Reasonable expectation of policyholders

NTUC Income has given me the two scales of terminal bonuses (for surrender and maturity/death claims) payable on each of my policy for each year in the future. In total, I have four complicated scales for two policies.

The scales appear to be calculated to give terminal bonus that is slightly more than the cut in the annual bonus. They may suit these policies at the present time, but it is unclear how the scales will be changed in the future to reflect changing cirumstances.

I have asked NTUC Income to clarify the following questions:

1) Will the same scales of terminal bonus apply to all policies in the same series, or will they differ according to year of entry as well?

2) How will the scales of special bonuses be changed in the future, to reflect changes in the investment yield?

3) What are the principles that will be followed to maintain fairness between the policyholders with different entry years and different policy types?

4) To what extent is the higher rate of special bonus guaranteed, as it is intended to compensate for the cut in the annual bonus?

5) Will NTUC Income be prepared to lay out these principles in a transparent manner to be disclosed to all affected policyholders?

6) For policyholders who have suffered a reduction in annual bonuses for a few years since 2003, does NTUC Income intend to use some of the exceptional
surplus in 2007 to pay additional bonuses to policyholders to make good their shortfall (as compared to the projected bonuses at the time that they bought the policies)?

7) Will NTUC Income give an option for policyholders to remain on the old bonus structure, if they do not accept the change to the new bonus structure?

My personal preference is to stay with the "old" bonus structure, as it is more transparent and a higher proportion of the bonus is vested each year.

I do not like the "new" bonus structure as it can be subject to arbitrary adjustments and the terminal bonus can be withdrawn in the future. I am also less confident of getting a higher payout, if the investment yield improves.

Regular savings plan at 1.75% sales charge

I received an advertising mailer from Fundsupermarket. They offer a range of investments funds with an sales charge of 1.75%, and are available for regular savings plans. Details are shown here.

http://www.fundsupermart.com/main/research/viewHTML.tpl?lang=en&articleNo=2289

The sales charge of 1.75% is even lower than the spread of 3% chargeable for single premium investments by insurance companies. The expense ratio of some of the funds are quite accepable, between 1% and 1.5%.

If you have invested in some of these funds, please share your experience. I shall be contacting Fundsupermarket to learn more about these funds.

Save for a child's education

Dear Mr. Tan,

1. In your FAQ: Save For Your Child's Education (http://www.tankinlian.com/faq/child.html), it mentioned that an investment-linked plan gives a better return as compared to an education endowment plan. If I intend to save $150 a month over 21years, what type of plan should I buy to go with a 21 years decreasing term insurance plan? Is it advisable to buy the plans from different insurance company?

2. I read about DIY insurance from the website (http://www.askdrmoney.com/Ins_DIY.htm). May I know what is a "recurring single-premium ILP"?

3. If I intend to DIY for my child's education fund, what plans should I consider?

REPLY
I am disappointed that most insurance companies take away too much of the policyholder's premiums. Read this FAQ:
http://www.tankinlian.com/faq/ilp.html

At one time, I was prepared to recommend the Flexilink or the Ideal (ID7) from NTUC Income. I am not sure if they are still keen to offer these low cost plans. You can ask their business center.

You will have to wait for someone to introduced indexed funds in Singapore. I hope to get a new life insurance company to offer it within the next 6 to 12 months. Read this FAQ:
http://www.tankinlian.com/faq/low.html

In the meantime, it is best to invest in the StateStreet Trakker Fund (i.e. the STI ETF). You have to pay about $3,300 to buy 1,000 shares. Perhaps you can save in a bank account each month and buy this fund when you reach the minimum amount.

A recurring single premium plan is a ILP where you make a large one time investment to start the policy. They allow you to make recurring payments into the plan and be freed of the heavy upfront charge applicable to regular premuim savings.

Shocked with bonus cut

I received a copy of this letter written by a policyholder to the appointed actuary of NTUC Income.

Dear
I'm glad to receive the INCOME 2008 annual Bonus Statement yesterday but was shocked with the contents.

My family of 5 have a total of 25 insurance policies with NTUC INCOME, nothing else but our trust on the house brand that give us protection and more reasonable returns.

I'm deeply disappointed with the new formulas used in calculating the annual bonus.

My family 5 Living Policies got the greatest hits. Based on the presentation by your agent, I accepted these Whole Life Policies and hope that in case needs arise, I can anticipate the Cash Value at that point of times in need. Now that INCOME told us
that we can expect the good returns after we leave this world and amount is up to INCOME mercy at that time. We have lost on planning of our insurance asset and unable to anticipate the amount we can get.

Your cut of about 50% in annual bonus for Whole Life Policy give a BIG BLOW to INCOME Policy Holders.

Visitors hit a new record 1,318

The visitors to my blog hit a new record, 1,318 visitors, on Friday 2 May 2008. It surpassed the previous record on Tuesday.

The average daily visitors has now passed 1,000. It hit 1,021 visitors for the past week. It seems that the bonus cut of NTUC Income is attracting many more visitors to my blog.

Uncompetitive motor premium rates

Dear Mr. Tan,
Recently my Motor Insurance was due for renewal with NTUC Income. I rang the customer service with the intention of renewing my insurance. I was shocked to learn that it has increased from $690 to $815 after 50% NCB and 5% direct discount and 5% loyalty discount.

When I asked if the premium can be lowered since I have been insuring with NTUC Income for 8 years, I was told it was company's policy and the premium is fixed. I then called AA and was offered a premium of $766 with another insurance company.

My question is why can't NTUC look at the insurance coverage of each individual and fix the premium. All my family insurance are covered by NTUC Income, yet I find NTUC Income to be rigid and does not consider the loyalty placed by an individual
Can I have your comments?

REPLY
I suggest that you pass the feedback direct to the new management of NTUC Income. You can send to sq@income.com.sg.

I also experienced a large increase in premium on my wife's motor car recently. I was able to get a much lower premium rate from another insurance company. I decided to move my motor insurance to the new company, in spite of having insured with NTUC Income for many years, without any claim.

Home insurance claim

Dear Mr. Tan,
My maid was replacing the bulb on my expensive lamp fixture. The ladder slipped. She fell and pulled the fixture down with her. Is the loss of this fixture covered under a home insurance policy? I am insured for the building and the content as well.

REPLY

I checked with an insurance claim expert. Here is his reply:

quote
The lamp fixture falls under the scope of "contents". Inorder for the policy to respond, the damage or loss must be within the insured perils. Home insurance is a fire policy that have been extended to cover floods, water damage (e.g. overflowing sewerage pipes), damage by lighning. It does not cover accidental damage to the lamp fixture under the circumstances described by you.
unquote

Transfer of shares to family members

After my retirement from NTUC Income, I decided to invest most of my savings in shares on the Singapore Exchange. The shares are kept in CDP.

I had considered the option of investing the additional savings in the Combined Fund in NTUC Income, but I find the upfront spread of 3.5% to be too high.

I have now decided to transfer some of my shares to my wife and children. I asked them to open a stockbroking and CDP account. My stockbroker said that I could approach CDP to make the transfer to family members at quite modest cost.

It is better to make the transfer now, so that my family members are able to learn about investing in shares. They can collect the annual dividend directly. Later, they can also learn about investing in low cost unit trusts. They should not have to pay high charges for investment-linked funds marketed by life insurance companies.

This is also a good way of distributing some of my assets now (instead of waiting until I leave this world! )

Cooperative principles and values

Dear Mr. Tan Kin Lian,
I have been a strong supporter of Income for many years. My family has several policies with Income. I am also a member of NTUC union.

You said that the bonus cut by Income is unilateral and arbitrary. Is this the proper behaviour for a cooperative soceity. I thought that the coop acts in an open, transparent manner and look after the interest of the policyholders. This behaviour is as bad as the commercial companies, maybe even worse. Is there any body in the board and management of Income that understand coop values? What about the NTUC?

REPLY
As you are a union member, you can bring this matter up with the leaders of NTUC. They have been promoting cooperative principles and values and wish to see the NTUC cooperatives behave differently from commercial companies. Maybe, the NTUC leaders can intervene to rectify this matter.

In my frank opinion, the cut in bonus is to the detriment of the policyholders. It will destroy the trust of policyholders in NTUC Income and in the NTUC as a whole (as many union members are affected).

Thai workers protest for higher minimum wage

Thousands of workers waving flags and banners gathered in the Thai capital on Labour Day to call on the government to raise the minimum wage and improve their welfare.

Do not cancel your policies

Hi Mr. Tan,

I have been a loyal policyholder of NTUC for many years. I am really disappointed with the bonus cut, affecting several of my policies, including the policies taken for my children. I am considering to cancel all of these policies and to invest in unit trusts. Do you advice this move?

REPLY
Do not cancel your existing policies, as you will suffer a financial loss. You can lodge a strong protest against the bonus cut to the board of directors and to the MAS. It is a serious breach of contract.

When you bought these policies, you were given a scale of bonuses to expect in the future. NTUC Income does not have the moral right to change this structure, in an arbitrary manner. You can bring up this matter with MAS as they have to safeguard the "reasonable expectation" of the participating policyholders.

In the future, you should avoid saving in life insurance policies, including policies with bonuses and investment linked policies. After deducting the agent's commission and marketing expenses, they give poor value to the policyholder. The modest yield is now being reduced further through the manipulation of the bonuses.

You should also tell your friends to avoid buying saving-type life insurance policies with high upfront charge, sold by insurance agents.

Buy low cost Term or accident insurance to provide the protection for your family. Read this FAQ:
http://www.tankinlian.com/faq/savings.html

Pay of leaders

A few days ago, someone passed this question to me, “Do You think our leaders' performance commensurate with their pay?”

It is my policy to avoid commenting on any specific person’s performance and pay, even if this person reports directly to me.

I wish to share my personal views on how corporate and government leaders around the world are rewarded.

The prevailing thinking is that corporate leaders should be rewarded based on the shareholder value that they have created. This approach appears to be wonderful in theory. But it has great difficulty in practice.

The current method of measuring shareholder value based on the share price is flawed. The share price can fluctuate wildly based on many factors that are not related to performance of the corporate leaders.

Corporate leaders like this method because they can get fat bonuses in good years, and are not required to pay back these bonuses during the bad years.

It has contributed to big moral risks. Some corporate leaders manipulate the accounts to show big profits in the early years. Remember Enron and Worldcom? Some others take big risks to boost short term profits. Remember subprime mortgages, hedge funds and special investment vehicles?

These corporate leaders earn unimaginable amounts during the good years. When their companies have to write off billions of dollars of shareholder money in the subsequent years, these leaders depart with golden parachutes.

How should government leaders be paid?

It is important that the rewards should attract the right type of people to take the risk and nature of political life.

Monetary reward is an important factor. But it should not be the sole or dominant factor. A passion for this type of work and life is equally important.

We should attract leaders who have the passion to help improve the living standards of the ordinary people. These leaders are willing to put their interest of the public above their personal interest and give up the bigger rewards of corporate life.

They need to receive an adequate remuneration, so that they do not need to supplement their incomes through corrupt means. A remuneration of 10 to 20 of the average earnings of the population, accompanied by a good pension, should be adequate to give a comfortable life. But it will not put them anywhere near the earnings of top corporate leaders and professionals.

I believe that there are many capable people who are willing to come forward for the satisfaction of serving the people and an adequate remuneration. This will be the best type of people to be in government.

If a country cannot find this type of people, then there must be something seriously wrong with the values of that country!

Street maps and better signages

I parked my car at Suntec City to attend a dinner. I had to walk to Millenia Walk to collect a bag. I had some difficulty in finding the way to my destination. Someone approached me on the street and asked for directions to the National Library. He was also lost. I was not able to help.

In many cities, there are street maps displayed at prominent places to help visitors to find the way to prominent landmarks. This is sadly lacking in Singapore. Signages in Singapore are also poor.

I hope that some responsible agency can take the initiative to provide street maps and improve the signages to help people to move around more easily.

Management direction has changed

Dear Mr. Tan,

Thanks for giving me a job when I am in need while you're still our CEO at NTUC INCOME.
I have decided to leave INCOME as the direction of the management changed.

The commercial mindset INCOME adopted is no doubt one of the good options but it will be likely at the expense of the policyholders as the cost of operation increased (renovation, staff salary adjustment and advertisement).

I really admired the days when INCOME was steered by your leadership. This is also one of the reasons that motivated me to join NTUC INCOME during your era. Your management has definitely secured a job for the staff under your care and benefited the policyholders at large as they enjoy good bonus from year to year from the policies.

Mr. Tan you're always a model for me to learn and I am looking forward to your return to this industry to benefit us.

How to invest in low cost investment funds

Hi Mr. Tan,
I read your article about not to invest in structured deposit. How do I go about getting the ideal plan ID7 or ETF as recommended by you? How much do invest and for about how long? Thank you.

REPLY
You can ask the business center of NTUC Income, if they can sell the ID7 plan to you. You can buy the ETF through a stockbroker.

You can invest any amount, subject to a minimum of 1,000 shares in the case of ETF. You can invest as long as you wish. Usually, you will get a better return when you invest for the long term, i.e. for 10 year, 20 years or longer.

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

Terminate an existing life insurance policy

Hi Mr. Tan,
I have purchased an Umbrella Policy from NTUC since 1990. The cash value as of end Mar '08 is $X. I am thinking to terminate this policy and to invest the money instead. Do you think I should do this? Thanks a lot for taking time to help!

REPLY
It depends on the following:
a) do you still need the life insurance cover?
b) do you need the cash now, to spend on your daily expenses?
c) do you wish to reinvest it to earn a higher return?

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

I hope that it gives useful informatin for you to make a decision.

Difficult to assess the risk

Mr. Tan,
I would like to seek your opinion on the MQ yield 2.08% product, as advertised in Strait Times . Do you think this is safe ?

As you know, the interest rates for FD is so low. I am thinking of treating this as a FD for 2 years. Coupon 2.08% annually, payable every 6 months.

This is a capital guaranteed. Provided Macqueries Bank does not go burst. This seem unlikely to happen. Can you please highlight other possible risks ?

REPLY
This is a structured financial product. I avoid all structured products, for the reasons given in this FAQ:http://www.tankinlian.com/faq/sinvest.html

In the document for this product, the issuer said that the "principal protection" does not apply under certain circumstances. Honestly, I do not know how to assess this risk (but it is not something you can just dismiss away) I am also not able to spend time to study this risk. Often, it cannot be calculated anyway. So, I always avoid these types of products.

Invest separately for higher return

Dear Mr Tan,
Thanks for your great advice in your blog, I always thinking that NTUC is the best insurance company in term of its low premium compared to other companies. However, after go through your article, I start to wonder.

Recently I have just bought a living policy (VIVO life) for my wife, my son and me, I attached the policies for your reference.

Would you mind to advice me whether I should continue or cancel this policy and change to Term policy instead?

REPLY

In the table below, I tabulate the cash value for each policy at the end of 20 years (based on 3.75% and 5/25%) and the amount that you can get by investing the same premium to earn a net yield of 4.5%

policy      Annual     Cash value 20 years     Amount
              premium    @3.75%       @5.25%    @4.5%
Self          $1,454      $31,294      $34,907      $47,666
Wife         $1,217      $26,428     $29,478       $39,890
Son           $1,171      $27,105     $30,234       $38,389

You can get about $10,000 (or 30% more) more for each policy by investing separately. If you buy decreasing Term insurance to provide the protection, the cost is very low. The Vivolife policy gives a poor return due to its high expenses, which are taken away from your savings.

It is better for you to buy Term insurance and invest the difference, as explained in this FAQ:
http://www.tankinlian.com/faq/savings.html

You should have adequate life insurance cover on your life (say about 5 years of your income). You can buy a 20 year Decreasing Term or level TErm insurance.

REad this FAQ:
http://www.tankinlian.com/faq/benchmark.html

I hope that this information is helpful for you to make an informed decision.

Poor yield from financial products

Do you fit into any of these categories? What about your family members?

1. Many people earn a low rate of interest on bank deposits. The bank interest rate, which has been less than 2% for several years and now less than 1%, is insufficient to cover the rate of inflation, which has now increased to more than 5%. If they invest in other financial products, they have to pay high charges and get a poor yield.

2. Many people invested several billions of dollars in structured financial products in the hope of getting a better yield than bank deposits. They were taken to the cleaners. Many housewives and retirees told me about their investment in the capital guaranteed products that were heavily advertised and sold by our trusted banks. After locking up their principal for five years, they get a total return of less than 1% per year, worse than bank deposit. They missed the chance of earning more than 10% per annum on the booming stockmarket.

3. For most people who invested in unit trusts and investment funds offered by life insurance companies, the outcome was not better. They have to suffer an upfront charge of 3% to 7% on their investment and an annual charge of 1% to 3%. After deducting these high charges, the net yield on their investment is mediocre and does not commensurate with the risk. The fund managers and other financial intermediaries have taken away most of the gains.

4. The worst cases are the hundred thousands of people who invested their regular savings in an investment linked product sold by the life insurance companies. In addition to the high charges mentioned above, they have to suffer “allocation rates” that takes away two years of their savings to pay commissions to the insurance agents. Many were not aware about the financial impact of these predatory “allocation rates”.

This is an extract of an artilce printed in: http://www.theonlinecitizen.com/.

Reply: Puncturing inflated claims

This letter is printed by Straits Times on 30 April with some editing.

25 April 2008

Editor
Forum page
Straits Times

I refer to Christopher Tan's article entitled "Puncturing Inflated Motor Claims" in the Straits Times 21 April 2008.

I wish to share my perspective on this matter, having been personally involved in helping my team to build the largest market share in motor insurance during my period as the chief executive officer of NTUC Income. We were able to offer lower premium rates to more than 300,000 policyholders and still produce a profitable business.

For many decades, insurance managers in Singapore are aware that dishonest workshops inflate the repair bills on third party claims. These workshops aggravate the damages to inflate the repair bills, claim for parts that are not replaced and exaggerate the repair time to claim a higher compensation for loss of use.

They use lawyers to lodge the third party claim against the insurance companies. The legal fees are added to the total claim. If insurance companies do not settle the inflated claims, the lawyers are quick to file a legal suit, which takes the cases into the domain of the courts. This further increases the legal fees and now adds the court costs.

To avoid the high legal fees, many insurance company assessors find it better to settle the third party claim, even though they are ware that the claim amount has been exaggerated. The higher claim payments are ultimately reflected in higher insurance premiums paid by motorists.

What can be done to reduce these inflated claims?

Six years ago, the insurance companies introduced the Idac scheme (i.e. independent damage assessment centers). They require the motorists to report the accident at an Idac center for the damages to be assessed on the spot, before the vehicles are sent to the workshop. This reduces the opportunity for the workshop to aggravate the damages. The Idac scheme was intended to apply to all claims, including third party claims.

The Idac centers are actually more convenient for motorists. The centers are open during most hours of the day and night and are a one-stop center for reporting of accidents and assessment of damages. Many motorists who experienced the service of the Idac centres give positive feedback on their convenience and reliability.

Unfortunately, some insurance companies decided to withdraw from the Idac scheme. Without the full participation of the insurance companies, it is not possible for the Idac centers to play its role in controlling the inflated third party claims. This led to the escalation of motor claims during the following years.

In my view, the Idac scheme still represents the best way to control the inflated claims. I hope that the insurance companies will review their position on this matter.

Another possible solution is for the Government to pass a law to make it mandatory for a motorist to lodge a third party claim directly with the insurance company immediately after the accident. This will allow the insurance company to assess the damages and settle the claim, without involving a lawyer. If the claim is in dispute, the owner can then engage a lawyer to handle the case. This is a common practice in many other countries.

Without legislative support, it is a constant cat and mouse game with the dishonest workshops. Insurance managers have to devise many checks and controls to manage the dishonest claims. It is expensive and tiresome.

Singapore has an expensive and wasteful method of handling third party claims, resulting in inflated claims and high legal expenses. It is a blemish on our record as an efficient, transparent society.

Tan Kin Lian