Saturday, November 11, 2006

High commission for life insurance products

Hi Mr Tan,

I enjoyed reading your blog.

You mentioned that some insurance products have high charges that take away 2% to 3% from the annual yield. Is this bad for cosnumers? Can a consumer buy directly and avoid this high charge, especially the high rate of commission paid to the agent?



Dear TSB

When life insurance was first introduced more than 100 years ago, the government (in most countries) offered a tax incentive for people to buy life insurance. The premium paid towards life insurance is deducted from taxable income. The consumer is able to enjoy tax savings.

The tax savings help to offset the high charges and still give a fairly attractive return to the consumer. The high charge was required to train and pay the agent to advice the consumer about the value of this product.

About twenty years ago, most governments withdrew the tax incentive. The high charge become a burden to the consumers. Many insurance companies continued their old practice to pay high commission.

They trained their agents to convince customers about the "value" of life insurance, but they did not try to reduce the cost to the consumer.

NTUC Income is different. We reduced the cost to the consumer significantly. Hence, our deduction from the yield is lower than the market. Our customers are able to get a much better return from us, due to our lower charge.

If you are investing for the long term, the lower charge can give you a lot more on the maturity of your policy.

Diversified funds with low fees

Someone asked me, "What are the large, diversified funds with low fees available for investments?

To my knowledge, these are the available funds:

- combined funds from NTUC Income (with annual fee of less than 1%)
- ST Tracker fund available in the Stock Exchange (annual fee of 0.3%)
- indexed funds available in America (annual fee of about 0.2%)

I have invested most of my savings in the combined funds (from NTUC Income) and the ST Tracker fund (which I have now withdrawn).

Recently, I investigated about investing in the indexed funds in America. It seems that they are not allowed to market in Singapore, due to some regulatory constraints.

So, most of my investments are now in the combined fund.

I withdrew my investment from the ST Tracker Fund becuase it is invested solely in Singapore and the market is quite high. I have re-invested it temporarily in the money market fund (ie flexi-cash) and will wait for the right time, within the next 12 months, to re-invest it in the global equity fund.

NTUC Income funds will continue to perform well

A policyholder, whom I know personally, had a large amount of savings in NTUC Income's funds.

He met me last night and told me, "Kin Lian, I have a lot of money invested in NTUC Income because of you. I know that you will take care of the interest of the policyholders. Now that you are leaving NTUC, shall I keep my savings with NTUC?"

I told him, "It should be all right. The current general managers will continue to run NTUC Income. The structure has been in place, to take care of the interest of our policyholders. After leaving NTUC Income, I will keep my investments with NTUC.

If NTUC Income changes its focus in the future, and acts against the interest of its policyholders, I shall withdraw my investments. At that time, I shall alert you and other policyholders. But, I don't think that this will happen."

FAQ: Financial Planning Tips

1. How much should I save for my retirement

You should save 10% to 15% of your regular earnings for your retirement. This is separate from your savings to pay for the purchase of your home or your children's needs.

You can count your savings in the Central Provident Fund (excluding the portion used to pay your home loan or set aside for medical expenses) as part of this savings.

If your net saving in the Central Provident Fund is inadequate, you should make additional savings for your retirement. Most people try to save at least 10% of their regular savings, in addition to their Central Provident Fund savings.

2. How much life insurance do I need

If you have dependents, you should have life insurance for 5 to 10 years of your earnings. If you earn $30,000 a year, you should have life insurance for $150,000 or more.

It is better to buy a decreasing term assurance. At age 30, you can buy a 30 year decreasing term assurance for $150,000 for only $165 a year (male) or $115 a year (female). This insurance covers you for $150,000 during the first year and reduces by $5,000 in each subsequent year.

After 30 years, you will probably have accumulated sufficient savings to take care of your family or your own future needs. By that time, life insurance is not necessary.

If you buy a level term assurance to cover $150,000 for 30 years (i.e. the insurance does not reduce), the premium is $280 a year (male) or $195 a year (female).

3. How should I invest my savings

You should invest in your savings in a large, well diversified, equity fund. An equity fund can give you a higher return compared to other types of investments, such as bonds or cash.

By investing in a diversifed fund, you reduces the risk of loss from a few bad investments. As the other investments may perform better, the average return for the fund should follow the market.

You should also invest for the long term, i.e. for 10 years or more. The investments will perform very well in some years (e.g. give a return more than 15%) and may perform badly in other years (e.g a negative return). By investing for many years, you will average out the good and bad years.

Over the past 20 years, the global equity market earned an average return of 10 percent per annum. In the future, the return may be more lower, say 6% to 8% per annum, but it is still very attractive.

You should also choose a fund that have a low upfront fee and a low annual fee. This allows you to keep most of the market gains. You should not allow the fund manager or the financial adviser to charge high fees, as they have to be paid from your investment gains.

If you invest in a fund that have low fees, compared to a fund with high fees, the difference in the your return can be as much as 20 percent over a period of 30 years.

NTUC Income offers several large, well diversified funds with probably the lowest fee in the market. You can choose an equity fund or a combined fund (i.e. equity and bond).

4. Should I buy a whole life or endowment policy

An endowment or whole life policy provides the protection and savings in a bundled product. It gives a modest net return of about 3% to 4% per annum. It is inflexible, and requires you to pay the premium regularly over the duration of the policy.

Many people prefer a more flexible plan and earn a higher return.

You now have the option to buy a low cost term insurance to cover your protection needs and to invest your savings in an investment fund. You have flexibilty to change your savings and to make withdrawals, without penalty. You can also change the investment fund.

5. What age should I retire

You should work for about 40 years, so that you can accumulate sufficient savings to meet your financial needs during the next 15 to 20 years of your life. Most people start work around age 25. They should aim to retire at around age 65.

If you save 10% of your earnings and invest wisely, you should have sufficient savings for a basic lifestyle. You should save 15% of your earnings, if you aim to have a more comfortable lifestyle during retirement.

At the time of retirement, you should have accumulated savings representing 6 to 10 years of your earnings, plus a fully paid home. If your annual earning is $50,000, you should have accumulated savings of at least $300,000.

If your accumualted savings is inadequate, you should work a few years longer. If you have to retire earlier, you should accept a more modest lifestyle.

It is better to save a larger portion of your earnings, if you can. Do not spend too much on your home, car or other expensive items.

6. Where can I get financial advice?

You can visit our business center and talk to our salaried consultants. You can also talk to our insurance adviser, who can visit your at your home. The financial advice is FREE.

Tan Kin Lian
Chief Executive Officer
NTUC Income

Financial Plan for Teenage Children

Dear Mr Tan,

1) My son is 21 yrs old. In year 2009, he will go to university. I plan to put aside of $30,000 for him to earn as much interest as possible. What should I do? Buy investment fund, endowment or bank FD?

2) My daughter is 17 yrs old. She will go to university in 2009. I also wish to set aside $30000 for her. What should I do?

3) I want to start saving habit for them now. I can either pay monthly for them for few years and next time they continue on their own. Or I can put now additional $10.000 for investment or saving. After a few yrs they can continue to pay.

Can you advise me what to do?



Dear TBC

For short term savings, you can choose the following:

- fixed deposit from a bank (earns about 3% per annum, but locked in for the term)
- flexi-cash from Income (earns about 2.5% to 3% per annum, changes with money market, can be withdrawn without penalty).

My wife recently had $50,000 of fixed deposit matured. She placed it in the flexi-cash from NTUC Income. As this is flexible, she may re-invest in an investment fund at a later date, when the market corrects downwards.

For long term savings for your child, I recommend our Ideal plan.

Look at the FAQs:
Ideal Plan

I will arrnge for our product specialist to call and advise you.

Tan Kin Lian

Friday, November 10, 2006

High cost of structured product

Someone asked me, "Mr Tan, what is the underlying value and risk of a structured product? Why has it generally performed badly for the investors?"

Here is my answer:

1. The product arranger (also called the underwriter or issuer) designs the product to earn an attractive fee. Generally, they do not take any risk. Most of the risk is eventually shouldered by the investor.

2. The distributor (usually a few banks) earns an attractive commission to sell the product. They give a sales quota for their marketing officer to sell the product to their customers.

3. My guess is that the charges paid to the arranger and distributor could amount to 10% of your investment.

4. Usually, the investor shoulders most of the underlying risk of the investments. In some structure, a portion of the risk is transferred to another party, but it comes with a cost, which as to be paid to the counter-party that accepts the risk. The counter-party is usually a sophisticated financial institution that can price the risk to earn a big profit margin.

5. This complicated structure adds to the cost of the product. If a safe investment can earn 3% per year, the investor can earn slightly more than 15% for 5 years. After deudcting the cost (say 10%) on the structured product, the eventual return to the investor will be only 5% for 5 years (ie 1% a year). After investing for so many years, many people find that they get a poor return, from a low risk product.

6. Some investors did make a better return (say 10% to 15% for a few years) on structured product which carries a high risk. However, if they had invested in the shares directly, their return would have been much higher. For example, I earned a return of 60% on the ST Tracker Fund during the past three years.

Lesson: Do not pay the high cost of a structured product. It does NOT benefit the investor.

Thursday, November 09, 2006

Save in Ideal plan now and buy a life annuity later

Dear Mr Tan

I'm an Income policy holder. I've always believed in insurance, and understandably, annuity too.

Can I buy an annuity now even though I'm still working? I expect to continue working for another decade or two.

I want to make sure I will have more set aside when I retire to ensure a higher standard of living. My current CPF savings is not enough to ensure a high quality of lifestyle.



Dear MJ

My advice is to save and invest in our Combined Fund for the next 20 years.

You can use the accumulated savings to buy a life annuity after you have stopped working. More details are available from:

Tan Kin Lian
CEO, NTUC Income

Term insurance sells very well

What is the best way to get a large life insurance cover, and pay a very low cost?

Buy term insuance. NTUC Income offers term insurance (called i-Term) at the lowest rates in the market. It is well received.

It covers death from accidents and illness. It also covers permanent total disability.

The i-Term is well received by the public. About 1,900 applications were received over the past 6 months. This is THREE times of the average for last year.

Here are the reasons for its success:

- Simple application process. Can be submitted through the internet.
- Best value. The premium is about 30% cheaper than similar products in the market


By paying a lower premium for your term insurance, you can invest the rest of your savings in a large, well diversified, low charge fund to earn an attractive return (much higher than a traditional life insurance policy).

Invest your savings

Do you want to retire at age 54?

A newspaper survey said that Singaporeans want to retire at age 54 (on the average).

Sorry, this is not possible for the ordinary working person. You can retire at an erly age only if you come from a rich family or have a very high income.

A person who starts work at 25 should work and save for 40 years, until age 65, to have sufficient money to live for another 15 years (to age 80). You should save at least 10% of your earnings. The savings for your home or children should be separate items.

A saving of 10% is just sufficient for a basic lifestyle in retirement. If you want a more comfortable lifestyle, you should save at least 15%.

If you are not able to save sufficiently, you should be prepared to work longer, say up to age 70 years, or to live modestly.

You must invest your savings wisely, to get a good return for the future. You should invest in a product that gives you a fairly attractive return, such as a large, well diversified, low charge fund.

Do not invest in products that pays high commission to distributors (e.g agents) and make large profit margin for the financial institution. Take care of your own financial future. Do not allow other people to earn a lot of money at your expense.

Ideal Plan

Why structured products are risky

I wish to give a hypothetical example of a structured product, to show why the product can be risky to consumers. Some structured products in the market work in this way.

An investor who wish to have a safe guaranteed return for 5 years can expect about 3% per annum, by investing in a government bond.

A structured product can be designed to give a return of, say 5% per annum. To give the enhanced return of 2% per annum, the product has to give a potential loss of slightly more than 10% per annum (ie 2% p.a. compounded for 5 years) on maturity.

To hide this potential loss on maturity, the product will pay back 100% on athe principal on maturity under certain events, but will define some events (with a 10% or higher chance of happening) where the investor lose the entire principal.

The investors may not realise that they are taking a real risky bet.

The actual risk of losing the entire principal could be as high as 20% in this example. The arranger has to package this higher risk, as they wish to have an additional margin to pay the distributor (ie the bank that sells the structured product) and to keep a profit for the arranger (who designs the structured product). The total charges can be as high as 10% of your principal.

If you wish to have a safe return, are you really prepared to take a 20% chance of losing your entire principal?

The advertisement warns investors of the risk of losing the entire capital on the occurrence of certain events. You should take this warning seriously. Do not trust the words of the marketeer that the risk is "very small". It can happen and may be quite high, ie 20% or higher.

Wednesday, November 08, 2006

What return can you expect from NTUC Income's funds?

Dear Mr Tan,

I read your article in eNN.

On lesson 1, I was also told not to invest in srructured deposits too from my financial advisers . However what have you got to say about guanrantee returns of structured deposits from the banks. The minimum is at least 2% per annum and better than normal savings of less than 1% interest (maybe 0.5%).

For Lesson 2 and your best choice, what I can see is the difference perhaps could be the difference in charges. Other than that, the large, well-diversified fund you mentioned has its own risks attached. By the way, what returns are we talking about for those fund coming from ntuc income.



Dear TKS

If you wish to invest in safe investments that give more than 2% per annum, and have full flexibility, I suggest the Money Market Fund.


I have recently invested $100,000 in this fund to earn an interest rate of around 2.5% to 3%. The interest rate will fluctuate with the money market. I will re-invest this money in the combined fund (equity and bonds) some time next year, if the market has corrected from the current level.

If you wish to invest to earn a higher return, I suggest that you consider our Combined Fund.


Tan Kin Lian

Do not invest in structured products

Dear Mr tan

Thank you for your advice on eNN. It is a good e-newsletter. I like it. Brief and informative.

Yes, until now, I don't understand structured deposits; and the golden rule
of investing - invest not in what you don't understand....

Unfortunately, too many are trapped by marketing talk. It goes beyond any doubt that a well prepared marketing speech would have most objections taken care of, and
consumers stand little chance to "resist the good deal".

Luckily at my company, after having train about "closing a sale"; I have learnt also
"NOT TO DECIDE" immediately without thinking through. Takes discipline and
courage to walk away...



Best Fund to Invest

Dear Mr Tan

What are some of the best funds to invest now?



Dear NN
I recommend a large, well diversified, low cost fund. The Combined Fund (Growth) from NTUC Income is such a fund.

Combined Fund

It is invested in the four core funds with a total of $3,900 million of assets.

For an investor who is worried that the stockmarket is too high now, I suggest that the money be invested in the Money Market Fund now and be invested into the Combined Fund in a few installments.


Tan Kin Lian

What are structured products?

Dear Mr Tan

I am a NTUC policy holder. I just read what you have written on eNN. Can you kindly explain to me what is structured deposit?



Dear LSK

You can read about structured deposits in

Tan Kin Lian


Tuesday, November 07, 2006

Policyholders enjoyed up to 15% higher return on their policies

NTUC Income is the first insurance company to publish its ACTUAL RETURN on its endowment policies that matured in 2006.

The return was 4.4% p.a. for a 10 year policy, 5.2% p.a. for 15 year policy and 6.2% p.a. for 20 year policy. This is quite an attractive return.

The other life insurance companies are embarrassed to publish their actual returns.

Compared to similar plans offered by other insurers, the return from NTUC Income is up to 15% higher. This is possible due to lower commision to agents, lower expenses and lower distribution to sharehholders.

If the policy that you have taken from another insurer paid you $50,000 on maturity, a similar policy from NTUC Income paid you up to $7,500 nore.

It may be too late for you now. But tell your children. Put their savings with NTUC Income and earn up to 15% more.

AIA Choice Life policyholders has to pay premium for longer period

Someone sent this message to me.

AIA's agents have sold several ten thousands of life policies on the "promise" that the premiums will stop after a certain number of years.

Now, the policyhlders are told that they have to pay the premiums for many more years.

The agents earned high commission rates to sell these policies. Should they refund their high commission back to the customers? Should they earn high incomes at the expense of their customers?

A few years ago, it was the Financial Guardian policies sold by AIA. Now it is the Choice Life. What else can be expected in the future?

Sunday, November 05, 2006

Two pitfalls to avoid in your investments

So many people have fallen for these bad financial products. And they learned a painful lesson. It has been very costly for them.

Lesson 1.

Do not invest in structured deposit. They are structured to look attractive, but are usually quite deceptive. The product creator and distributor made high profit for themselves. Their large charges are hidden in the complicated structure. You will only find out after a few years. By that time, you will realise that most of the gains have been eaten away by the charges. If the market perform badly, you have to carry the loss.

Lesson 2.

Avoid investing through financial advisers. They will be able to find unit trusts that perform well in the past (from more than 300 unit trusts available in the market). The probem is that these unit trusts are NOT likely to perform well in the future. These unit trusts are likely to have high charges (2% to 3% per year). The financial adviser recommend them to you, because they get a trailer fee of 0.5% to 1% every year. This comes from your earnings.


Invest in a large, well diversified fund with low charge. Less than 1% per annum. This is available from NTUC Income. Many people have benefited for it. Join them.

An expensive lesson

A friend told me this story. She invested $25,000 in a "vitamin account" offered by a bank. The account paid 4% interest. After one year, the value of the account plus the interest paid is still LESS than the principal invested. There was no gain for the past one year.

She also invested in the Combined Fund managed by NTUC Income. It produced a return of about 10% during the same period.

She asked the bank why the return was still negative. The bank officer advised her to wait longer.

My friend now realised that the bank had high charges in the "vitamin account". Her money is locked up for 6 years. She does not know when she is going to get a decent return.

It is an expensive lesson for her.

Most structured deposits being marketed by the banks are similar to this product, namely:

- high charges (not disclosed)
- a complicated formula on calcuting the value of the investments
- a locked-in period

I wish to advise all consumers. Do not invest in the structured products. They are to your disadvantahe.

Invest your money in a large, well diversified fund, with low charges (less than 1% per annum). You will benefit in the long term.

Financial Adviser earns trailer fee of 1% annually

I met an agency manager from another company (not NTUC Income). His top adviser wants to leave him to join an independent financial adviser firm. The IFA firms pays him a trailer fee of 1% per annum on the total sum invested.

This means that the customer probably has to bear a charge of 2.5% to 3% on the amount invested. This is required to pay the trailer fee to the adviser and to pay the fund for managing the assets.

The total fee of 3% is FAR TOO HIGH.

Over the past 10 years, the average return on equity is about 7% per annum. After deducting 3%, the investor gets only 4% left. This is insufficient for the risk.

For a fund managed by NTUC Income, the total deduction is less than 1% per annum. If our fund earns 7%, the investor gets 6%.

A difference of 2% over 10 years amounts to more than 20%. You can get a much bigger payout from NTUC Income, because our deduction is modest. Most of the return goes back to you.

Over a long period, most funds will earn about the same return for the same type of risk. There is very little difference between the performance of good fund managers. It is better to invest in a large, well diversified, low charge fund (ie the fund offered by NTUC Income.

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