Earn a higher return from an investment fund

Dear Mr. Tan,

I am in my early 40s. Currently, I have a Living policy with an insured amount of $100,000. The insurance agent has recommended another policy for $100,000. It is a savings plan that also covers critical illness. Should I take up 20 or 25 year plan?

REPLY
I usually advice people to buy Term insurance and invest in a low cost, diversified investment fund.

Read these FAQs:
http://www.tankinlian.com/faq/choice.html
http://www.tankinlian.com/faq/savings.html

Choices in investments

Hi Mr. Tan,

Greetings. I am thankful for your blog entries. Thank you for taking the effort to share with us your expertise.

I am looking at investing for retirement. I have been looking at funds targeted at emerging markets such as Russia, India. I have also been told that the dollar-cost averaging helps to level out risks in the long term. Is then a monthly 'savings' into an emerging markets fund a sound investment for retirement? If yes, what are some funds that you would highly recommend? If not, what are the alternatives you would recommend I look into?

I am also looking into investment in more conservative avenues. I heard over television an expert recommending the money market funds as an ideal investment tool for the immediate future, as the markets are quite vulnerable. Are there any particular money market funds that are recommended for the more conservative investor?

A bank has introduced a new structured deposit (Crude Oil Structured Deposit). My first impression of the fund is that it looks pretty promising. Are there any fine print that I may have overlooked? Thank you very much for sharing your expertise and your time.

REPLY

My suggestion is set out in this FAQ:
http://www.tankinlian.com/faq/savings.html

I suggest investing in a low cost, diversified investment fund for the long term, in Singapore or a established market. I do not recommend investing in an emerging market fund, because it is more speculative.

You should also avoid structured products. Read this FAQ:
http://www.tankinlian.com/faq/sinvest.html

Low cost investment funds in Sweden

My friend in Sweden told me that there are low cost investment funds available in Sweden. The expense ratio is between 0.5 and 0.75% per annum. It offers a better return than other funds that have a expense ratio of 2% to 3%.

He was surprised that the low cost funds are not yet available in Singapore. He believed that this will come soon.

25 year family income and term insurance

When I was 30 years old, I bought a 25 year term insurance policy to cover a sum assured of $100,000 and to provide a monthly income of $2,000 to my family in the event of premature death during the term. I paid a premium of about $1,000 a year.

25 years have passed, and the policy has now expired. During this time, I was assured that, if anything had happened to me, my family would have a lump sum and monthly income to meet their financial needs. I have other life insruance policies, which provided additional coverage.

Term insurance was rather expensive in those early days. Today, the premuim rate for the same cover is much lower. It does not matter to me that I did not get any return for this term insurance policy, as I was able to accumulate and invest my savings in other ways.

Alternative to fixed deposit

Dear Mr. Tan,

My wife and I are in our early 30s. We know very little about insurance and investment. We wish to thank you for giving us advice and information in your blog.

We bought life insurance about 10 years ago and pay a premium of about $150 each for 25 years. Presently both our saving in bank is about $X.

Can you kindly advise us on how to invest our saving as interest rate on fixed deposit is low. We do not wish to take risk and have never invested in stock.

A few days ago, I visited NTUC income @ AMK hub but can't really decide on Flexi-Link policy, Growth Plan, Revosave or Ideal plan. In fact, we are getting more confused.

REPLY
I hope that this FAQ will help you to make a decision:
http://www.tankinlian.com/faq/savings.html

As you are investing for the next 30 years, it is better to invest in a low cost, diversified investment fund. You will be averaging out the good and bad years, and also diversifying your risk over a large number of shares. The risk is small, and you can get a good return.

I suggest investing in the STI exchange traded fund. You can buy through your stockbroker.

20 year Family Income Policy

If you are 30 years old (male) and you wish to provide $3,000 a month payable to your family in the event of premature death, the annual premium payable is:

20 year Family Income policy: $484
30 year Family Income policy: $1,068

The family income is payable for the remainder of the term. You can reduce your cost by 50%, when you select a 20 year policy, instead of a 30 year policy.

You can take the insurance to provide a higher benefit by paying a proportionately higher premium.

In my view, a 20 year policy is probably suitable for most people.

Buying insurance on a limited budget

If you are a male at 30 years and have a limited budget of $600 a year for life insurance and you wish to provide for your family in the event of premature death during the next 30 years, you have the following options:

a) Level term, covers $182,000
b) Decreasing term, covers $486,000 reducing gradually over 30 year
c) Family income of $1,685 payable monthly for remainder of 30 years (initial cover is $606,000)

Option (a) provides the same amount in the event of premature death. Option (b) and (c) provides a higher amount in the event of death during the earlier years, and a lower amount in the later years.

You also have the option to buy a whole life policy and get a sum assured of $30,000. This covers you for the whole of life and accumulates a cash value (i.e. some savings).

Which option do you prefer?

Surrender a life policy

Dear Sir,
Your Blog is much useful to many people. Unfortunately I have not come across before taking many of my insurance plan. Most of them were taken without having prior knowledge about it.

I have Company X Endowment policy under my wife's name taken 3 years back. I need to surrender it. Is it possible to do it now? If so, how much I may be getting in return?

I do not need this plan as I am now in out of Singapore. My current employer is covering insurance for whole family in this country. I was in Singapore for the past 7 years.

REPLY
I hope that this FAQ can answer your question:
http://www.tankinlian.com/faq/exist.html

You should ask Company X to quote you the cash value now, and in 5 years time, so that you can make the correct decision.

Big losses in AIG

From www.bloomberg.com

American International Group Inc., the largest insurer by assets, said Joseph Cassano will step down from running the financial products unit after $11.1 billion in losses on guarantees sold to fixed-income investors.

Cassano's retirement is effective March 31, Chief Executive Officer Martin Sullivan said today in a conference call. He will serve as a consultant through the year, Sullivan said.

AIG reported the biggest quarterly loss in its 89-year history yesterday after writing down the value of so-called credit-default swaps. The New York-based company said for the first time in yesterday's statement that realized losses on the portfolio "could be material'' to quarterly earnings. The fourth-quarter net loss was $5.29 billion.

NOTE: AIG is the parent company of AIA (American International Assurance) in Singapore.

Shuttle service to MRT station

I took a taxi to visit KK Hospital. The fare was $18. I learned later, that KK Hospital operates a shuttle to transport their employees and patients to the two nearby MRT stations.

Rather than have an organisation run a separate shuttle service, it will be more efficient to have feeder services that serve many public and commercial buildings within 2 kms of each MRT station.

I hope that Land Transport Authority will allow small bus operators to operate these feeder services. If these services are well publicised, more people will take the train instead of relying on expensive taxis.

Theft of cash cards from cars

I read in the newspaper of the high rate of theft of cash cards from cars.

About two years back, I discussed with some senior people in LTA to allow car owners to opt to pay ERP charges through a monthly bill. This is similar to paying for telephone charges based on actual usage. It should be easy for the ERP gantry gates to identify the vehicles that have incurred ERP charges and bill the owners on a monthly bill.

This has the following advantages:
1. Reduce the time taken by the owner to top up the cash cards
2. Reduce the risk of theft of cash cards.

At that time, the LTA officials explained to me on why the concept was not feasible. (I do not agree with their view). As they were not keen to explore an alternative. I decided not to pursue the matter. With the high rate of theft of cash cards, perhaps LTA will now review this matter?

Family Income Policy

A family income policy pays a monthly income for the remainder of the term, in the event of premature death of the policyholder.

For example, a male at age 30 can take a 30 year policy to provide a family income of $3,000 a month for an annual premium payable of $1,068 (based on my benchmark).

If death occurs at the start, the policy pays $3,000 a month for the 30 years, or a total of $1,080,000 (i.e. more than $1 million). If death occurs at end of 10 years, the income benefit is payable for 20 years (total of $720,000). If death occurs at the end of 20 years, the benefit if payable for 10 years (total of $360,000). If premature death does not occur, the policy expires at the end of 30 years, without any cash value.

The policy can be taken to provide a lower monthly benefit at a proportionately reduced premium. For example, the premium payable for a monthly benefit of $1,500 is $534.

The advantages of this policy are:

1. It provides a very large benefit at an afforable premium
2. It pays a monthly income, so the family does not have to worry about investing a lump sum payment.
3. The policyholder can invest the savings in a low cost, diversified investment fund to earn a higher return, compared to a whole life policy.

Term insurance replaces loss of earnings

Dear Mr. Tan,

My insurance adviser said that a term insurance policy will expire at the end of the term and after that, I will not have any more life insurance coverage. She said that it is better to take a whole life policy, as it provides coverage for the whole of life. I am undecided. What is your advice?

REPLY
Most people need life insurance to cover the loss of earnings in the event of premature death. They need the life insurance policy coverage only during their working life. The policy pays a benefit to replace the lost income and take care of the family needs when the children are still young.

When a person retires from work, there is no need for life insurance, as there is no lost earnings to be covered.

If you take up a term insurance policy, you pay a premium of about one-tenth of a whole life policy. This allows you to take a larger sum assured and protect your family more adequately. You need life insurance up to age 65 only.

You will find that a decreasing term insurance to be suitable for your needs. The sum assured starts at a high amount and decreases each year over the term. The premium is less than half of a level term insurance policy. You only need to pay about 5% of the premium for a comparable whole life policy.

Although the sum assured decreases each year, it is adequate for the family as the children have grown one year older, and need to be financially supported for a shorter period. The family would have accumulated one more year of savings with each passing year.

For example, a male at age 30 who takes a whole life policy to cover $300,000 has to pay a monthly premium of $500. This person can take a 20 year term insurance policy covering the same amount for a monthly premim of only $50. For a decreasing term insurance policy, the premium is about $25 a month.

If he takes a 30 year term insurance policy, the premium will be about $100 (for level term) and $50 (for decreasing term). They are much lower than the premium for a whole life policy.

There is another policy, called the family income policy, that pays the benefit as a monthly sum (say $3,000 a month) for the remainder of the term. I shall explain this policy in more detail separately.

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

Comparing Anticipation and Revosave

COMMENT POSTED IN MY BLOG

Despite the fact Mr Tan has repeatedly said he delivered products that give good value, he designed the Anticipation plan when there were better value products like Endowment around. Anticipation is Revosave's predecessor. Personally, I find this an irony. I hope Mr Tan do not take offence in me bringing up this blunt fact.

REPLY
Here are the facts.
1. The Anticipation plan was designed 25 years ago.
2. It pays a lower rate of commission compared to similar plans in the market
3. It offered an attractive return to the policyholder, more than 4% per annum
4. The return on Anticipation is similar to Endowment plan, as the payout is every 3 years.

I am not familiar with the Revosave plan. Some people said that it offers a poor return, which is much lower than the Endowment plan. It is also quite confusing to the customer. I would not have designed such a product, as it goes against my belief on what is good value for the customer.

In today's environment, it is better to invest in a low cost, diversified fund. The saving plan is more flexible. Read this FAQ:
http://www.tankinlian.com/faq/savings.html

Changi Airport

Changi Airport is an excellent example of forward planning - probably among the best in Singapore.

When they build Terminal 1 nearly 20 years ago, there were already plans for terminal 2 and terminal 3.

The gates in terminal were were identified as C and D. When terminal 2 was built 10 years later, the games were identified by E and F. Terminal 3 is recently completed. The gates are identified by A and B. These letters have been reserved for terminal 3 for 20 years.

Through this forward planning, the gates are identified in the right sequence, from A to F.

The signage in the airports are also among the best Singapore. It is easy to get around Changi airport. In contrast, many other large buildings and MRT stations in Singapore in Singapore have poor signages.

MAS Consultation Paper

Mr. Tan,
What is the key proposal that you will send on the MAS consultation paper?

REPLY
My key message is:
1. MAS requires the board and senior management to "put consumer interest first".
2. However, these parties are also required by their shareolders to "increase shareholder value", i.e make more profit for shareholders
3. More profit for shareholders mean more charges (and lower returns) to customers
4. As consumers will not pay higher charges, the life insurance company has to hide them, i.e. not transparent
5. It is difficult for the board and senior management to balance this conflict of interests
6. It is not realistic to expect that consumers can be eduated sufficiently to identify good financial products from bad ones.
7. MAS needs a new approach to look at safeguard the interest of consumers

I will be suggesting a new approach.

Inflation in Saudi Arabia

I met someone from Saudi Arabia at a conference in Bahrain. I asked him if the economy in Saudi Arabia is booming due to the revenue from the high oil prices.

He said that the cost of living has increased sharply. Many ordinary people are finding it difficult to cope, as their wages have not gone up to the same extent as the cost of living.

I looks like the problem is the same in most countries, namely, the inflation is too high this year.

Fair treatment of policyholders

Dear Mr. Tan,
Thank you for your explanation about the anticipated endowment policy. Based on your example, the policyholder is worse off, as he has to pay an additional premium and get back only a part of it (after deducting expenses) as the annual cash benefit.

MAS has published guidelines on the fair treatment of policyholders. In your opinion, will the board and senior management get into trouble by selling this type of product, as the policyholder appears to be worse off?

What about the insurance advisers who sell this type of product? Are they in breach of their duty to give good advice?

REPLY
In my view, it will be difficult for the board, senior management or insurance adviser to explain how this product is better for customers, compared to an ordinary endowment policy.

In the past, insurance companies have the leeway to design products that are pay high commission for agents, make good profit for their shareholders, but give poor value to the policyholders. This may change with the new MAS requirement.

This is just my guess. I do not know how MAS intends to implement the new regulations. We have to wait and see the future developments.

Bahrain

Bahrain has a population of 800,000. It is an island nation, slightly bigger than Singapore in physical size. The capital is Manana. The cost of living is high. Taxi and hotel fares are about 150% to 200% of similar prices in Singapore.

Dubai Airport

I transit through Dubai Airport before morning on the way to and from Bahrain. On both occasions, Dubai Airport is packed. It is more than twice as busy as Changi Airport. Many of the passengers had to sit on the floor, as the chairs are all taken.

Many people use Dubai Airport to transit to other cities in the Middle East. They go to work in the booming Middle East couniires. Thanks to the high oil price and the new found wealth.