Saturday, September 22, 2007

China stocks are too expensive

There is a report in the Straits Times on Saturday. It mentioned that some of the China stocks are traded in Hongkong and in Shanghai. The price in Shanghai can be up to 9 times of the price in Hongkong. This shows how highly priced it can be.

If you invest in a China fund, are you paying too high a price for these stocks? Will it continue to go higher? Or will it head for a crash?

I prefer to buy these stocks in Hongkong at a fraction of the price in China. When more people in China buy the Hongkong stocks (which are relatively cheap compared to China), the price differential should narrow.

However, the prices in Hongkong may still be too high (based on price earning ratio), compared to stocks in other parts of the world.

Lesson: If you do not know the market, it is best to avoid investing in the over-priced stocks.

Choose the right fund

Dear Mr Tan,

There are so many investment funds in the market. How do I make the right choice? Should I chooce the China and Indian funds that are likely to do well over the next few years? Any advice?


Choose a large, well diversified fund fund that have low upfront and annual expenses. Preferably, chooose an indexed funds, such as the STI ETF (exchange traded fund) or the S&P 500 fund (in America).

Invest 80% of your savings in these funds. For the remaining 20%, you can choose the fund that appears to be exciting, such as the China or India fund. However, you must select carefully, as the stocks in China are now too highly expensive.

Educate the customers

Many insurance products are too complicated. The agent does not spend time to explain the product to the policyholder. They are trained to sell the products to the customer, using emotive reasons.

As a result, many policyholders, including those that are well educated, do not understand the product that they have bought.

This is an unsatisfactory state of affairs. It has been the case for many decades.

I personally share some of the blame for this state of affairs, as I had been involved in running an insurance company for 30 years. At least, I tried to offer simple products at low cost that give better value to the customers. And I did try to give simple explanatory leaflets.

I hope that, in the future, the insurance industry will put more effort in the following:

1. simplify the product
2. educate the customers
3. empower customers to select the product that best suit their needs.
4. reduce the upfront and operating costs, and disclose them to the customers.

Need for financial discipline

Dear Mr Tan,

You advocate the strategy of buy term and invest the rest in your blog.

While I personally practise this as well, I wish to add a word of caution as well.

This strategy is not suitable for everyone. People who are spendthrifts may not be able to execute this strategy well. People who are naturally risk-adverse (to the point they avoid risk) are not suited too.

Another group who is more 'greedy' should not use this strategy as well. This is because they will not win in the emotional game of investment. It is likely their investment portfolio will be overly focused and carry too much unsystematic risks.

I hope you can add this word of caution in your blog and spur some discussion on this topic.

My worry is that people may just read your blog and make a decision without a deeper assessment of whether they can execute buy term and invest the rest well.


Thank you. Let me see how to encourage people to exercise more financial discipline.

A life insurance policy (such as whole life or endowment) is supposed to force people to have the financial discipline. But, it has not worked well.

If the policyholder is not able to continue paying the premium, the policy will lapse, and they will lose part or all of their savings. A high percentage of policies does not reach the maturity date, causing loss to the policyholders.

In my view, the solution is:

* educate the consumer
* design products with low upfront load and low expense ratio
* offer terms that are fair to consumers.

The Central Provident Fund fits into this criteria.

Friday, September 21, 2007

Longevity insurance - What are the Options?

The Straits Times published my article in their Review section on 21 September 2007.

I explained the increasing life expectancy and the high proportion of people that will survive to 85 and 95. This is higher than what most people think.

I estimated the cost at age 55 of buying the longevity insurance which pays $300 a month from age 85 for the rest of the lifetime, as follows:

Male Female
No increase, no refund $6,818 $ 8,759
No increase, with refund $9,824 $11,594
Increase by 2% yearly, no refund $15,137 $19,548
Increase by 2% yearly, with refund $28,923 $32,991

With refund: the original sum is refunded (without interest) on death of annuitant
Increasing payout: the amount increase by 2% yearly from the time of purchase.

I recommend to buy the increasing annuity, with no refund for those who do not have any serious medical problem. For those who are in poor health, they should buy the increasing annuity with full refund.

Life annuity pays out more

A life annuity can provide a better lifetime income, compared to a fixed term annuity.

A male at age 65 can invest $150,000 in the following:
Payable for 20 years $902
Payable for 30 years $709
Payable for life - no refund $929
Payable for life - with refund $827

If he choose a fixed term annuity (20 or 30 years), he will get a monthly payout of $902 or $709 respectively. The money will run out at the end of the fixed term. In the event of death during the term, there is some money remaining that can be paid to the estate.

There is a 52% chance of surving to 85 years and 24% to 95 years.

If he choose a life annuity (with no refund on death), he can get a monthly payout of $929. This payout continues for as long as he lives, but there will be no refund on death.

He can get a bigger payout payable for a potentially longer period under a life annuity. This is possible because those who die earlier leave behind the balance of their money in the fund to pay to those who live longer. This is "pooling of longevity risk".

He can opt to buy an annuity that gives a refund on death during the first 20 years of the balance of 20 years payment. The monthly payout is $827, which is 11% less than the "no refund" annuity.

A female at age 65 can invest $150,000 in the following:
Payable for 20 years $902
Payable for 30 years $709
Payable for life - no refund $747
Payable for life - with refund $728

The payout under the life annuity is lower, as a female is expected to live longer than a male.

Disclaimer: These figures are based on an interest rate of 4% and the population mortality rates, with adjustment for future reduction in mortality. It ignores expenses and profit margin.

This is written to educate the public about the principles of life annuity. They may not reflect the commercial terms that may be offered by an annuity provider.

I used an interest rate of 4% to calcuate the annuity as it is the same interest rate paid by CPF on the retirement account. I hope that CPF can be convinced to offer a life annuity using the same interest rate. There is no additional cost to the CPF. This may make the life annuity to be more attractive.

Does an independent adviser give better value?

Someone frequently posted comments in my blog arguing that an independent financial adviser have a better range of products to offer to the client, compared to a tied agent.

In my view, this is not a priority. More importantly, it is the integrity of the adviser that counts.

Does the adviser (i.e. tied or independent) act ethically in looking after the best interest of the client? Or does the adviser push a product that earns the highest commission?

Within any company, there is a range of products. Some offer better value to the client and pays less commission to the adviser. Others pay higher commission. Which product does the adviser recommend?

When I was in charge of NTUC Income, I made sure that all the products offer good value to the customers, and a fair rate of commission to the agent. Most of the agents recommended these good value products, even today.

Purchase additional insurance

Dear Mr Tan,

I wish to seek your advise on whether I should take up a Limited Living Policy to which I need not pay any premiums after 20 years of retaining the policy. I still enjoy the protection and returns.

Currently I am holding a Foundation policy and a Pioneer policy from NTUC Income. I had this feeling that I was not insured enough so I contacted an agent who ecommended the Limited Living Policy.

I am now seeking your advice whether should I be going ahead with this policy.


Please read this FAQ.

In my view, it is better to buy term insurance and invest the difference in an investment fund, such as the combined fund of NTUC Income.

You can ask the adviser to show the difference in return under both options. You can make a more informed decision.

Thursday, September 20, 2007

Write a will

I gave this suggestion to attendees at my educational talk.

1. Write a will. It will help your family to sort out your financial affairs when you pass away.

2. If you are not sure about your final intention, you can write an interim will now and replace it with a new will later, if your circumstances change. A will can be revoked by a new will.

3. If you do not write a will, it is all right. Usually, the family members will decide on how to distribute the assets through mutual agreement.

4. If there a dispute among the family members (without a will), the estate can be distributed according to the Law on Intestacy.

More importantly, an elderly parent should involve your family members early, in managing the assets, i.e investments and properties. This allows the family members to identify the assets and manage them easlily, following the death of the parent.

Distribute your assets early

I give this advice to attendees at my educational talk.

If a parent has more than sufficient assets for his or her future needs, the parent can distribute some of your assets to the family members early, rather than wait till the parent passes away.

This is how it can be done.

1. Assume a parent has $1 million of assets. Many middle income parents have this sum, inclusive of the value of a property.
2. Take $500,000 to buy a life annuity. It should give the parent more than sufficient for future needs.
3. Keep $150,000 in liquid form for emergency needs.
4. Distribute $350,000 to the children now (when they reach, say, 25 years)

The parent can vary the amounts according to the personal circumstances and the amount of the assets.

The advantages of this arrangement are:

1. No need to pay estate duty.
2. The money is more useful to the adult children now, rather than many years later (on death of the parent).

If the parent does not wish to give a lump sum to a child at 25, the parent can buy a fixed term annuity to pay the money over a period of say, 10 years.

Some attendees told me that they have not thought about this idea before, but they will like to consider it.

Wednesday, September 19, 2007

Reaching age 55

Dear Mr Tan

I will be reaching 55 years old this November. I was encouraged to buy into NTUC Income's annuity by a friend early this year.

However, with all these new govt policies coming out on the deferred bonus and interest rate on CPF, may I seek your advice whether I should still go for Income's annuity or not? I really appreciate your expert advice on this.


It is better to keep your money in the CPF retirement account to enjoy 4% plus 1%.

You can decide at a later date, when you are 62 years old, whether to invest in a life annuity from NTUC Income.

Coverage under Medishield and hospitalisation plan

Hi Mr Tan,

My husband is covered under the Government's Medishield plan. He is also covered under my company's hospitalisation plan for which I pay only 50% of the premium. Is this double insurance? Should I continue to insure him under my company's plan?


There is double insurance for Medishield and the hospitalisation plan.

I suggest that you ask the insurer to explain to you the extent of the overlap. If the overlap is significant, there is no point for you to pay two premium. If the overlap is minor, then it is all right to keep the hospitalisation plan (as you only pay 50% of the premium).

You can see if the deductible under Medishield is covered adequately by the hospitalsiation plan.

Selecting a Shield plan


The situation is between the gap in Shield Plan for the Deductible and Co-insurance that is difficult to balance. The other scenario is one has employer benefit, and Shield Plan acts as a backup.

Shield Plan is a primary need. If one has not other coverage, look at covering the Deductible and Co-insurance. Insurers like Ntuc Income has Plus Rider that covers the Deductible and Co-insurance gap nicely.

Then again, some people do a low plan, example Plan Basic and seek private hospital care, then there will be a different scenario.

Some time it is difficult to decide on type of level of coverage unless one is sure which type of medical care one will need. Generally, most will be comfortable in B1 or B2 government restructured hospital care.

Most parents will prefer private hospital care for their young children. Some ladies, like privacy when come to woman's problem and sough private medical care.

Unless one is able to be firm on the need, some time overlapping cover may be useful in such situation.

But example if one has Plan Preferred with Rider, this will cover mostly all types of care, as this is private hospital level of plan.

Thomas Phua

Avoid over-lapping insurance policies

Take this example of a policyholder who has two medical insurance policies:

1. A Shield policy that pays 90% of the hospital bill in excess of $1,000.
2. A medical policy that pays 100% of the bill up to $5,000

The policyholder incurs a hospital bill for $8,000. The claimable amount is:

1. Shield policy: 90% of (8,000 - $1000) = $6,500
2. Medical policy: $5,000

The policyholder can only claim up to the bill of $8,000, i.e. $5,000 from the medical plan and $3,000 from the Shield plan. But, he had to pay a full premium for each policy.

It is better to avoid over-insurance through two over-lapping policies.

Pooling of risks

Insurance works on the principle of pooling of risks.

Take an example. There are 100,000 houses in a community. Each year, an average of 100 houses are totally destroyed by fire or other perils. The chance of a total loss is 1 in 1000 houses.

Each owner cannot take the risk of a total loss of his house. Suppose all the owners agree to participate in an insurance scheme, they only need to pay a pure premium of $1 to cover every $1,000 of the value of the property. A property worth $300,000 will need a premium of $300.

The insurance company will probably add a loading to the premium to cover the operating expenses and a profit margin, say $450. Each owner will probably find that it is worth paying a premium to cover the risk.

The insurance policy usually cover other losses as well, such as partial loss or damage caused by flood, burglary and other perils.

The insurance company will work out the total claims based on its past claim experience, and compute a premium rate for every $1,000 of insured value. A loading is added (for expenses and profit) to obtain the gross premium charged to the policyholder.

In practice, the risks are divided into separate groups according to the likelihood of a claim, to obtain the premium rate for each group.

Insure against big losses

You should buy insurance against a big loss with a small chance of occurence. Look at these two cases:

Case 1:
Potential loss is $100,000. Chance of occurence is 1%. Expected cost of claim is $1,000. Premium (allowing for expense and profit margin) is $1,500.

Case 2:
Potential loss is $2,000. Chance of occurence is 50%. Expected cost of claim is $1,000. Premium (allowing for expense and profit margin) is $1,500.


For case 1, you cannot afford to bear a loss of $100,000. So, it is worthwhile to pay a premium of $1,500 to cover this risk.

For case 2, you can afford a loss of $2,000. It is not worthwhile for you to pay a premium of $1,500 to cover this risk, as you have to pay $500 more than the expected cost of claim (of $1,000).

It is not necessary to take insurance against small losses. It is better to bear this risk on your own.

An example is the deductible under a Shield plan. It is not necessary for you to buy insurance for this deductible, as you can take this risk on your own (or pay out of Medisave savings).

Tuesday, September 18, 2007

People are living longer

Based on the mortality rates in 2005, the life expectancy at 65 is 17.7 years for males and 20.7 years for females.

Over the past 25 years, the mortality rates have been falling by an average of 3% yearly.

If this trend continues, and there is every reason to believe that it will, the life expectancy at 65 is expected to increase to 23.4 years for males and 27.5 years for females.

52% of males at 65 are expected to live to 85 years and 24% to 95 years. The proportion for females are 65% and 32% respectively.

Based on death rates Allow for decline in
in 2005 death rate, 3% yearly
75yrs 85yrs 95yrs 75yrs 85yrs 95yrs

Male 77% 39% 7% 80% 52% 24%
Female 87% 53% 11% 88% 65% 32%

Note: The calculations are based on the mortality rates taken from the population, with projection for future improvement in mortality.

Funds with Low Upfront Charge

In America, you can invest in "no-load" funds. They do not have any upfront charge. 100% of your money is invested.

In Singapore, the usual upfront charge is 3% to 5%. Some unit trusts offer promotions that reduce the upfront charge to less than 2%.

I like to ask visitors to my blog to submit a comment. Are you aware of any unit trust that offer a upfront charge of 2% or lower? Give the following details: name of unit trust, distributor, website, upfront charge, expense ratio, size of fund.

Monday, September 17, 2007

Diversification and liquidity

Which will yield a better return over the next 20 years?

* Genting International Shares
* Freehold private property


I prefer the STI ETF as it is well diversified (compared to an individual share) and has better liquidity (compared to a freehold property).

Retirement Planning

Dear Mr Tan,

I am in my early 50s and have $300,000 in my CPF ordinary account. What is your advice for my retirement planning?


I suggest that you invest your CPF ordinary account in a large, well diversified, low cost investment fund.

You can select the following:

* STI ETF traded on the Singapore Exchange
* Combined fund from NTUC Income

As the stockmarket is at a high level, you should make this investment in lots over the next 12 months. Read this FAQ.

Education in Singapore.

Education is an important issue to everyone. What we are depends on how well educated we are vis a vis the opportunities given to us or how we get out of the rut we sometimes find ourselves in.

Dr. & Mrs. Lee Kum Tatt have both spent a good part of their lives in various capacities educating themselves, their family members, our fellow citizens and others. They are going to share with us some of their inspiring experiences in education. You can read about this in Dr. Lee’s blog.

Questons on Life and medical insurance

Q: My medical bill is covered by the Government. I am on the pension scheme. Should I be covered for Medishield under CPF?

If you are covered for medical benefits by the Government for a lifetime, there is no need for you to buy Medishield or any of the private Shield plan. You can save on the premium.

I understand that the Government scheme may require you to make a small co-payment for some of the charges. This co-payment is small and can be paid out of your savings. There is no point in buy a Shield plan to cover the small co-payment, as the premium charged is out of proportion to the coverage that is provided.

Q: I have a whole life policy. I am 35 years old. Should I liquidate and convert to a term assurance?

It is better for you to keep the whole life policy, as you have already incurred the upfront expenses that is deducted to pay the commission to the agent.

In the future, you may have to increase your life insurance protection. At that time, it is better to buy a term insurance or a decreasing term insurance for the additional cover.

Q: I bought a Living and a Career policy from NTUC Income What is the best time to redeem these policies?

I suggest that you continue this policy until your retirement date. At that time, you can decide on how best to deal with these policies. You can read the tips contained in paragraph 10 in this FAQ.

Questions on Investing in funds

Q: I invested in a China equity and balanced fund. What are the prospects after the Beijing Olypmics?

Share prices in China, traded through the Shanghai exchange, are too expensive. For many shares, the price in Shanghai is more than two times of the price of the same share traded in Hong Kong. It is too speculative. Be careful.

Q: How can I buy government bonds?

You can buy government bonds through a bank or stockbroker. You can get information about the price and yields of government bonds from the MAS website.

The current yields are:

5 year 2.44%
10 year 2.7%
15 year 3.09%
20 year 3.24%

Remember. If you invest in government bonds, the yield is locked up for the period. You will not enjoy any future increase in yield. But, you will not suffer any future reduction.

Q: Is it better to invest in a fund using single or regular premiums?

Many insurance companies levy higher charges for investing in regular premiums. It is usually better to invest with single premiums, including recurring single premiums, to enjoy the lower charges.

If the fund have the same charges for single and regular premium, it does not matter which mode you choose.

Q: How can I invest in Singapore equity? Global equity?

NTUC Income has several funds with low expense ratios. You can ask their insurance adviser or visit their business center to talk to a salaried consultant. See the link on the right of my blog.

You may be able to find some unit trusts with low expense ratios as well. A financial adviser can help you.

Q: Is it a good time to invest now? Should I wait for the peak to be over?

It is difficult to make this judgement. I find the current level to be rather high, and am willing to wait for a lower level. In the meantime, I have my savings in short term deposits to earn 2%.

Usually, the stockmarket performs well during the last quarter of the year. I will probably invest early next month.

Q: My financial adviser says that it is good to switch investments (without any charge) to maximise my return. Is this true?

It is usually difficult to make this type of decision. If you do, take a long term view. Do not switch just a few percent change in the unit price of the fund. In a voltile market, the price can change by up to 10% or more, without affecting the underlying trend.

Most people invest for the long term, and do not bother about making the switches.

Q: I like to invest in a fund. How do I find a reliable broker?

NTUC Income has several funds with low expense ratios. You can ask their insurance adviser or visit their business center to talk to a salaried consultant. See the link on the right of my blog.

You may be able to find some unit trusts with low expense ratios as well. A financial adviser can help you.

Questions on Overseas property

Q: What do you think about investing in land in UK. Is it safe? Are the returns good?

I am not familiar with the UK property market. I read that the property values have increased to a high level over the recent years. There are also reports about the inability of home owners to repay their mortgages, similar to the sub-prime problem in America.

Be careful. It is best to avoid investing in an asset that you are not familiar with. It is more risky, if you are investing overseas.

Q: I am interested to invest in an apartment in Australia. I can get a return of 10%. Is this a good investment?

I understand that property values in Australia have increased significantly in recent years. Is the price too high now?

If you invest in an overseas property, you must be aware of the following:

* It may be difficult to find a tenant.
* The property may be vacant for part of the year.
* You have to deduct the agent fees and other expenses from the rental income.
* Many people find the additional expenses to be costly and a hassle.

If you have a family member that is using the apartment for a few years to stay in, it may make the property more attractive. At least, you can save on the rental that you have to pay for a rented property. But, you have to consider what to do after that period.

Be careful. It is best to avoid investing in an asset that you are not familiar with. It is more risky, if you are investing overseas.

Sunday, September 16, 2007

Questions on Life Annuity

Q: What is the monthly payment for $400,000 to buy an annuity, with capital refund and without capital refund?

Some typical rates can be obtained here.

Q: Does the medical history affect the payout under an annuity?

The insurance company assume that all annuitants are in good health and have a longer lifespan. You should buy a life annuity only if you are of fairly good health.

If you are in poor health, you should not buy a life annuity, as you are likely to receive the payout over a shorter lifespan.

Q: Is there any difference due to timing?

If you buy a non-participating annuity, the payout that you get may vary according to the prevailing interest rate at the time of purchase.

For a participating annuity, the payout is likely to be the same, as the investment yield will be reflected in the bonus payable on the annuity.

Q: Why does a male get a higher payout from an annuity, compared to a female?

A female annuitant has a longer lifespan, and will receive a lower payout, compared to a male annuitant.

Q: I give $500 to my parents monthly. Is there a better way to stretch my money for my parents?

If you have a capital sum, you can buy a fixed term or life annuity for your parent. It may offer you a better return, compared to short term interest rate.

Q: Is it better to buy an annuity at 55 or at 65?

It depends on your personal needs. If you buy the annuity at 55, you will get a lower payout as the annuity will be paid for a longer period. If you wait until 65, you get a higher payout.

Talk to teachers on Managing your Finances

I gave a talk to teachers about Managing your Finances. there was a lively "question and answer" session.

More than 20 questions were submitted by the participants covering insurance, investments, overseas properties, life annuity.

I have answered them at the talk. I have also posted these questions and provided the answers in separate postings on this blog.

Waive legal fees of $45,000


It is indeed commendable and magnanimous of NTUC Income CEO to waive the $45K against a Mr. Lock. (I am confident that Mr. Tan Kin Lian would have done that too. He did it many times during his tenor).

It is an act of compassion. It is far more power than all the marketing efforts and money spent in the recent months to repackage Income's image. It has demonstrated that it cares for the people, the policyholders. Indeed it is well capitalised and kudos to the CEO.

I am sure the consuming public will be touched by this. It will be deeply etched in the their mind. This is a new positioning and revolutionary. I am one who has been critical of Income is also touched.


I am not familiar with the facts of this case, so my comments may be out of context.

I read from the newspaper report that it was Mr Lock who took the case against NTUC Income. He was represented by his lawyer.

I do not know why it was necessary for his lawyer to take this case to this extent and incur high legal fees for both parties. It was reported that Mr Lock still has to settle a legal bill of $80,000 from his lawyer.

The legal fees is clearly out of proportion to the amount of a few hundred dollars that was being claimed.

Many people were not aware about the high cost of legal fees. They engage a lawyer without thinking about the cost, in the belief that it will always be borne by the insurance company.

I hope that the waiver of the legal fees does not encourage people to continue with the old habit.

Lesson: Do not engage a lawyer for a small claim. If the matter gets complicated, the legal fees can cost a lot of money. Try to settle any dispute directly with the insurance company.

Simple facts about life annuity

There is a lot of discussion about life annuity. Here are some simple facts.

A life annuity is a contract for a customer (annuitant) to pay a lump sum into a fund and to receive a monthly payment during his or her lifetime.

The amount of the monthly payment depends on:

* The amount paid to buy the annuity
* The future yield on the investments of the fund
* The future lifespan of the annuitant
* The expenses and profit margin of the insurance company

An annuity provides two valuable services for the annuitant. It frees the annuitant from the hassle of investing the money for many years. It allows a pooling of the longevity risks, as the annuitants who die earlier leave behind the balance of their money to pay the monthly payment to the annuitants who live longer.

Should you keep your minimum sum in the Central Provident Fund or buy a life annuity? Should you buy a life annuity with your personal savings? What type of annuity should you buy?

You can get some simple facts and tips from this article.

Future bonus of NTUC Income

Dear Mr. Tan,

From my personal experience with (name of company), I think their agents and overheads are very "well fed".

I bought their investment product. From their annual report, most or all of the funds are put into fixed income instrument. At the end of the tenor, I got less than the initial amount I put in despite that it is a guarantee product (the agent did not mention the high distribution cost upfront).

After which, I never bought or like anything from that company.

Now, with the change of CEO, I am quite worry about my future insurance bonus with NTUC Income. I think you are still the best so far.


I hope that NTUC Income will continue to operate on low cost, and for the benefit of its policyholders. I also have many policies with NTUC Income. So far, I do not have much concern.

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