Saturday, September 15, 2007

A flexible product

It is advisable to invest in a flexible product which does not lock you up for many years. This product has no entry or exit charges, apart from a small transaction charge.

Examples of a flexible product:

* saving account
* short term fixed deposits
* no-load investment fund (with no exit penalty).

Examles of non-flexible products:

* traditional endowment and whole life policies
* structured products

The non-flexible products usually has high marketing costs. To recover this cost, the product has to be locked up for many years. If it is terminated early, there will be high charges.

Reduction in yield

If you buy a life insurance policy, you will receive a policy illustration (comprising of several pages) that shows many figures.

You can look for an explanation of the following:

1. Total distribution cost
2. Effect of reduction
3. Reduction in yield

All insurance companies are required to provide them in a common format.

One key figure that you should study is the reduction in yield. It shows how the total distribution cost and other charges impact on your yield.

Here is an example of two plans, for 25 years, offered by the same insurance company. The gross investment yield is projected tobe 5.25% (not guaranteed).

Reduced Reduction
yield in yield
Endowment policy 4.61% 0.64%
Endowment (new) 3.74% 1.51%
If you save $300 a month for 30 years, the difference is as follows:
Net yield Total on
4.61% p.a. $166,600
3.74% p.a. $147,500
Difference $ 19,100

The new product provides an annual payback of 5% of the sum assured from the second year. It has high distribution cost, which reduces the yield.

Lesson: Buy simple products that offer a better yield.

Selecting an investment fund


There are so many investment funds in the market. I need advice about selecting the fund to invest, but the insurance agent and adviser normally recommend only those funds that they they are engaged to sell. Can I expect to get impartial advice? I am quite confused.


You should ask the adviser to recommend a fund that meets the following criteria:

* is a large, well diversified fund
* has low annual fee, i.e. less than 1% per annum for equity fund or 0.5% for bond fund
* have a low upfront charge (less than 3%)
* invest 100% of the monthly savings
* no exit penalties

If the adviser can recommend a suitable fund that you meets your criteria, they will be giving a useful service to you.

The adviser may not be able to recommend a fund that meets all of the above criteria. You have to take the next best choice.

I have recently decided to invest in a Vanguard fund that is based outside of the USA (to avoid US withhholding tax). It is a very large equity fund that has an annual fee of 0.35% and no upfront charge.

The STI ETF in Singapore also have similar features.

People are living longer

REVISED: People are living longer. Many people do not realise the significance of this statement.

Based on the current death rates, a male at age 65 has an average life expectancy of 16.8 years. Most people think that the chance of surviving past 81 years is about 50%. Actually, the chance is much higher.

I looked at the death rates of people in various age groups, as reported in Population Trends, published by the governemnt's Department of Statistics.

Over a period of 25 years, from 1980 to 2005, the death rate fell by about an average of 3 percent yearly. For example, the death rate for 40-45 years was 2.9 per 1000 popuation in 1980. It fell to 1.4 in 2005.

If less people die in each year, more people will live longer. If we assume that this improvement of 3% continues yearly over the next 30 years, the average life expectancy of a male at 65 is 22.7 years (as compared to the current 16.8 years). You can expect to live 6 years longer.

Here is something for you to ponder. You should plan for your CPF savings to last beyond age 85. This is why the Government wants to encourage people to buy life annuity - so that their minimum sum can stretch over a lifetime.

Friday, September 14, 2007

Workshop uses lawyer to make the claim

Hi Mr Tan,

I did not involve in any accident since 1997 but had one recently.

I was also surprised that the workshop involved a lawyer to help get payment from the insurance company. I believe that was not the case ten years ago.

I asked the workshop owner why there is a need for lawyer and he told me that the insurance company will act promptly if they are represnted by a lawyer. If this is true then the insurance companies are responsible for this practise.


Singapore is one of the few countries in the world where lawyers are engaged to make the third party claim. This is expensive and wasteful.

The fault lies mainly with the insurance companies and the regulator. The insurance companies allow the bad practice to continue, and do not take any action to combat it (except for NTUC Income during my tenure).

In many countries, the regulator (ie Government) takes the lead to combat bad practice, when the insurance companies are unable or unwilling to act. They act to protect the interest of the consumers.

Expensive taxi fare

Usually, I take the MRT to Yio Chu Kang station and change to a bus to my home. The bus fare, after the transfer discount, is probably 50 cents. (I did not pay attention to the actual amount).

Today, I decided to take a taxi, as I have a few heavy bags. I thought that the taxi fare will be around $3.

I was surprised that it turned out to be $6.60 (inclusive of a peak hour charge of $2 - which I was not aware).

This will be the first and last time that I take the taxi from the MRT station to my home.

New products from NTUC Income


The extravagant splurging on ads and rebranding is going to make REVoSAVE the most expensive product ever launched.

PAYMYuni has already gone south. Going by the reception by the public it looks it was doomed from its birth. Why? It is a redressed up product with no real benefit. It's a wolf in sheep's clothings. (High commission)

An agent was promoting to me of the flexible options revosave has. I told her, money in my hand is far more flexible. I have more options.

For liquidity I can put into a money market which earns up to 3.5%
If I want to be locked away for many years I can buy a plain vanilla endowment for higher return and higher insurance coverage.

For even higher return I can invest into a RSP which charges 3% but with all my premium invested and not just 36% of my premium as in what I would have paid for revosave.

You see, I can have more to spend on my sunny days and also plenty to meet my rainy days and not forgetting to mention the insurance coverage which is higher than revosave for same premium. I have real freedom and peace of mind.

Thanks to Doc. Money, without his advice I would have been a prey also.


Revosave is similar to (but offer a slightly better return) compared to another product that sells very well in the market.

The popularity of the earlier product may suggest that there are some features that appeal to the consumer. Some people may not be driven entirely by the return on the product.

PayMyUni is an endowment product. It gives insurance protection and a fairly satisfactory rate of return (maybe 3% or higher). It was designed during my tenure as CEO.

However, parents now have another option, i.e to invest in a low cost fund, such as the combined fund, and to buy a decreasing term insurance. Read this FAQ.

Lower rates of commission


Mr Tan,

Did you try to reduce agents' commission during your tenure with INCOME? If you tried, how effective were you? What were the challenges you faced if you tried to reduce the commissions? Why were you not able to overcome the challenges? What do you think that the present CEO can overcome those challenges?


During my tenure, the selling cost for NTUC Income is about half of the rate payable by other insurance companies. The agent gets lower commission. There is no over-riding commision payable to the agency manager. The advertising expenses are kept low.

Due to the low cost, the life insurance products were offered at lower premium rates, or give a better return to the consumers.

The agent can earn a satisfactory income by generating more sales, as the products are easy to sell.

Many of the current products offered by NTUC Income belong to the "old series" and still give good value, compared to similar products in the market.

I have no comments about the pracitce of the new management.

High cost financial products

Dear Mr Tan

I understand that life insurance products in many other countries also involve high commission rates. This is not the case for Singapore alone. Why is this practice so common, in so many countries?


In many countries, the Government give tax incentives to encourage people to save for their future needs. As these incentives are quite complicated, the financial adviser has to guide the consumer on how to benefit from these incentives.

After paying the cost of the advice (ie commission or fee), the consumer will still benefit, as the cost is lower than the tax savings. The adviser is able to add value and benefit the consumer.

This situation does not apply in Singapore, as our tax rate is low and there is virtually no tax incentive for the savings. The high charges payable to the adviser become a burden to the consumer. The products are designed to hide this fact, by making it confusing to the consumer.

Lesson: When there is no tax savings, it is better to buy low cost financial products.

Wednesday, September 12, 2007

Life insurance commission

A senior manager of a large life insurance company in Indonesia told me that the commission rate payable on an endowment policy is 20% of the premium during the first year and 5% during the second year. The total is 25%. For whole life, it can go up to a total of 40%.

The commisison rate for regular premium unit linked business in Indoesia is higher, at about 45% in total.

I told him that the commission rate payable in Singapore for a similar product is about three times. He was surprised. He asked, "How can the product give good value to the customer?"

I have found that many countries have reduced their commission rates on life insurance products. The commisison rates in Singapore are far too high. I hope that the Singpaore market can keep up to the trends in other countries.

Note: Most of the products sold by NTUC Income have commission rates that are much lower than the market. I hope that they will be the benchmark for the other companies to follow.

Monday, September 10, 2007

Dying at home

Many old people prefer to die at home, rather than in a hospital, if they know the death is near. They know that it is costly to stay in hospital and that the medical treatment only prolong the suffering.

I spoke to the administrator of a hospital about this matter. He said that 70% of people die in the hospital, although it is beter for them to be in their home during the last days.

His hospital is able to arrange for a nurse to train the family members on how to handle the last days, and also to pay a visit the patient, when required.

One difficulty faced by the family members is finding a doctor to certify the death. They can get the family doctor to do it, if they have a regular doctor. If not, this can be quite troublesome.

He said that the funeral director can also arrange for their doctor to handle the certification.

Here is a practical advice. When the time is near, it may be better to make prior arrangement with a funeral director. They can handle the nencessary matters and reduce the stress for the family.

Motor accident - file your claim directly

If you are involved in a motor accident and wish to make a claim, you should report it directly to the insurance company, either your own or the insurer of the other vehicle.

Do not ask the workshop to handle the claim for you, as some workshop are involved in a racket and get their lawyer to file an inflated claim for you.

As you have already signed some papers to authorise the workshop and their lawyer to act for you, you are party to the fraud. If the insurer who is paying the claim challenge the claim in court, you may be liable for the legal fee, if you lose the case.

Avoid getting into this type of complication.

Sunday, September 09, 2007

100,000 visitors

Dear Mr Tan,

Congratulations!! for having 100,0000 visitors to your blog.

Once again, thank you for your timely advice on financial and insurance related matters.

Best regards

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