to be 1,600 (mid-way between the high and low) and in 2002 to be 2,000. Projecting from these two fair values, I regard the fair value of ST Index in 2008 to be 2,700.

During a crisis, the market can drop to 1/2 or 1/3 of its peak. Taking the peak before the current crisis to be 3,800, I think that the ST Index can drop all the way down to 1,900.

However, if you wish to invest, you should not wait for it go all the way down to 1,900. It is all right to start investing now, and to add on (i.e. average it) down to 1,900. In case it does not reach this level (and the market recovers), you will have made some investments. As you are investing below the "fair value", it is all right to hold on to the investments, even if it falls further. The market will eventually recover.

Beware of Scams

Read this article and comemnts from readers in

http://theonlinecitizen.com/2008/09/beware-of-scams/#comment-21550

On My Own

This is another of my favorite songs from Les Miserables.

http://www.youtube.com/watch?v=7tcEf2mEjP4&feature=related

Eligibility for an Eldershield claim

Disability shall mean the inability of the Policyholder to perform at least 3 of the following Activities of Daily Living, even with the aid of special equipment, and always to require the physical assistance of another person throughout the entire activity.

Washing : The ability to wash in the bath or shower (including getting into and out of the bath or shower) or wash by other means.

Dressing : The ability to put on, take off, secure and unfasten all garments and, as appropriate, any braces, artificial limbs or other surgical or medical appliances.

Feeding : The ability to feed oneself food after it has been prepared and made available.

Toileting : The ability to use the lavatory or manage bowel and bladder function through the use of protective undergarments or surgical appliances if appropriate.

Mobility : The ability to move indoors from room to room on level surfaces.

Transferring : The ability to move from a bed to an upright chair or wheelchair, and vice versa.

Definition of Pre-existing Disability

Pre-existing Disability are excluded, i.e. suffering from the Disability as defined above before your ElderShield Policy's commencement date. For persons who are auto-covered, disability caused solely by accidents that occur during the 90-day opt-out period shall not be regarded as Pre-existing Disability.

Eldershield - is it worth insuring?

Dear Mr Tan,
I have just received a letter asking me to subscribe for Eldershield. Can I know is it worthwhile to subscribe to it or not. I am covered with enhanced Incomeshield, term insurance, accident and critical illness plan.

REPLY
It depends on the cost and benefit of the Eldershield plan.

I suggest that you take the annual premium and accumulate it at interest rate of 4% per annum (which is what you now earn on your special account).

The chance of making a claim before age 75 is quite low. The chance of making a claim after 75 is probably between 30% to 50% (which is just my guess).

Perhaps, you can see if it make sense to insure, or carry the risk on your own.

Do you need life insurance for the whole of life?

Do you need life insurance for the whole of life?

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

Eldershield - benchmark figures

A male at 40 pays $175 for 25 years for the lifetime coverage of Eldershield. If this person opts out of Eldershield and keeps the money in CPF special account to earn 4% a year, the premium will accumulate to $11,220 at age 75.

The chance of making an Eldershield claim before age 75 is quite small, maybe less than 5%. The chance of making a claim after 75 is perhaps less than 30% (but it may increase in the future).

Eldershield pays $400 a month for up to 72 months. However, most people who make the claim do not live for 72 months. I guess that the average payout could be (say) 48 months. This gives $19,200.

If the chance of making a claim is 30%, the average payout is $5,760. This represents a claim ratio of 51%. This claim ratio is quite fair.

However, if the chance of making a claim during the lifetime is less than 30%, then it is better to self-insure, rather than buy Eldershield.

A female pays a premium of $218. This is 25% higher than for a male. The chance of a female making an Eldershield claim is higher than for a male.

I do not have the latest figures on the claim rate. Perhaps, the Ministry of Health may release this figure in the future?

Term insurance - is the premium proportional?

Dear Mr. Tan,
Thank you so much for putting so much useful information on your website. I almost bought a whole life insurance policy from my financial planner--but luckily thanks to finding your site I realized that it doesn't really make sense to do so. I'm in the process of reading every article in your website.

I have a question about the following page on your website: http://www.tankinlian.com/faq/term.html

In it you stated that the annual premium for $100 000, 30-year old male, covered for 30 years, are $305 for level, and $115 for decreasing.

My question is: how linear is this guideline? Does it mean that to get if the sum is $200 000, the premium should be $610 and $230, respectively? Does it get cheaper if the sum assured is more than 1 million? Also, what if I want the coverage to last 35 years (until I'm 67), instead of 30 years?

Thank you very much in advance, and thanks again for your blog and your website.

REPLY
Usually, the premium rate is in straight proportion to the sum assured. However, it depends on the practice of each insurance company. It is best to ask a few insurance companies to quote you the rates for various sum assured.

Here are some companies that you can call
http://www.tankinlian.com/faq/termd.html

Do you hear the people sing

This is my favorite song from Les Miserables. It was during a time when the poor people of France were oppressed, and they wanted a new life. Maybe, this reflects our current times?

http://www.youtube.com/watch?v=x6-5g78Nr6Q

Is your money safe with AIA ?

Several AIA policyholders have asked my advice. They are worried that AIA may be affected by the collapse of AIG. They asked if they should surrender their AIA policy now and receive the surrender value now.

My advice is:

> AIA has a separate policyholder's fund covering its liability to its policyholders in Singapore.
> To my knowledge, this fund is solvent and is not affected by the problem faced by AIG
> There is no need to panic and surrender the AIA policies at this time
> Even if this fund is in trouble, there is a Policyholder's Guarantee Fund managed by MAS that can take care of most of the liability (maybe 90% or more).
> It is better to wait for any official announcement from MAS

I hope that my comments are correct and can help to allay the fears of AIA policyholders.

Guaranteed drawdown pension

Hi Mr. Tan,

What are your views about this type of pension? If a UK insurance company can offer something like this, surely the Singapore government can offer something like this on annuities for post 62ers? Or least something better than what we will get.
http://newsvote.bbc.co.uk/mpapps/pagetools/print/news.bbc.co.uk/1/hi/business/7595951.stm

REPLY

I promoted the concept of pension drawdown with an investment fund (i.e. equity, bond or mixed fund). The idea is that you invest your savings in the investment fund, earn a market yield (which can fluctuate wildly) and draw down each month what you need. Any balance in the fund on death of the investor is paid to the estate.

You can calculate the monthly drawdown to last until you are (say) 120 years old. As most people will not live to that age, there will always be some balance that is available.

If you are investing for many years, you reduce the risk of the investment fund as you will get some good years and some bad years, which will give an average yield over the period.

The UK product works in a similar way. It has an added feature to provide the guarantee. I usually advice people to avoid buying this type of guarantee, for the following reasons:

> it is costly
> it is not transparent
> the financial institution backing the guarantee can go bust (like what is happening to the credit default swaps,etc)

Take risk. Risk is to your advantage. Stay with the transparent products. Avoid structured products (like this type of guarantees),-

Distress over an investment linked policy

A reader asked for my advice on the following:

> He invested heavily in an investment-linked policy. He made many fund switches in past years.

> Recently, he asked to make a partial surrender. The company held back the payment of the surrender amount, to investigate his fund switches. The payment was not made after more than one month.

> The company did not specify in writing the reason for the delay and the nature of the investigation. The customer called the company, but was given verbal promises that were not kept.

>The customer also asked to switch from the equity fund to the money market fund. This was not executed. The customer went to the company the following day and submitted a new request. This company did not execute the switch. The company wrote a week later to state that the switching has been suspended due to irregularites. They did not specify the nature of the irregularities. The equity fund dropped by 30% over the next two weeks, causing great loss to the customer.

I advised the customer to lodge a complaint with MAS on the dreadful conduct of the insurance company. If this is not resolved, the customer should take up a legal case against the company for the losses that they have caused to him.

Specific Unfair practices

Schedule 2 of the Consumer Protection (Fair Trading Act) lists down 20 specific unfair practices. They are listed here:
http://statutes.agc.gov.sg/non_version/cgi-bin/cgi_legdisp.pl?actno=2003-ACT-27-N&doctitle=CONSUMER%20PROTECTION%20%28FAIR%20TRADING%29%20ACT%202003%0a&date=latest&method=part

Those relevant to financial products are:

7. Representing that a price benefit or advantage exists respecting goods or services where the price benefit or advantage does not exist.

11. Taking advantage of a consumer by including in an agreement terms or conditions that are harsh, oppressive or excessively one-sided so as to be unconscionable.

12. Taking advantage of a consumer by exerting undue pressure or undue influence on the consumer to enter into a transaction involving goods or services.

14. Making a representation that appears in an objective form such as an editorial, documentary or scientific report when the representation is primarily made to sell goods or services, unless the representation states that it is an advertisement or a promotion.

20. Using small print to conceal a material fact from the consumer or to mislead a consumer as to a material fact, in connection with the supply of goods or services.

Consumer Protection (Fair Trading) Act

Financial products are now governed by the Consumer Protection (Fair Trading) Act.

More details here:
http://app.mti.gov.sg/default.asp?id=84

Read this FAQ:
http://app.mti.gov.sg/default.asp?id=565

1. What constitutes an unfair practice under the Act?

It is an unfair practice for a trader, in relation to a consumer transaction-

> to do or say anything, or omit to do or say anything, if as a result a consumer might reasonably be deceived or misled;

> to make a false claim;

> to take advantage of a consumer if the trader knows or ought reasonably to know that the consumer
++ is not in a position to protect his own interests; or
++ is not reasonably able to understand the character, nature, language or effect of the transaction or any matter related to the transaction; or

> to do any of the 20 unfair practices listed in the Second Schedule of the Act.

The trader should provide the consumer with all relevant and material information so as not to mislead the consumer. The consumer can then make an informed decision. Traders should review their business practices; in particular, what information they provide to consumers and how they convey information.The court, in determining whether or not a trader has engaged in an unfair practice, would consider the reasonableness of the actions of the trader. The court would also take into account, in granting remedies to the consumer, whether the consumer tried to resolve the dispute with the trader first before commencing action.

My comment: Many of the complicated financial products offered in the market will not pass this test of "fair trading".

Are Consumer Protection Initiatives Meeting Expectations

This paper gives an interesting explanation of the approach adopted in Canada, UK and Australia:

http://www.isis.org.my/files/pubs/papers/AreConsumerProtection.pdf

It explains the approach taken in Singapore as follows:

In the case of Singapore, financial services (excluding money lending and pawn broking) have now been brought within the ambit of the Consumer Protection (Fair Trade) Act of 2004. Consumers now have the option to pursue remedies under the Act for unfair practices and unconscionable conduct (such as high-pressure selling) by financial institutions. Dispute resolution is delegated to the Financial Industries Disputes Resolution Centre Ltd although only cases of up to S$50,000 will be heard. Interestingly, in 2004 the President of the Consumer Association of Singapore, who is also a Member of Parliament, raised the issues of high pressure sales tactics, the high rates of interest charged on credit card balances and the ‘cartel-like manner’ in which banks maintained interest rates of 24 per cent when other financial borrowings incurred interest of less than 5 per cent.

The Second Minister of Finance responded by saying that the Monetary Authority of Singapore does not consider its role to include directly settling commercial disputes between financial institutions and their customers. The Authority also does not interfere in the setting of interest rates and prices or what terms and conditions should govern commercial transactions. Rather, he Authority provides the regulatory framework for the necessary disclosure and the proper business conduct standards to be undertaken so as to ensure that the consumer is fairly treated.

In the light of the above, how might one evaluate Bill Knight’s conclusion that “the importance of
the consumer to a vibrant and healthy economy has moved non-prudential/market conduct regulation to a place at the table beside prudential regulators in the financial services regulatory structures around the world”? This might be true of OECD countries generally but significant developments in other parts of the world seem less apparent. Could one possibly envisage conditions where governments “move forward to adjust regulatory structures (and) pay close attention to the consumer and their needs”? Consumers are unable to generate any degree of countervailing weight while governments still seem be too protective of, and too hesitant to ‘fetter’ their financial institutions, to do anything dramatic in this direction. One may not be far wrong to say that most countries are, to some degree or other, behind the best-practice curve and perhaps Asian countries are further behind than where they ought to be.

The key message from this paper is quoted in the last line, "most countries are, to some degree or other, behind the best-practice curve and perhaps Asian countries are further behind than where they ought to be."

Avoid investing with leveraged money

Dear Mr. Tan,
Three months ago, my bank suggested to take an overdraft at 3% interest to invest in a Dual Currency Invesment.


Since then, my investment has performed badly. With the drop in the AUD, my investments have been converted to AUD. It has dropped further, leading to a large unrealized forex.


How can I reduce my loss, especially from the leveraged investment?


REPLY

Generally it is unwise to speculate (invest) using borrowed money (i.e. leverage).I suggest that you find an early opportunity to redeem the leverage.


It is all right to take risk with your savings (but not leverage) as you can afford to wait until the exchange rate recovers (and hopefully, it does recover).

Stress and uncertainty with Incomeshield

Hi Mr. Tan,

I would like to seek you advice on my Incomeshield. Previously, I was still covered under Medishield. I underwent an operation to remove X and Y. Later, I switched to Incomeshield. I declared the operation but forgot about the Y and only indicated X. I was accepted with no exclusion term.

Recently I found out about the omission and make another declaration. I was excluded from any claim relation to and/or arising out of Y.

I called CPF to check if I were to revert back to Medishield, would Y be excluded? They were not able to answer it. I called NTUC, they are not able to advise whether the basic component will still cover that.

At the point of my operation, I was covered under Medishield. What is the possibility that CPF will exclude this clause. I'm in dilemma as to whether I should continue with NTUC or go back to CPF.

REPLY
I believe that Incomeshield is required (by Ministry of Health) to cover you for Y for the Medishield limits under Medishield. You can confirm this point with NTUC Income. If this is the case, you can lodge a complaint about giving you a lot of stress and uncertainty.

Simple Financial Planning

I wish to give this advice to any person on your financial planning:

> buy a 20 year term assurance for 5 to 10 years of your income
> ask the insurance company to quote the rate for your comparison
> do not talk to an insurance agent
> do not invest in any whole life, endowment or investment linked policy
> make monthly savings (of 15% of your earnings) in a bank
> when the saving reach $3,000, buy 1,000 units of STI ETF.

Read these FAQs:
Financial planning for the young
http://www.tankinlian.com/faq/fptips.html
Personal insurance:
http://www.tankinlian.com/faq/choice.html
Buy Term Insurance directly:
http://www.tankinlian.com/faq/termd.html

If you talk to an insurance agent, be prepared for the agent to "convince" you to buy a critical illness policy or a term to 100 years (which is a whole life policy by another name). Say good-bye to more than $1,000 of your savings (as it will be used to pay commission to the agent.

Swedish practice on life insurance

After the Second World War, there were political discussions where the left wing parties, who were in power, suggested that all banks and insurance companies should be state owned.

As a compromise, a fairness principle was introduced in the Swedish Insurance Company Act in 1948. The fairness principle stated that premiums paid by policyholders shall be fair compared to the benefits received by these policyholders. For life insurance business, this was interpreted to mean that all profits made on premiums should be returned as bonus to the policyholders, present or future.

The shareholders of the companies were only allowed a fair return on the share capital, which in most companies was very small.

This was in line with how some life insurers already operated, but was a major change for some others.

During the 1960’s and 1970’s, a practice emerged of paying no dividends at all to shareholders, and this was formalised when the Swedish Parliament in 1982 passed a bill that prohibited the distribution of profits to shareholders of a life insurance company.

This is what makes special the mutual model for non-profit distributing life insurance companies in Sweden: as in a true mutual life insurance company, no profit is distributed to shareholders but the company is still formally a shareholder-owned company. An important aspect of this is that the shareholders retain the right to make important business decisions for the company, without requiring permission from the policyholders or any of their representatives.

Around 1990, unit link life insurance was allowed in Sweden, and unit link companies were allowed to distribute profits to its shareholders through dividends. Sweden became a member of the European Union in 1996, and a change to the Swedish Insurance Company Act in 2000 again opened up for distribution of profits to shareholders in traditional life insurance companies.

However, a process has been established to transform an existing life insurance company to a
profit distributing company, where a transformation for example depends on the approval of the policyholders.

Since then, only a few existing life insurance companies have changed into profit distributing
companies following the change of the company act. In these cases all existing capital of the company has been distributed to the policyholders while the shareholders have injected new risk capital in the form of equity into the company.

Speaker's Corner, 13 September 5 p.m.

The Online Citizen is organising an event as follows:

Topic: Public Transport in Singapore

Venue: Speaker's Corner, Hong Lim Park

Time: 5 p.m.

Date: Saturday 13 September, 2008.

Agenda: Speech by 4 speakers on the topic

A paper on proposals to improve the public transport will be handed out.

Project 11-11-2008

My target is to achieve 500,000 visitors to my blog by 11-11-2008.

The sitemeter shows 430,484 visitors as at 11 Sep 2008. The average visitor per day is 1,137.

The projected date to achieve the target of 500,000 visitors is 11 Nov 2008 (based on average of 1137 per day). We are right on target ... exactly to the day!

Today is the 7th anniversary of 9-11 terrorist attack on the World Trade Center in New York.

Ask the agent

Many readers dare not ask the agent to explain the key questions. They are confused by the explanation given by the agent. They sent an e-mail to me for advice.

My usual reply is:
> The agent can earns $1,000 or more to sell a life policy to you
> The agent has a duty to explain the product clearly to you
> You should ask for explanation on the Benefit Illustration
> Ask for the explanation in writing
> You should never buy the product, if you are not clear about it

> I am not able to give personal advice to you
> You have to make your own judgement

Advice from my blog and website

Hi Mr. Tan,

I have been reading your articles on the high costs of whole life insurance. Could you help to comment on the below quotations from Income for a 10 yr and 20yr Vivolife policy? I would like to know the explanation of distribution cost and effect of deduction using the below.

(Details removed)

REPLY
My advice is given in my blog:
http://tankinlian.blogspot.com/2008/09/advice-on-vivolife.html

Please read my blog and website for the information:

http://www.tankinlian.blogspot.com/
http://www.tankinlian.com/

Insurance companies: commitment and transparency needed

Here is a letter printed in The New Paper:

http://tnp.sg/speakup/story/0,4136,176036,00.html

Free Public Transport

This article describes cities that have free public transport:
http://en.wikipedia.org/wiki/Zero-fare_public_transport

A friend, who sent the information to me, confirmed that the information on Auckland is true:

Auckland, New Zealand
A free CBD loop service links the ferry terminus, railway station, universities, theatres, casino, galleries and shopping districts using hybrid electric buses. It operates from 8am to 6pm, 7 days, at 10 mins interval, but not all buses are hybrid.

The quality of service is quite good, although it does get crowded at certain time, eg. school hours, lunch time, etc.

World Class Public Transport System

Read about my suggestions to improve the public transport system in Singapore, and comments from other readers as follows:

http://theonlinecitizen.com/2008/09/ptw-from-third-world-to-first/#comment-20915

Inadequate cash value

Dear Mr. Tan,

Thank you for telling us about the special report in The New Paper. I surrendered my life policy recently and received a refund that is much lower than the premiums that I paid. I have written to MAS to ask them to take up the case with my insurance company. I hope that they will act. Do you think that the insurance company will pay more to me?

http://tankinlian.blogspot.com/2008/09/new-paper-truth-of-life-insurance.html

REPLY
Let us wait for the reply. Wish you all the best.

Take a bigger loan at a low interest rate

Hi Mr. Tan,
I am in the process of looking for a housing loan. My friend advised me not to pay off the loan so fast, but to use my available cash for investments. Is it a wise thing to do? He showed me some calculations, to convince me that I would be better off taking loans and investing my cash. But won't I be losing from the high interest the bank charges?

REPLY
If the interest rate on your loan is low (say 2.6% for HDB loan), you should be able to earn more than than this interest rate from your invetment, if it is invested wisely. You should avoid investment that has a high charge, especially if it is marketed to you by an agent or financial adviser.

However, if the interest rate is more than 4%, it is not worthwhile to take the investment risk.

Suzy Orman on Life Insurance

A friend recommends a whole life policy and earns $10,000 in commission.

Watch this video:
http://www.youtube.com/watch?v=6vnN9liFWaE

Suitable products depending on needs

Some readers argued that certain products are not inherently bad. They are suitable for certain people, according to their needs. This is only partly true.

Here are my points:

> A product is bad, if it is designed to "cheat" people. This type of product has high charges that are hidden from the consumer.

> These products are "pushed" by agents or marketeers, who mislead the consumer through their "marketing techniques".

Most life insurance "savings" products and structured financial products fall in this category.

The good products are those that do not need to be marketed. They are bought by the consumer, usually over the counter. They include:

> bank deposits
> government bonds
> low cost unit trust
> term insurance products

Advice on Vivolife

Hi Mr. Tan,
You must be familiar with NTUC Vivolive. An agent tried to sell it to me...Is it of any good value? It seems to be a whole life policy.

REPLY
You should ask the agent to explain the following figures to you:
1. What is the value of the premium accumulated at 3.75% and 5.25% after 20 years or at age 65 ?
2. What is the projected cash value of the prolicy after 20 years or at age 65
3. What is the percentage reduction from the value of the premium represented by the cash value?
4. If the percentage reduction is more than 30%, the policy is expensive.
5. What is the amount deducted from your policy as distribution cost (mainly to pay commission to the agent)

Read this FAQ:
http://www.tankinlian.com/faq/true.html- Hide quoted text -

Big exchange loss in a Dual Currency Investment

Hi Mr. Tan,
I invested in a Dual Currency Investment two years ago and made a good return. Recently, the AUD depreciated against the USD. All of my investments got converted to AUD at 0.90. The exchange rate has now dropped further to 0.816, which makes the unrealized forex loss to US$50K.

What strategy should I take to minimized the loss? Right now, while waiting for the AUD to do better against USD, I have placed my money into a weekly time deposit earning almost 6%p.a.

REPLY
It is all right to keep the AUD in fixed deposit and earn 6% interest. There is a chance that it will recover, as it has dropped by more than 10%.

If you had invested in the AUD directly, instead of a DCI investment during the past two years, you would have made an exchange gain that is more than the loss that you suffer now. But, if you invested in the DCI, your gain would have been much lower.

I usually advise people to avoid DCI, as the investor is taking the risk of a loss (like you did), it was not able to enjoy the full appreciation (if the currency goes up).

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

Choice of term or personal accident insurance

Dear Mr. Tan,
I have read your blog and website. Your articles are really helpful to individual investors at the grassroots.

I have term life and personal accident policy. You mentioned that it's reasonable to have sum assumed 5 to 10 times of annual income. Does this ceiling apply to life and personal accident respectively or separately? Should the aggregate sum assumed be taken to make up the ceiling?

REPLY
If you can afford the premium, you should buy term insurance for the target sum of 5 to 10 years of salary. Term insurance covers death from accidents and illness.

If you with to reduce the cost, you can insure the target sum partly by term insurance and partly by accident.

You should get the quotation of the cost and make your decision based on the figures.

The New Paper: Truth about Life Insurance Payout

http://newpaper.asiaone.com/news/story/0,4136,175807,00.html?

Investing in NZD

Dear Mr Tan
What is your opinion of investing in the NZD at this point of time? What are the risks and rewards involved?

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

The NZD has corrected a lot from its high level. This seems to be an attractive level for a new investment.

Another scam: Beware of Push Pockets ...

I RECEIVED THIS E-MAIL

While the scams are happening in Malaysia , it's a lesson worth noting for anyone of you who loves to travel. Be alert!!

I am sure you all have heard of 'pick pocket'. Now there is a new trend, 'push pocket'.

A few days ago a new type of crime has surfaced in town. It goes something like this:-

Somebody slips a hand-phone into your pocket, sometimes it could be just a wallet with an identity card and a few Ringgit.

A few minutes later, the 'owner' comes up and confronts you, the 'thief'. He makes a big commotion that you stole his stuff.

You, caught unaware, are then pulled aside by the 'owner' for a settlement you are intimidated and threatened that if you do not pay up, the police will be brought in. If you pay up, this 'owner' lets you go. If not, the police are brought in.

Another strange thing is that, there always seems to be a 'witness' to the your 'theft'.

I am told this often happens to foreigners at the Kuala Lumpur International Airport (KLIA) or even at LRT trains. Given that you're 'guilty until proven innocent' as far as the Malaysian police are concerned, I understand some poor people are in jail for these 'offences'.

At the KLIA, the 'owner' throws his hand-phone and wallet with the few Ringgit notes into the luggage trolley of a just arrived passenger. The drama unfolds a few minutes later.

The real culprit has easily convinced our Malaysian police to arrest the real victim (if he has not paid up the 'settlement' demand).

This is a very serious matter.

This is another form of extortionists operating in broad daylight. They are disgusting criminals who will do anything to rob and steal. The sickening part of the whole scenario is that unless you pay the 'quoted settlement' money, they will put you in real trouble by calling the police.

The real culprit gets back his hand-phone and wallet but the real victim (i.e. could be any one of us) is thrown into the police lock up and charged in court.

So do be very careful, otherwise you may end up as a 'thief' as you have no way to prove your innocence.

Hurricanes in USA

The hurricanes have a name, starting with A, B up to Z using female names. After 26 hurricanes, a new series is started with A, B up to Z using male names. The current names are (male) Gustav, Hanna and Ike.

Gustav (which has just passed) was earlier feared to be as bad as Katrina a few years ago, but it finally did not cause much damage.

CORRECTION
The names of the hurricanes alternate between male and female names, starting from A followed by B, etc. Here is a list of names of hurricanes:

http://www.nhc.noaa.gov/aboutnames.shtml

The New Paper - Truth of Life Insurance Payout

The New Paper has a special report on "The truth of Life Insurance Payout" in its
September 6 edition.

I recommend to all policyholders to read this special report. It shows that the amounts paid out to policyholders on a surrendered or matured policy is far short of the "asset share" of the policy. Many policyhoders are being paid far less than a "fair amount".

If you fall in this category, I suggest that you should write to the Monetary Authority of Singapore to ask them to take up the matter with your insurance company.

I have written to the Consumer Association to raise the following matter with MAS:

1. Is the amount paid to the policyholder of a surrendered or matured policy quite close to the "individual liability” in respect of the policy? Is the insurance company allowed to pay out an amount that is far short of this “individual liability”? The individual liability is required to be computed by the insurance company for each policy and reported in total in the annual return to MAS.

2. In the interest of transparency and fairness, can MAS require the insurance company to disclose the "individual liability", upon the request of the policyholder of a terminated policy, so that the policyholder is aware of the amount of the "individual liability" that is held back from him?

3. Is it fair for a policyholder, on surrender of a policy, to be getting back less than the premiums paid after 10 years or longer, when the insurance company is able to retain up to 40% of the "individual liability" from the policyholder?

4. Why is it not possible for Singapore to adopt the practice in Malaysia and other countries, which requires the insurance company to pay out the “asset share” on a terminated policy after it has been held for more than a certain period? The “asset share” is similar to the “individual liability” reported in the annual return to MAS. This payout appears to be fairer and is much higher than the cash value now given to a policyholder in Singapore.

5. Can MAS ask the insurance company to disclose the total cash value of all policies, to allow it to be compared with the “sum of the individual liability in respect of each policy” as reported in the annual return? This will allow the public to know the amount that is held back by the insurance company, if all the policies were terminated.

Life insurance products can give good value

Some people argued that whole life, whole life limited premium and other life insurance products can meet the needs of certain categories of people and can be considered as good products.

This is correct.

Life insurance products can be designed to be good for consumers. They become bad products when they are designed to pay high commission to the agent and give poor value to the consumer. This high cost is not disclosed to the consumer.

Unfortunately, most of the products in the Singapore market are designed to be high cost, good for the agent and bad for the consumer. Up to two years of the premium are taken away to pay the commission and marketing expenses. If the monthly premium is $300, the amount of the hard earng savings taken away from the policyholder can be as much as $7,200.

This is a lot of money to be taken away from the unsuspecting policyholder, and is not told to the policyholder at the point of sale. This fact is hidden in the Benefit Illustration among 20 pages of confusing information.

If the charges are kept at a reasonable level, say a maximum of half year's premium (which is still a lot of money) and this is clearly disclosed to the policyholder, then a whole life, endowment or investment linked policy can be considered to be a good product and is suitable for most people.

Annual General Meeting of NTUC Income

Two readers of my blog, SiewKhim and Falcon, have posted comments asking me to raise issues on behalf of policyholders at the next annual general meeting of NTUC Income.

I have posted a request for them to send their e-mail address to me, so that a meeting can be arranged.

I did not receive any response from SiewKhim. Falcon wrote an e-mail to me, but did not reply to my e-mail.

I like to ask them to contact me at kinlian@gmail.com.

Bad advice given by the agent

Dear Mr.Tan,

I had read some of your articles about insurance and would like to seek your advice.

It is sad to learn that the current practices by insurance companies and their agents are not as ethical as what they claim in their mission statement or business code of ethics. It is also too late for my wife to realize that her entire CPF savings (ordinary and special) is now suffering heavy loss after being misled by an insurance agent in November 2007.

All along, ordinary people like my wife took insurance agent as professional and able to give reliable and accurate information. However, such trust was shattered after she was misled to loss-making investment-link policies. The way that he pushed the high risk bank-stock-link funds before the stock crash to unaware customer as low-risk investment still upset me today.

Although we complained about the agent's misrepresentation in Feb 2008 and got him admitting his 'ignorance' of the stock market, our request to annul the policies was rejected without clear explanation. His unethical use of national annuity scheme to scare my wife into putting her entire CPF savings in the dubious policies was also unanswered.

We contacted FIDREC but pulled out halfway due to stress and forlorn hope because my wife had already signed the Know Your Client Financial Needs Analysis Form which binds her to everything.

I have some questions below and I wonder you could offer your opinions.

1) Can stock-link-fund-selling agent ignore stock market warnings such as US housing credit crisis, US recession, banks' losses, etc? Isn't he a professional in his industry?

Reply: It is difficult for the fund agent to know that the market will be so bad. If they know, nobody will be transacting in the market.

2) These funds follow STI intimately; can agent ignore STI's sliding from historical peak late Oct 2007 and sell the funds at highest prices? Isn't his financial advice guided by the "buy low sell high" principle? This goes against Income's claim that they care about client's interest and are social responsible.

Reply: It is difficult for the fund agent to know that the market will be so bad. If they know, nobody will be transacting in the market.

3) Is it ethical to use annuity scheme to scare and influence client's decision, instead of sound financial judgment?

Reply: The agent should not use the national annuity scheme to scare the investor into making stock market investments.

4) The business law governing fund selling seems to be flawed. We only realized now that the Financial Needs Analysis Form, done casually, is holding the policy holder solely responsible. Isn't this document a likely signed blank check which could be rigged by unscrupulous agents?

Reply: The financial needs analysis should have been done properly and not casually.

5) Isn't there a mechanism to prevent such suicide-like buying of funds when all the indicators point to a looming stock crash? Can such crash prophets by George Solos, Warren Buffett and Jim Rogers be totally ignored and risks as high as such not mentioned to clients during the selling presentation?

Reply: It is difficult to know if the market will go up or down, at any point of time. One can only know with the benefit of hindsight. Your wife has made a long term investment. You should hold the investment for many years. It is likely to recover.

I made a personal investment myself around that time, and my investment is showing a big loss now. So, I was not aware that the market can be so bad. But I have to wait for it to recover.

Agent does not explain clearly

Many people read my blog regularly. When they meet me, they told me, "I like your blog. It helps me to understand the insurance policies that I have bought over the years. The agent did not explain the policy clearly to me".

Why are insurance companies continuing to design complicated insurance products that their agents are not able to explain to the customer?

Here is the secret. The agent does not want to tell you the truth. If they do, you will not buy the product, because it gives poor value to the consumer. The agent finds a way to make your buy the porduct, without really understanding it.

The regulator requires the agent to give a Benefit Illustration. It does not help, as the Benefit Illustration is confusing to the consumer (and even to an expert like me).

Twisting of existing life policies

Dear Mr Tan,

I am a young, single working adult. I've met up with two financial planners. One is from a reputatble affliated insurance company (X) and another is a independent financial advisor (Y).

X recommends me to buy a limited whole life plan (coverage of 100K) and a private hospitalisation plan and some other riders such asdiability income. The total premiums payable per month is around 250. Previously I've already bought a ILP ffrom X (100k coverage) and I have another 50K coverage from a whole life plan that my parents bought for me since young ($50 per month).

Y recommends me to cancel the 50K whole life plan that my parents bought for me and buy a term plan including HnS for only 100 (coverage of 250k), and invest the rest.

I understand this is in line with your "buy term, and invest the rest" strategy. But do I have to cancel the plan that my parents have been paying since 13 years ago?

And what is your opinion on limited whole life plan?

REPLY
You should continue your existing policies. Do not terminate them to buy the recommended new policy.

The agents X and Y are trying to "twist" your policy. Read this blog to understand what is "twisting": http://tankinlian.blogspot.com/search?q=twisting

If you wish to "but term and invest the difference", you should choose a 20 or 30 year term and not term to 100 years - which is like whole life insurance. The agent is cunning, and is trying to make a sale at your expense.

Avoid the whole life limited payment plan. It is expensive and give poor values. Do not cancel any existing policy to buy a new policy with high charges.

Land Banking - a scam?

Edited from an article in: http://www.guardian.co.uk/money/2008/aug/23/scamsandfraud.consumeraffairs1 Lesson:

Land banking is listed as a scam in this article.

Land banking
Here you are persuaded to pay a large sum of money for a tenth of an acre in a field - on the promise the land will soon receive planning permission and soar in value. So far, no land banking site has ever gained the building go-ahead. Most land sold in this way is green belt or zoned for agricultural use only.

But land bankers seize on every government statement about the need for more homes to stress that this means that it is certain that the site they are selling will soon be covered in houses - like almost all scams, this relies on an element of truth.

Continue an existing whole life policy

Hi Mr Tan,

I've been reading your website with interest recently, and I noticed that you do not believe in the need for life insurance after the age of 65. I understand your point of view that as the kids have probably grown up already and you are retired with your nest egg funds and no need for the coverage.

However, I have the following view. If I have already saved up enough money for my retirement without the need to surrender my life plan which I started at a young age (thus high coverage and cash value), wouldn't you think it would be better for the family to have that whole sum? I'm assuming life plans cover death up to age 99.

Example, I buy a whole life plan since I'm 21, with death coverage of $200,000. Upon age 65, cash value may be another $200,000. If I do not need the money, I could just leave it there, paying my insurance charges, and assuming I die age 70, my family will have sum assured $200,000 + cash value $200,000, therefore = $400,000 instead of me terminating the policy at age 65, withdraw the money and place in fixed deposits for the next 5 years until iIpass away at age 70?

Please correct me if I'm wrong in any of the assumptions I've made, but what I'm trying to say is that, leaving the money for my next generation through insurance may be another way to look at it instead of the simplistic approach of terminating all my policies once I reach age 65. It should all depends on individuals.

Thanks for your time, and hope to hear your point of view.

REPLY
Please read this blog and watch the video by Suzy Orman
http://tankinlian.blogspot.com/2008/08/susie-orman-on-life-insurance.html

As you have already taken a whole life policy, you can continue with it and leave the proceeds to your children, especially if you have sufficient money to meet your own needs. For young people who are not so well off, it is better to buy term insurance for 20 to 30 years, and invest their savings in a low cost investment fund.

Read this FAQ about continuing with an existing life policy:
http://www.tankinlian.com/faq/exist.html

Million Dollar Round Table (MDRT)

Dear Mr. Tan,

I was previously an insurance agent and a salaried agency supervisor with two different insurance companies. From my experience, I have learned to be less than enthusiastic about the so-called prestige of the MDRT (Million Dollar Round Table). In fact, I might even have been sceptical.

The MDRT measures an insurance agent by the first year commission earned on new policies sold. It equates equates more commission earned to being more successful and prestigious. As a sales motivation, , it drives the agents to earn higher incomes. However, it may also tempt many agents into dubious practices in pursuit of qualification for membership.

I feel that to the ultimate consumer, the insurance client, buying a policy from an agent who makes $30,000 p.a. is no different from buying from an agent who makes $300,000 p.a., as long as it's a suitable policy. Just a suggestion. I hope that you may like comment on the MDRT in your blog.

REPLY
You have already made the point well. I have no further comments.

Articles in Online Citizen

I write an article each week for the Online Citizen.

It can be accessed at www.theonlinecitizen.com

Here are some of my articles, and the comments from the readers:

Beware of scams
http://theonlinecitizen.com/2008/09/beware-of-scams/#comments

One country, two systems
http://theonlinecitizen.com/2008/08/one-country-two-systems/

Poor return on life insurance policies
http://theonlinecitizen.com/2008/08/poor-return-on-life-insurance-policies/

We, the citizens
http://theonlinecitizen.com/2008/08/we-the-citizens/

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

Give equal access to social benefits
http://theonlinecitizen.com/2008/06/giving-equal-access-to-social-benefits/

Unclaimed money

Banks and life insurance companies make a lot of profit from customers who were not able to claim what wa due to them.

Watch this video:
http://www.youtube.com/watch?v=1_BWTYv7ey4

Investing in Volatile Markets

What are the three most important factors in investing in property? They are location, location and location.

What are the three most important factors in investing in equity? They are timing, timing and timing.

If you invest at the right time, you can earn 5% to 10% more, compared to investing at the wrong time. What is the right time? It depends on major events and how they affect the market prices.

You can learn about the impact of events on market prices through this simulation game:

www.tankinlian.com/trader

Tips:

1. If interest rate goes up, the currency goes up
2. If USD goes up, JPY and EUR is likely to come down.
3. If stock goes up, bond is likely to come down (as people sell bond to buy stocks)
4. If oil price goes up, USD is likely to come down, and gold will go up.
5. If the US economy does well, the US stock and USD is likely to go up.
6. If company profits goes up, the equity is likely to move up.

With these tips, see if you can learn the right timing decisions!

Whole life Limited Payment

Hi Mr. Tan,

My friend, an insurance agent advised me that there is a new life policy where I only need to pay premium for 15 years. My present policy (which I bought from another agent before) needs the premium to be paid until I am 85 years old. She said that it is better to pay more and have the premium stop after 15 years. Should I stop the old policy and take the new one? I find the premium for the new policy to be quite expensive.

REPLY
Your agent is trying to "twist" your policy. Read this blog for an explanation about twisting:
http://tankinlian.blogspot.com/2008/09/twisting-is-bad-for-customer.html

You should lodge a complaint against the agent for this unethical product. Did the agent tell you that she is earning commission by selling the new policy to you? Did she tell you how much is the commission?

Dealing with credit card debt

Dear Mr. Tan,

I came across your blog and decided to ask for advise. I am married and have 4 children. I live in a HDB flat.

Recently i chalked up about $30,000 of credit cards debt. I decided to respond to an advertisement that offers to consoidate the debt with the banks. I believe that I can pay my debt, but I have to change my spending habits. They charge a fee. Is this a good solution? I did find out there is one local agency 'CCS' that deal with this situation. Can they help too?

REPLY
You can approach Credit Counselling Singapore.
They will be able to help you.
They give free advice.

Here is their website:
http://www.ccs.org.sg/

Joke: I am a crook

A drunk wanders into the lounge of a hotel where an insurance convention is being held, intent on causing trouble. He yells, "I think all insurance agents are crooks, and if anyone doesn't like it, come up and do something about it.

"Immediately, a man runs up to the drunk and says, "You take that back!

"The drunk snears and replies, "Why, are you an agent?"

"No," the man replies, "I'm a crook."

Mis-information of consumers

A policyholder wrote to me as follows: "I sign on a ILP in 2005. I paid $100 every month through Giro. The agent told me I can only withdraw after six years. So far I had invested $36,000 but the return is $27000."

This statement shows the poor state of affairs in Singapore. After paying the premium for 3 years, the policyhholder is still not aware about his contractual rights under this policy, namely:

> He can withdraw his ILP at any time (and not after 6 years)
> The high charges deducted from his premuims represents a certain proportion of his loss
> He does not know that he can approach his insurance company to get an explanation

The Benefit Illustration given at the point of sale should provide a clear explanation to the policyholder. But, most of the Benefit Illustrations are very confusing.

Twisting of ILP to Revosave

Dear Mr Tan,

I sign on a ILP in 2005. I paid $100 every month through Giro. The agent told me I can only withdraw after six years. So far I had invested $36,000 but the return is $27000.

Today another agent explained to me that this ILP will not make any gain for the next three years. Since I have a living policy which muture at 65, he reconmented a RevoSave Policy, which can earn bonus and insure for permenent disablity and death.

I am 58 year old and want to save for my retirement. I found that I rather pay the similar amount to the RevoSave. He told me I can withraw the ILP anytime, it is true? Shall I terminate the ILP and take the RevoSave?

REPLY
The Revosave is not suitable to save for retirement, especially for someone at your age. It gives a poor return. You should continue with your existing ILP.

The new agent is trying to "twist" your policy, but getting you to terminate an existing policy and take up a new policy (i.e. Revosave) so that he can earn a high commission on the new policy. You should ask the agent to explain how much commission he can earn from the new policy.

Here is an explanation about twisting:
http://tankinlian.blogspot.com/2008/08/understanding-twisting-and-churning.html

You should lodge a compliant with the insurance company or Monetary Authority of Singapore about the unethical advice given by the agent.

Premium for the Shield rider is too high

I usually advice people to buy the Shield plan, without the rider to cover the Deductible. If you are hospitalised, you can pay the Deductible from your Medisave. This does not need to be insured.

Here is the reason:

> Assume that the chance of being hospitalised for your age band is 10%
> The Deductible (to cover B1 class) is $2,000.
> The cost of claims is $200 (i.e. 10% X $2,000)
> The premium that you have to pay is about $300 (usually 50% more than the cost of claims).
> $100 each year goes towards the expenses, including commission to the agent.

If you insure for 10 years, you have to pay a total premium of $3,000 and are likely to make 1 claim of $2,000. The additional $1,000 goes to pay expenses.

Structured products that are fair to consumers

Financial institutions have been designing structured products that are unsuitable for consumers. They are marketed with misleading advertisements and convassers.

Here are my suggestions on how to ensure that these structured products are designed to be fair to consumers:
http://www.tankinlian.com/articles/structuredi.html

Increase in Shield premium

Dear Mr. Tan,

The premium for my Incomeshield Plus rider has increased from $163 to $276 - an increase of more than 69% for those age group from 41 to 50. This is more than 8 times our GST rate! How can Singaporeans afford a reasonable health insurance with this kind of rate?

NTUC has also have a social mission of providing a reasonable affordable low cost insurance and stablizing food prices.

Is there any body to check on the NTUC insurance for the recent hefty increase in premium! It will definitely affect the middle income family.

REPLY
If you are a member of a trade union, you can write to the secretary general of NTUC to voice your concern. If not, you can write to the chairman of the board of Income. All the best.

Introduce your friends to my blog

A request to regular visitors to my blog.

Send an e-mail to your friends and ask them to visit my blog. The link is www.tankinlian.blogspot.com.

I hope that you will respond to my request now. Your action will be reflected by an immediate increase in the visitors to my blog over the next few days.

500,000 visitors by 11-11-2008

I projected earlier that my blog will reach 500,000 visitors by 11-11-2008.

I recalculated by projection this morning, i.e. 2-9-2008. I have an average of 1138 visitors a day. The blog now has 419,668 visitors.

My Excel spreadsheet calculated projected that the target will be reached EXACTLY on 11-11-2008. What a coincidence!

Twisting is bad for the customer

Insurance agents are provided with a range of complex products, such as whole life, endowment and investment-linked plans. There are many variations of these products, including the cash back features. Some have guaranteed returns, some have bonuses, and some products have values that are linked to a fund.

It is easy for an agent to confuse a customer to stop an existing insurance policy to buy a new policy. The agent can easily point out a different feature and explain why it is good for the customer. This is not true, but the agent is trained on how to make the customer believe in the statement.

The agent can earn a high commision on the new policy. This commission can take away newly two years of the premium. If the premium is $300 a month, the customer can lose up to $7,200 of premium as charges taken away from the new policy, mainly to pay commission to the agent.

This practice is called "twisting" and is illegal in many countries. It is quite rampant in Singapore. Many consumers are taken for a ride. If you find that an agent has "twisted" your policy, you should lodge a complaint with the insurance company or with the Monetary Authority of Singapore.

The insurance companies should also be blamed for this bad practice. They introduce new products, which gives the opportunity for the agent to twist the policy of other agents, from the same company or a new company.

How is the customer twisted?

1. If you have a whole life or endowment policy, the agent will tell you that it is better to buy an investment-linked policy by showing the projected returns assuming a high yield

2. If you have an investment-linked policy, the agent will tell you that it has lost money (which it has in the recent market down-turn) and move you back to a whole life or endowment or cash back policy.

Remember: the agent always gains from the high commission when you stop a policy and buy a new policy. This is always done at the expense of the customer.

The truth about life insurance

I write this article for Online Citizen a few months ago. It cause a lot of discussion from consumers and insurance agents. For those who missed it, you can read it here:

http://www.tankinlian.com/articles/truth.html

Excessive spread and unfair practice

Dear Kin Lian

I bought a regular ILP (with annual contribution of $5,000) using CPF many years ago. I did not notice that the offer and bid spread is 5% at that time and the agent also did not tell me (otherwise, I will not buy it).

Every year when I contribute the amount using CPF, the insurance company will purchase the unit trust using the offer price and immediately redeem it using the bid price to cover the insurance premium. The insurance company is profiting not only on the insurance premium but also on the bid/offer spread.

Currently, investment of unit trust using CPF, the maximum bid/offer spread is 3%. Is this maximum spread of 3% applicable to existing ILP? If yes, how could I get the insurance company to reduce it? If not, how can I request CPF or MAS to look into this?

REPLY

I suggest that you write a complaint to the Insurance Department of MAS addressing the following two issues:

1. Conduct of the insurance agent in failing to inform you about the spread. However, as this occurred many years ago, you may find it difficult to raise this point now, as you failed to do so during the past years.

2. Unfair charge levied by the insurance company in applying the spread on your premium and enchasing it immediately (after deducting the spread) to pay the expenses and mortality charge. It would have been fairer for the company to separate your premium into two portions (for charges and for investments) and to apply the spread only on the investments. I think that MAS should not condone this practice, which is unfair to consumers.

If you find the charges to be too high, it is best for you to terminate the policy.

Joke: Open a tin of peas

A man called on a married couple whom he had not seen for some time. The door was opened by the woman to whom the man said, "Hello, Mabel, and how is Jack?"

"Oh," she replied, "didn't you know? He died a while ago."

"Well, I am sorry to hear that," the man said, "How did it happen?"

"Well," he informed him, "he went into the garden to pull a cabbage for dinner, when he collapsed and died."

"Dear, dear," said the man, "whatever did you do?"

"Well", she rejoined, "what could we do? We had to open a tin of peas".

Does NTUC Fairprice give good value?

Dear Mr Tan,

I am an avid reader of your enlightening blog. I remember that you once cited that NTUC Fairprice offers the most economical pricings. What is your comment on the article below:

Price chart figures can be misleading
I refer to last Sunday's table titled 'At the shops', which compared the prices of food products in various supermarkets and wet markets in Singapore.

I have issues with the way in which the food prices were presented. At best, the figures require the readers to do some calculations to arrive at the right conclusions. At worst, the numbers mislead the readers into thinking that NTUC FairPrice always offers the most competitive prices.

For example, in citing the prices of kai lan, the table displayed FairPrice's pricing as $1/200g. This works out to $5/kg, which is higher than that in Sheng Siong supermarket ($2.50/kg) and Chung Ling Wet Market ($3/kg).

The comparative prices of cucumber and cai xin were also presented using sometimes different units of measure.

It turned out that in these instances, FairPrice's prices were the least competitive. From the table, it seemed FairPrice offered the most competitive pricing only for a carton of 10 eggs.

Most readers just want a quick look at the comparative prices. This being the case, the way the figures were presented can easily mislead the readers into thinking that FairPrice products are priced the lowest, when that may not be the case.

REPLY
It is a matter of opinion. Generally, Fairprice offers good value. Sheng Siong gives good value as well.