Friday, March 07, 2008

Poll: Preferred type of term insurance

If you have young children and can afford only $30 a month for life insurance, which do you refer as the benefit payable on premature death during 25 years ? (31 replies)

9% - $150,000
35% -$360,00 reducing by $14,400 yearly
54% - monthly income of $1,500 payable for remainder of 25 years

Subprime losses could reach USD 400 billion

I saw a few estimates that put the subprime losses as USD 400 billion.

Here is my guess about how this number is arrived:
number of houses in USA - 100 million
proportion that are subprime, say 20%
number of subprime mortgages: 20 million
proportion in default: 50%
defaulted mortgages: 10 million
average loss per default: USD 40,000
total subprime losses: USD 400 million

My guess could be wrong. For example, it may be fewer mortgages with a larger average loss, or more mortgages with a smaller average loss.

The large financial institutions have reported losses under subprime mortges in the magnitude of USD 10 million. If this is the average loss, a total of 40 financial institutions would make up the total of USD 400 billion.

High charges

Dear Mr. Tan,

In my foolishness, I bought an ILP from company X. After paying premiums for a few years, I was surprised to find out that my investment is still way below the invested amount.

I asked the agent for an explanation. He pointed out to me, from the policy contract, that the percentage of my premiums that was invested during the first few years, only a certain percentage was invested (starting at 20% for the first year). This was not explained to me when I bought the policy.

Why should the insurance company take away so much of my premiums? I wish to get out of this policy, but I will have to lose more nearly two years of my savings. What is your advice? Should I cancel the policy?

If you have not been property informed about the charges, you can make a complaint to this organisation,

The insurance adviser is required to explain to you about the key points of the contract and to recommend a financial product that suits your needs. If he or she has failed in this duty, you should make a complaint.

If more consumers are willing to come forward, this will help other consumers from being misled.

Credit card debt

Dear Mr Tan,
I have huge credit card debts of up to $55k. I am facing a lot of stress and have made my parents very upset. Right now, I am waiting to file for bankruptcy. Is this the right way?

I suggest that you approach this non-profit organisation to seek their advice and assistance:

Earnings of Global Insurers

From Economist Magazine
There were more poor earnings from the insurance industry. Swiss Re's quarterly net profit fell by 87%, compared with a year ago, because of subprime losses. And AIG posted a $5.3 billion quarterly loss on the back of write-downs it flagged last month. It was the biggest-ever such loss at AIG, which traces its history back to 1919.

Growth Policy

Dear Mr Tan,
Should I invest in the NTUC growth policy using my CPF special account?

CPF special account pays interest of 4% plus 1% bonus. It does not have any risk. The Growth policy gives a return of 3% to 4% (not guaranteed) and has to be invested for 10 years or more. It is better to keep your money in the CPF special account.

Selamat Datang

My friend visited Johore. He was sure that Mas Selamat is in Johore. He saw a sign all over Johore that says "Selamat Datang". "Datang" means "come" in Malay.

Thursday, March 06, 2008

Term insurance with income benefit

Dear Mr. Tan,

I am 32 years old (male) and have 2 children aged 2 and 5. I like your suggestion to have a term insurance, combined with a monthly income of $2,000, in the event of premature death. How much do I have to pay?

I suggest that you insure for 25 years. The annual premium is:

Term insurance for $50,000 for 25 years: $154
Family income benefit of $2,000 monthly for 25 years: $606
Total $760 or approx $65 per month

These are my benchmark rates. They do not represent the actual rates charged in the market.

You can calculate the benchmark rates for other ages by referring to this FAQ. In your case, I have to work out the premium for age 32 by estimating from the rates for 30 and 35.

If you reduce the cover to 20 years, your cost will be reduced by about 30%.

Taxis Stands in Central Business District

There were several complaints by taxi drivers and commuters on the new rules regarding taxi stands in the Central Business District. The taxis are required to pick up commuters only at the designated stands. The taxi drivers complained that the stands do not have sufficient space for waiting taxis.

The underlying problem is the imbalance between the supply and demand of taxis. At some times, there are too many taxis waiting for commuters. At other times, commuters could not catch a taxi (during which time, the taxis are hiding somewhere waiting for a telephone booking).

The solution? Improve the feeder services to take commuters to the MRT stations. If the feeder services are convenient clearly marked at bus stops, more people will be willing to take these services, instead of relying on taxis during the busy hours.

I hope that the Land Transport Authority will take early steps to make it convenient for commuters to use the feeder services. The current bus services can perform this function, if people understand how to use them.

Any views?

Finance Your Passion Workshop

Winston Ng approached me to help them to market this workshop which is being conducted by his young company.

After speaking to him, I believe that his workshop may be of useful to the visitors to my blog. The workshop is for 2 full days and does cost a modest fee. If you attend, give your feedback to me.


The Finance Your Passion Workshops are created with the intention of teaching core Financial, Retirement and Protection Strategies to the masses at an affordable price. We are independent from any financial product company and neither endorse nor are against any products.

We teach the key "questions" that individuals should ask themselves before buying any product. The basic knowledge they need to know, rather than being blind-sided by all the sales gimmicks.

Our study of the best systems in the world found that Retirment Planning is a multi-faceted process that includes:

1) Increasing Earnings
2) Finding Your True Purpose in Life
3) Mastering Spending Patterns
4) Adequate Protection
5) Safe Investing
6) Charity Giving

In our Finance Your Passion Workshops, we teach all these to people at an affordable rate, so that when they approach their insurance advisors/ fund managers. They know the right questions to ask, rather than paying unnecessary hefty fees and worse still get biased advice.

During the workshop, they will also build their very own retirement plan - something which most singaporeans do not have!

More details can be found at:

They provide a series of reports on their website when you sign up for their free mailing list.

Consumers are dissatisfied with financial institutions

Dear Mr. Tan,
A consumer survey conducted by MAS showed that only 33% are satisfied with the financial product that they have bought. 67% are neutral or dissatisfied.

In your opinion, does this reflect a general state of unhappiness among consumers?

Consumers have been unhappy with the low interest rate paid by the banks for the past years. The interest rate is insufficent to offset inflation. The large increase in inflation rate this year has worsened the situation.

Many consumers switched to structured financial products and obtained an equally low return. Life insurance and investment linked products also incur high charges and will take a long time to reach the break-even point.

The negative experience of consumers on financial products has been reflected in their answers to the consumer survey.

MAS has now issued a proposed guideline to make the board and senior management of financial institutions to be more accountable for giving fair dealing outcomes to consumers.

Buying life insurance in Singapore

Dear Mr. Tan,
I came to know you from your useful financial tips in MyPaper.

I am a Malaysian working in Singapore. My wife and I currently maintain some insurance plans, previously bought in Malaysia, as shown below: (details deleted).

We later found that the insurance policies available in Singapore provide greater value. As a result, we are now thinking of terminating some of our existing Malaysia insurance policies and buy insurance policies from Singapore insurance companies, as shown below: (details deleted).

Do you foresee any problems for Malaysians who buy insurance policies (life and medical) from Singapore? Is this advisable? Are the coverage sufficient for us? Are the premiums reasonable?


I am not able to give specific advice for your situation. I suggest that you talk to a financial adviser (find one whom you can trust).

My general advice is set out in my FAQ, as follows:

a) Existing Policies:

b) Investing your savings

I do not forsee any problem for Malaysians buying life insurance in Singapore. I believe that many people have done it. The only disadvantage is that it is not recognised for income tax relief in Malaysia, but this is probably not important for you.

Speculative investment

Dear Mr. Tan
I am thinking of investing in Citigroup Inc in the USA. Do you think that this is a wise move?

Investing in Citigroup is speculative. You should do it only with money that you can afford to lose. But, I agree that it is quite tempting and there is a good prospect of an attractive gain.

Computing the yield

1. You can compute the yield accurately by using a financial calculator.

Period: 5 years
Amount now: $5,000
Annual saving: $1,200 for 5 years
Accumlated amount in 5 years now: $12,000
Annual saving invested at beginning of year
Computed yield: 2.23% p.a.

Annual saving invested at end of year
Computed yield: 2.58% p.a.

2. If you do not have a financial calculator, you can use a rough method.

Total invested at start of period: $5,000
Total invested at end of period: $11,000
Average amount invested: ($5.000 + $11.000) / 2 = $8,000
Gain for period: $12,000 - $11,000 = $1,000
Yield = $1,000/ $8,000 / 5 years = 2.5% per year

This method works for short durations, i.e. up to 5 years. The difference
betweens larger for longer duration.

Tan Kin Lian

How to invest in this environment?

Interest rate from bank deposit and Government bonds are at a low level.

The investment choices are:

1. Keep the money in the bank and accept a return of 0.5%
2. Invest in the stockmarket for the long term, and accept the volatility.

Do not invest in a high cost financial product (such as a structured product or an investment-linked policy) as the charges will reduce your yield further.

Read this FAQ about charges:

Yields on Singapore Government bonds

Here are the yields of government bonds, obtained from

The yield is about 1% for durations up to 3 yrs, 1.5% for duration of around 5 years, 2.5% for 10 years and 3% for 15 years and longer.

The yields are low.

Bond Name Year IYld
NX98100H; Coupon 5.625%; Maturity 01/07/2008 0.32 1.47
NX99100S; Coupon 4.375%; Maturity 15/01/2009 0.86 0.93
N504100Z; Coupon 2.375%; Maturity 01/10/2009 1.56 1.04
N505100F; Coupon 2.625%; Maturity 01/04/2010 2.07 1.28
NX00100T; Coupon 4.625%; Maturity 01/07/2010 2.32 1.07
NX01100H; Coupon 3.625%; Maturity 01/07/2011 3.32 1.16
NX02100S; Coupon 3.500%; Maturity 01/07/2012 4.32 1.46
NX03100Z; Coupon 2.250%; Maturity 01/07/2013 5.32 1.68
NX04100F; Coupon 3.625%; Maturity 01/07/2014 6.32 1.89
NY01100F; Coupon 3.750%; Maturity 01/09/2016 8.48 2.31
NY03100A; Coupon 4.000%; Maturity 01/09/2018 10.48 2.50
NY05100N; Coupon 3.250%; Maturity 01/09/2020 12.48 2.79
NY07100X; Coupon 3.125%; Maturity 01/09/2022 14.48 3.01
NZ07100S; Coupon 3.500%; Maturity 01/03/2027 18.99 3.25

YrTM: Years to maturity
IYld: indicative yield based on offer price


I opened an account with Fundsupermart. The process was easy. The website is well designed. I intend to buy low cost unit trust and government bonds through this account. I will share my experience of this platform in this blog.

Wednesday, March 05, 2008

How To Maximize our R & D Investments

R & D in Science & Technology is important and good for Singapore. There are many aspects to these activities. Many students, parents, professionals, managers/project leaders and policy makers would like to know how they can participate and contribute to this important adventure of ours.

Based on his experience Dr. Lee Kum Tatt has written a number of articles on this subject in his blog http//

Read his latest articles where he and his wife share their experiences in developing
R & D in Science & Technology with us.

Questions on existing life insurance policies

1. I have paid the premiums under my life insurance policy for more than 10 years. The cash value is still less than the total premiums paid. Why does the policy give such a poor yield?

The insurance company has paid a high rate of commission to the agent in selling the policy to you. The commission and other marketing expenses take up about 24 months of your premium (for most cases). This money has been spent and is taken away from your savings.

The company has also incurred cost in providing the life insurance cover to you under the policy. This cost is relatively small. The company has also taken away some of your premiums as a profit margin for their shareholders.

After deducting the charges, the balance of the premium that is invested is quite small in the initial years.

For a company with high expenses, it usually takes more than ten years for the policy to reach its break-even point, i.e. the cash value is more than the premiums paid. If the expenses are low, the break-even point may be reached before ten years.

2. I have an existing life insurance policy. It provides a poor return on my premiums. Should I continue to keep this policy?

You should as the insurance company to quote the following figures for you:

cash value, if you surrender the policy now
cash value, if you surrender the policy in 5 years time
premium payable for the next 5 years

You can compute the yield for the next five years. If the yield is more than 3%, it is better to keep the policy, as you enjoy the life insurance cover and still get a modest yield. You can get a fairly satisfactory yield, as you have already incurred the high charges during the earlier years of the policy.

If it is less than 3%, you can consider terminating the policy. You can take up a term insurance policy and invest the difference in premium in a low cost investment fund.

3. Should I continue with my investment-linked policy? Does it give good value?

You have to study the charges under the investment-linked policy. Some of the charges are:

the spread taken from each premium that is invested
the expense ratio taken from the fund
additional administrative fee charged on the policy
mortality charges
distribution cost

The distribution cost is usually hidden from the policyholder. It is the difference between the premium that you pay and the amount that is invested for you. This difference is used to pay commission to the agent and marketing expenses. It is usually taken from your policy during the initial years. After this initial period, here is no more distribution cost.

You have to compare these charges with the charges for similar plans in the market. Usually, if the distribution cost has already been fully deducted, it is better for you to keep the investment-linked policy.

4. I have retired from work. I find it a burden to continue paying the premium under my life insurance policy. Some policies require me to pay premiums for my entire life. What should I do?
You have the following options for these policies:

· continue to pay the premium using your past savings
· stop paying premium, and enjoy a lower coverage under the paid-up policy
· terminate the policy and receive its cash value

If you have sufficient savings, you can study the yield over the next five years, to decide if you should continue the policy. You can adopt the approach mentioned in paragraph 1 above.

If you do not have past savings, you have to consider the paid-up policy or to cancel the policy entirely for its cash value.

Low Cost Life Insurance Policy

Dear Mr. Tan,
Is it possible to have a low cost life insurance policy, other than term insurance? Can a whole life or endowment policy be designed to be sold directly, without the high charges for commission to be paid to agents?

This is possible to design a "no-load" life insurance policy. It will combine the protection and savings and give a good rate of return to the customer. The customer may have to pay a flat fee of say $100 towards the cost of issuing the policy.

The advantage of this "no-load" life insurance policy is that the cash value can be more than 80% of the premiums paid, from the first year onwards. The remaining 20% will be used to pay the premium for the insurance cover, and some expenses.

I hope that some new insurance company will work on this type of policy design. This will offer a good option for the public.

Accumulate short term savings in a bank account

Dear Mr. Tan,
What is the best way to invest $200 a month?

You can accumulate the savings in a bank account. If you join a monthly savings plan, you may be able a higher interest rate on your savings.

After you have accumulated sufficient savings, you can use it to buy Government Bonds or invest in the STI exchange traded fund. or a low cost investment fund.

The advantages are:
1. 100% of your savings is intact
2. You can earn a better return from the investment fund or government bonds.

Do not invest in an insurance product where 18 to 24 months of your savings are taken away as charges to pay the agent and other expenses.

Do not pay high charges for your investments. Read this FAQ:

Poll: Saving for a child's education

How do you like to save for your child's education (21 votes)

19% - In an education policy (i.e. life insurance)?
57% - in a low cost investment fund (separate for the child)
23% - together with the parent's savings

Fair remuneation for an adviser

Dear Sir,
What is the fair remuneration for an adviser to sell a life insurance policy?

1. It should be based on the time spent
2. It should be comparable to other occupations.
3. To sell a policy, a fair remuneration should earn $100.

At present, the advisers earn about one year or more of the savings. If you take a policy for $200 a month, the adviser earns about $2,400. His manager earns an overriding commission. There are other cost.

The total cost to the customer could add up to $4,800. This is the total amount taken away from the customer's savings. It is excessive. The customer should not be have to pay such a heavy cost, just to get a life insurance policy!

For an adviser to make a living on $100 per policy, it is necessary for the customer to visit the adviser in his office, just like you visit a doctor in his clinic. I hope that, in the future, insurance policies will be sold in this cost effective manner.

Charges on your Investment Linked Policy

Dear Sir,

I have an investment-linked policy that I took up about 10 years ago. Is it "too late" for me to terminate the policy and take up term insurance, with the intention to invest the savings on my own?

For your ILP, you probably have already incurred the upfront charges. So, it is probably better to continue the policy. An ILP works like a unit trust. You can ask the insurance company about the charges in their ILP to make a decision.

Read the attached FAQs:

Poor cash value for this whole life plan

Hi Mr Tan
.... you mentioned total premiums $5,600 was made and policy has existing cash value of $2,700 with a "loss" of $2,900... just curious, are you expecting free insurance?

This is a whole life policy about $430/yr or $35/mth. Even if you were to get term insurance at $80/yr, you would have "lost", $1,040 after 13 years.

Furthermore, assuming that her budget is $430/yr and that is all she can spare, where would you suggest she invest the balance of $350/yr, to get a investment gain of 4% p.a.

Even if she had invested and able to get 4% p.a., for the last 3 months, all the equity markets were down, it would be hard for her to sell as her funds would have dropped at least 20% in value.

It would be good to know what the expected surrender value is after 20 years so that we have a better picture.


The term insurance premium for a cover of $30,000 should be less than $30 a year. The life insurance company sell high cost products that takes away more than 10 times of the real cost, and locks the customer into a product that they will suffer a big loss for the "whole life".

Many insurance agents make a living out of the losses of their customers. There are many new customers that they can take advantage of, each day.

I hope that the life insurance industry and its "professional" agents will be ethical in doing what is right for customers.I have never seen any whole life policy that offers such a poor cash value after 13 years. Matters are getting out of hand.

For my views about investing your savings, read this FAQ:

Poor products and unethical sales techniques

An insurance agent presented an insurance policy for a young person. The agent gave him a standard "policy illustration" comprising of about 10 pages with several hundred figures. The young person was confused. He asked for my advice.

Here is my analysis of the plan:

1. It is an investment-linked plan involving a monthly saving of $100
2. About $2,400 of the insurance premium (about two years of savings) will be taken away to pay commisison and expenses.
3. After 10 years, even if the fund earned 9% (which is unlikely), the cash value is still less than the premiums paid
4. The agent recommended that the premium be invested in the India and Vietnam funds.

I am angry that a respectable insurance company could offer a poor value product to its customers. The insurance agent is unethical in pushing such a product to an unsavvy customer, without disclosing the relevant facts.

The strategy is to confuse the customer with a lot of confusing figures and to train the agent in the "sales technique" to sell this product.

How many customers are being taken for a ride each day, with this type of products? I hope that the Monetary Authority of Singapore will realise the weakness of this type of "product disclosure".

Tuesday, March 04, 2008

A very poor deal

A mother bought a life insurance policy for her son. After 13 years, the cash value was only $2,700. The total premiums paid was $5,600. The policyholder suffered a loss of $2,900 plus the investment gain for 13 years.

For the next five years, the additional premium is $2,160. The increase in cash value is only $1,480. The policyholder will suffer a further loss of $580. The policyholder decided to give up the policy.

I consider that the policyholder has been given a very poor deal. It seems that, after the policy was taken, the policyholder is at the mercy of the life insurance company.

I advised the policyholder to seek an explanation from the insurance company, and later to lodge a complaint with the Monetary Authority of Singapore. The insurance company is a large company which has many hundred of thousand of policyholders.

Poll: Attitude towards savings

If you earn a modest salary, do you prefer to: (30 replies)

90% - set aside some savings for the future
6% - spend all the earnings now
3% - spend some of the future earnings now, by taking credit or a loan.

Article: Don't expect another bull market

Dear Mr. Tan,

Please give your comment on this article:

Don't expect another bull market
Stock returns may never be the same - at least for this generation of investors.


The author said that for the past 20 years of the bull market, the stock market produced a return of 19% per year. He does not expect this kind of return in the future.

Over a longer period of 56 years, the stock market return was 9% per year.

For the future, the author said that he is reasonably confident that "stocks are likely to outperform high-quality bonds in the long term" 30-year Treasuries now yield about 4.5%.

I agree with the author. I expect stocks to yield about 6% in the future. I have indicated this as the likely return for the future. This is better than bonds, and is more suitable for a long term investor.

Monday, March 03, 2008

Poll on savings and insurance

1. How do you prefer to invest your savings? (45 replies)

0% - in a bank savings account to earn 0.5% yearly
91% - in a low cost investment fund to earn 5% yearly (estimate), and manage the risk
9% - in a life insurance policy to earn 2.5% yearly, locked in for 20 to 30 years

2. If you set aside $30 a month, which insurance policy do you prefer? (49 replies)

12% - whole life policy to cover $10,000 payable on death, and accumulate some cash value
85% - term insurance policy to cover $150,000 payable on death, but with no cash value
2% - do not buy any life insurance, as death is remote

Life insurance for a child

1. Should I buy a life insurance policy for my child, so that my child can enjoy a lower premium rate by starting at a young age?

It is better for your child to take the life insurance policy at a later date, when he or she starts to work. Although the premium is higher at an older age, the increase in premium is less that the premiums that you had to pay during the earlier years (including the gain on investing the premiums).

The insurance agent is likely to sell you a high cost life insurance policy, such as an endowment or whole life policy, for your child. If your child buys a policy at a later date, he or she can buy a low cost term insurance and pay a premium that is much lower than the endowment or whole life policy. There is no need for you to buy life insurance for your child at an early age.

2. Should I take a separate life insurance policy to save for the tertiary education of my child?

It is better for you to invest the savings in a low cost investment fund. You will be able to earn a much higher return, compared to an education policy.

There is no need to take a separate policy for each child. You can make the total savings in your own investment account to meet the future financial needs of your family, including education and retirement. You will retain the flexibility on the amount, timing and purpose of the withdrawals from the investment account.

To ensure that there is adequate savings for your family, you should have adequate life insurance on your life, e.g. a level or decreasing term insurance. It is low cost and provides a large coverage.

3. Do I need to buy any insurance for my child?

You only need to buy insurance to cover the medical expense of your child.The Medishield policy from CPF is most suitable. It will cover the large hospital bills. You can pay the deductible from your Medisave account or from your personal savings.

4. I have bought an education policy for my child already. Should I continue the policy or cancel it?

You can ask the insurance company to quote the following:

(a) Cash value of the policy at the present time
(b) Cash value (estimated) of the policy in 5 years time
(c) Premium payable for the next 5 years

If the yield for the next 5 years is more than 3% per annum, it is all right to continue the policy. If it is less, you can cancel the policy and invest the premium in a low cost investment fund.

5. Does the life insurance policy taken on my child provide a good yield?

The yield is usually quite low, due to the high charges taken to pay commission to the agent and profit for the insurance company. Many policies take 15 to 20 years to reach the break-even point (i.e the cash value is equal to the total premiums paid). If you have invested in a low cost investment fund, you are likely to see a gain of at least 50%.

Tan Kin Lian

Lower premium on motor insurance

Hi Mr. Tan,

My motor insurance for my off-peak car was due and my current insurer wanted to charge me $890 for it. Fortunately, I decided to check whether you had any advice on your site on buying motor insurance, and found your advice to buy directly from the insurer.

I contacted the companies that you listed on your site. It was a little time-consuming, but the result was worth it. I managed to reduce my premium to $618, plus the insurer also gave me $30 worth of shopping vouchers for self-collecting the documents at their branch!

Thanks for your great advice, Mr Tan.

Life policy taken by a parent

Hi Mr. Tan,
My mother bought a $30,000 life policy for me when I was young. The cash surrender value is about $2500. I have calculated that premiums paid throughout the years is about $7000.

I am really surprised at the low surrender value because when I referred to the projection value that came with the policy, the guaranteed value by now should have been around $5000. Why is that so? And do you think I should cancel?

Ask the insurance company to quote you the following:
a) Cash value now
b) Cash value in 5 years time
c) Premium payable for next 5 years
d) Coverage for next 5 years

You can make a better decision, when these figures are available. Read this FAQ

Ask the company to explain the difference between the cash value now, and the projection that was made when the policy was taken. You can send the documents to me, after they gave you a reply.

Sunday, March 02, 2008

Guaranteed renewability

Dear Mr. Tan,
I am told that if I make a claim, the insurance company can refuse to renew my medical insurance. Is this correct?

Some medical insurance plan operate on a yearly basis. The insurance company has the legal the right to refuse renewal or to charge a higher premium rate if the policyholder is in bad health.

The Medishield (and similar plans provided by the insurance companies) have the guaranteed renewability feature. It operates as follows:

1. The insurance company is obliged to renew the medical insurance until a certain specified age (say 85 years) or for a lifetime.

2. The premium rate is the same as applied to all people in the same age group or category. The insurance company cannot charge a higher premium rate for an insured person who has made a claim.

This is called "guaranteed renewability".

Coping with future increases in medical insurance

Dear Mr. Tan
I am informed that the premium rate on Medishield increases with age, and may be subject to future revision. Is there a medical insurance plan that offers a guaranteed rate of premium? I am willing to pay a higher premium now, so that I do not have to incur future increases.

It is not possible for the insurance company to gurantee the future premium rates, as they are subject to the future increases in medical expenses, which cannot be predicted or controlled.

A similar situation is with the cost of living. It is not possible for the Government to guarantee you the prices of basic necessities in the future, as they are subject to the market situation.

You can manage the future increases as follows:
1. Leave sufficient savings in the Medisave account to pay the higher premium at older ages.
2. Be prepared to downgrade to a cheaper insurance plan when you get older
3. Do not spend your Medisave for expensive insurance plans that you do not need.
4. Stay healthy.

Pay off a housing loan

Dear Mr. Tan,

I have a housing loan with a bank. I wish to repay the loan at the end of the 3 year lock-in period. I have the following options:
(a) Do a partial payment and continue to pay the same monthly payment from CPF OA
(b) Do a full payment using cash and CPF OA
(c) Do a full payment from CPF OA

Interest rate on loan: 4.95%
Rate of cash savings : <1%

What is your advice?

I suggest that you keep a certain amount of cash savings (say $10,000) to be used for emergencies, and use the remaining cash savings to pay off the housing loan. You can pay the remaining loan from your CPF ordinary account.

Your balance in CPF will earn you 2.5% plus 1% bonus on $20,000. By repaying the housing loan, you can save on 4.95% of interest.

Earn a return of 6% to 24% a year

How can you get a return of 6% to 24% a year?

The solution: lend to yourself. How is this possible?

During the first few years of your working life, you accumulate savings. You will earn a modest rate of 2% a year on your savings. In later years, when you need money to make a major purchase or an unexpected emergency, you borrow from your past savings.

If you do not have the past savings, you have to take a loan and pay interest at 6% (on secured borrowing) to 24% (on credit card). By borrowing from your past saving, you save this hefty interest rate.

It does not matter that your saving earn you only 2% a year in the meantime. When you need it, you can save 6% to 24% on your loan interest.

If you borrow $10,000 at 6%, the interest is $50 a month. If the rate is 24% a month, the interest is $200 a month. If you can save $50 to $200 a month on interest payment, it can add to your savings.

If you do not need to lend to yourself, you can invest your savings in a low cost, diversified fund to earn about 5% to 7% per annum. That is still better than 2%.

Remember: When you have the chance, accumulate savings. You will need it for the future. Keep your saving in a flexible investment that can be withdrawn without penalty, such as a savings account or an investment fund.

Do not invest in high cost financial products that locks you up for many years and imposes a heavy penalty on early withdrawal.

Benchmark premium rates for Term Insurance

Hi Mr. Tan,

I read with great interest your example about the family income policy. You quoted the premium rate for a male at age 30. I am now 35 years old. What is the premium that I have to pay?


You can get the benchmark premium rates for various ages, and period of insurance, and for the three types of term insurance plans, from this FAQ:

These benchmarks are the premium rates that I consider to be good value for consumers, based on the expected claims and reasonable expenses and profit margin. They are lower than the term insurance rates now charged in the market.

I believe that, in the near future, some life insurance companies will offer premium rates that are lower than the benchmarks to capture this big market.

Save for your future needs

If you earn a modest salary, do you prefer to:

(a) Set aside some savings for the future?
(b) Spend away all of your savings
(c) Spend your future earnings now, by taking a loan or credit?

If you decide to save, do you prefer to:

(a) Put the savings in a savings account to earn 0.5% interest
(b) Invest in a low cost, diversified investment fund to earn 5% (average), but has risk
(c) Invest the savings in a life insurance policy to earn 2.5%, but is locked in for 10 to 30 years.

If you like to earn a better return, but wish to learn how to manage your risk, you can read this FAQ:

Value of Life Insurance

If you have a family with young children, are you willing to spend $30 to $50 a month to pay for a life insurance plan that can provide a benefit payment in the event of premature death of the parent?

Which do you prefer?

(a) Buy a whole life plan that covers about $10,000 to $15,000 and accumulate cash value?
(b) Buy a term insurance plan that covers $150,000 to $250,000 (i.e. no cash value)?
(c) No need to buy life insurance, as premature death is quite unlikely.

Do you prefer the payment of the benefit to be in the following:
(a) A lump sum,
(b) A monthly income for 10 to 20 years,
(c) A combination of both payments?

Are you willing to spend $30 to $50 a month as an expense (i.e. without any return), to provide adequate financial security to your family?

I recommend a term insurance plan that pays a lump sum benefit of (say) $50,000 plus a monthly income of $2,000 until the end of the term (say, until your age of 55). This will cost about $50 a month for a person now age 30 years old.

Spread in Flexi-link

Dear Mr. Tan,

I checked on the Flexi-link and was told that there is an upfront spread of 3.5%. What is this spread? I was told that my investment will drop by 3.5% immediately after I bought the units of the fund. Is this too costly? Are there any funds that do not charge this spread?

The spread is the difference between the offer price and the bid price of the units. You buy the units at the offer price and sell them at the bid price. If you invest today and sell immediately, you will suffer a loss of 3.5%, due to the spread.

This spread is used to pay the agent for selling the investment to you, and to the insurance company for its expenses. If you invest $100,000, you will lose $3,500 immediately, due to this spread.

If you keep your investment for 5 years, the spread of 3.5% average out to a cost of 0.7% per year. You have to incur the annual expense ratio, which is about 0.5% to 1.3% per annum (depending on the type of fund). The total cost is 1.2% to 2% (which is rather high). If you keep the invetment for a longer period, then the cost comes down.

If you wish to invest in a low cost fund, I suggest that you consider the STI exchange traded fund. It has an initial cost of 0.3% (i.e. the brokerage to the stockbroker) and an annual fee of 0.3% per annum. This is a low cost fund.

Blog Archive