Saturday, July 12, 2008

Regulation of financial products

Read the debate in this blog:

Blog on public transport in Singaore

The Straits Times Review section published my article about the "world class transport system". the article can be located here:

The article mentioned that my blog on public transport can be found in this website. The actual website is:

Low yield for policies with restructured bonuses


NTUC Income earned an investment yield of 10.7% on the participating fund in 2007. The average long term yield (computed over the past 10 years) is 7.8% per annum.

I have two policies that are affected by the restructuring of the bonues. I calculated the yields on these policies as follows.

This policy commenced in December 2003 with a single premium of $75,000. The estimated cash value at December 2008 (5 year duration) is $85,127, giving a policy yield of 2.5%. There is a gap of 5.3% compared to the fund yield of 7.8%.

If I keep the policy to the maturity date in December 2013, the projected maturity benefit is $112,795 giving a yield of 4.2%. This is still somewhat low, giving a gap of 3.6% compared to the fund yield.

This single premium policy has low expenses and low cost of insurance. I estimate that a fair reduction in yield should be 1%. The actual gap is somewhat high.

This policy commenced in October 1996 with an annual premium of $2,567. The estimated cash value in October 2008 (12 year duration) is $28,383, giving a negative yield of -1.5%. There is a gap of 9.3% compared to the fund yield.

Although a Living policy has higher expenses and a bigger cost of insurance protection, the gap appears to be excessive.

Over the next 3 years, the cash value grows by only 1.8% per annum. This is low compared to the fund yield.

I have three other policies not affected by the restructuring of the bonus. The cash value for two policies increase by more than 4% per annum over the next 3 years and by 2.8% for the Living policy.

I believe that the policies affected by the bonus restructuring have not been given a fair rate of annual and special bonuses. This has resulted in a poor policy yield, compared to the long term average yield.

Friday, July 11, 2008

False advertising

I passed by a shop in Toa Payoh. They were playing a recorded advertisement, announcing that the shop is closing down and they have to sell the products at a low price. I looked at the price labels and found that they were actually charging more than other shops. This is false advertising and amounts to cheating.

There is a similar situation with financial products sold by agents. The agents are able to make mis-representation on the products that are not backed by the printed materials. The printed materials are quite confusing, so the buyer needs an agent to explain the product. The agent has the opportunity to make a mis-representation and get away with it.

Many types of high cost, poor value financial products are sold in this way. You should avoid these products.

Human Organs for Sale

Read my views in

Regulation of insurance

Insurance is highly regulated in the United States. The intent is to protect consumers against the unfair practices of insurance companies.

Some of the areas that are regulated include:

* Licening of insurers and agents
* Approval of rates
* Content of policy forms
* Contract interpretation and enforcement
* Sales practices and information disclosure

Some of these requirements are already practiced in Singapore. In other areas, there is a need (in my view) for the regulatiron to be tightened.

For example, our regulators should ensure that the wordings of the policy forms are clear, to avoid future disputes between the insurer and the policyholder. The terms should also be fair to the policyholder.

Reduction of 4% in yield

I met an independent financial adviser. I told him about an investment-linked plan which projects a gross yield of 9% and a net yield of 5%. The reduction in yield was 4%. If the gross yield was 5%, the net yield was around 1%.

He was shocked. How can an investment product take away so much of the yield? He sells unit trusts, and is not able to recommend any investment fund that have an annual charge of 2% or more.

He asked, "How can insurance advisers sell products that take away 4%? Do they take care of the interest of their clients?"

Note: These high charges apply to most regular premium investment-linked products sold in the market. There are some exceptions, with lower charges. You should ask about the reduction in yield.

Avoid being cheated

If a salesman sells you a product and charges you a higher price compared to a similar product of the similar quality, you will feel that you have been cheated. You will probably avoid doing any more business with this salesman or his shop.

Does the same situation apply for financial and insurance products? Do you feel cheated, if you are offered a bad product and charged an excessive price? Can you avoid doing business with the salesman or his company?

The problem with a life insurance product is that you will be stuck with a bad product for 20 years or longer.

How to identify a bad product? Ask this question. Is this an investment product? If so, how much do I have to pay for the first 1 and 3 years. What do I get back if I stop the investment plan? If you do not get back your savings, it is a bad product.

Lesson: Avoid financial products that has high charges, lock you up for a long term, and imposes a high penalty on early termination.

Win $3 million on the Big Sweep

An old lady was nearly ninety years of age when she won $3,000,.000 in the Big Sweep. Her family were extremely worried about her heart and feared that the news of her large win would come as too much of a shock to her.

They decided to call the doctor and explained the situation to him. The doctor said, "Now, you don't have to worry about anything. I am fully trained in such delicate matters. I can break the news to her gently. Everything will be quite safe, if left to me."

The doctor went to see the old lady and gently brought up the subject of the Big Sweep. He said, "Tell me, what would you do if you have a large win on the Big Sweep, say 3 million dollars."

"Why, " replied the old lady. " I would give half of it to you, of course!"

The doctor fell down, dead from shock!

Thursday, July 10, 2008

How to drive to your destination

You will find an excellent website mentioned in:

Additional charges under the fund

Dear Mr. Tan,
I just found out that Y is offering funds, which invest into low cost ETFs. The management fee is 0.75% p.a. and the sales charge is 1.00%. I think this is sufficiently low cost.


My colleague did an analysis and found that there are other charges. His observations are set out below:

a. There is a 1% upfront sales charge by Y
b. Annual management fee of 0.75% (for passively managed funds) and 1.2% (for activately managed funds)

However, if we read more deeply into the prospectus, there are more charges as follow:

a. An additional 3% charge (one time), placed under "Initial Service Charge". This amt can be as much as 4% in the future.
b. Up to 0.1% of NAV as Annual Trustee feec.

A separate annual fee of 0.09% to 1.25% to pay for the fund's operating expenses. Realization and switching is free for now but can go as much as 1% in the future.

Ideal plan (ID2)

Dear Mr. Tan,
Could you advise me on the two Ideal ILPs I have taken up for my children? I have lost trust in my agent after he started to criticize you and sing praises about the new management.

The primary objective of the two plans is savings for their education. Both are invested in equal proportions of Growth and Singapore Equity funds.

Should I continue with them, terminate them and take up ID7, or terminate them and invest in STI ETF?

Ideal (ID2) taken in 2002
Ideal (ID2) taken in 2007

Thank you sincerely for your advice, Mr Tan.

You should continue with these two policies. You have already incurred the front end charge, so there is no need to switch now. Anyway, the charge under the ID2 is much lower than similar policies offered by other insurers.

Low Wage in Singapore

The average monthly earnings in Singapore in the first quarter of 2008 is $4,316. In the USA and a few other countries, the minimum wage is about one-third of the average wage. If this concept is applied in Singapore, our minimum wage should be $1,430 a month.

In Korea, the minimum wage is 27% of the national average. In France, it is 66%. In Taiwan, it is 34%. In Singapore, our low income workers earn about $750 a month. This represents 17% of the national average, and is much lower than Korea.

My friend told me that three jounalist from Taiwan visited Singapore to see how the poor live. He brought them to visit some rental flats. The flats were dark as the occupants did not want to spend money on electricity and do not watch television. The journalists said, "The poor in Singapore are poorer than the poor in Taiwan. In Taiwan, the poor can afford to watch television".

Education Loan

Dear Mr. Tan
I would like to apply for education loan from NTUC Thrift. Currently, I have some credit cards debts and my scoring with the banks are not good. My credit bureau report are effected by this.
I would like to ask whether do I stand any chance of applying this loan?

I am not familiar with the credit assessment of NTUC Thrift. You can give it a try. But, as you suspect, it is likely to be difficult.

I sugggest that you pay off the credit card loan first and save a lot of interest charges, before you apply for this education loan.

Buy term and invest in a low cost fund

Hi Mr. Tan,
I am thinking of purchasing a whole life plan, but my insurance advisor has advised me to go with an endownment plan. Can you advise me?

My advice is contained in these FAQs:

I prefer to avoid whole life or endowment plans, as they give a poor return to policyholders.

Wednesday, July 09, 2008

Improve the public transport in Singapore

Share your views in this blog:

Minimum wage in other countries

Taiwan's minimum wage since October 1997 was US$487 per month. This works out to a daily minimum wage of US$16 or around US$2 per hour.

In 2005, it was proposed that the domestic minimum wage could be raised to 40 percent of the average wage of US$1,357 per month. This would give a revised minimum wage of US$543 and would benefit up to 2 million domestic workers as well as 160,000 foreign workers in the manufacturing sector.

The ratio of minumum wage to average wage was:
France - 66.4 percent
Canada - 39.4 percent
Taiwan - 36.3 percent
United States 32 percent.
South Korea - 27 percent

People will buy insurance

Hi Mr. Tan,

I stumbled on your blog a few months back while searching for financial blogs and have since been a regular reader. It has been very interesting to know about your views since I am also involved in the industry.

I agree with your view that 'People will buy insurance', especially so as the public gets more educated and financial savvy. Technology provides a easily accessible platform for consumers to compare insurance products. I am looking forward to more insurance insights on your blog.

Asset Share Methodology


By 1 July 2005, all new participating life insurance policies are required to use the asset share methodology in computing the surplus to policyholders.

What is asset share methodology? Following are the FAQs on asset share:

1) What are the new guidelines on asset share methodology all about?

The asset share methodology is a method currently used in UK, Australia and South Africa to calculate the distribution of surplus to policyholders for participating life insurance plans (par plans).

This methodology allows for a share of the accumulated premiums plus investment earnings to be returned to the policyholder after allowing for deductions for cost of providing insurance coverage, acquisitions costs and other expenses incurred by the insurer.

2) What type of life insurance products are affected by this new guideline?

The new guidelines are only applicable to par plans. A par plan is one in which the policyholder will receive extra surplus in the form of non-guaranteed bonus or dividend, in addition to the contractual sum assured, which is guaranteed to be paid on death or maturity.

The new guidelines are, therefore, not applicable for insurance policies which only provide protection coverage (e.g. non-participating life insurance, medical, general insurance products) endowment products with only guaranteed benefits and investment-linked products.

3) How do the new guidelines affect the payment of surrender values?

Under these new guidelines, policyholders may receive surrender benefit in the first year. In the past, policyholders who terminate their policies before three years may not receive any cash value. This is because, traditionally, life insurance products being primarily longer term protection and savings purposes, are structured in such a way as to reward more to policyholders who continue to pay their premiums and keep their policies in force.

4) Do I have to pay more premiums on participating life insurance policies under the new guidelines?

The use of the asset share methodology may require some life insurers to revise the premium rates of their existing par plans. This is because life insurers will now have to pay higher surrender values in the earlier years compared to the old products. This additional cost will result in lower surrender and claim values in the later durations compared to the past. If a life insurance company intends to maintain the surrender values and claim values at the longer duration, it may have to increase the level of premiums to pay for the higher early cash surrender values.

5) Are the policy benefits similar for life insurance plans that are designed under the new guidelines?

Life insurer may maintain the same level of projected bonus/dividend for policies designed under the asset share guidelines compared to the old products. This will usually result in an increase in premiums. Since life insurance companies are required to pay out surrender values in the earlier policy years under the new guidelines, they have to maintain a higher percentage of their assets in shorter term and more liquid assets e.g. fixed deposits. The investment returns on these shorter term assets, which are low risk assets, are usually lower than other longer term investment instruments. Therefore the bonuses/dividends projected over the longer term may be revised to provide a realistic projection to policyholders.

6) Will I receive less bonus/dividends under the new guidelines?

Bonus and dividends are not guaranteed in advance. They are distributed from surplus generated from investments and operating profits from the participating fund. The actual amount paid out will depend on the investment performance of the life insurance company, operating experience and overall economic environment. You may receive more or less than the projected bonuses/dividends illustrated to you when you purchase your insurance policy. The distribution of surplus between policyholders and shareholders are governed by the Insurance Act 1996, in the ratio up to 90:10. This means that policyholders receive 90% of the surplus distributed from the life fund.

7) Will the new guidelines discourage policy holders to maintain their policies over a long duration?

Although the new guidelines may bring about higher surrender values in the early years, policyholders should be fully informed of the disadvantages of terminating their life insurance policies early. This is because the surrender value that they receive will be much lower compared to the premiums which they have paid, even under the asset share basis.

Consumers should always note that the purchase of a life insurance policy is a long term commitment and policyholders who hold their policies till maturity will continue to enjoy better values than those who surrender early. Policyholders have to bear in mind that when their life insurance policies are surrendered, they will lose their life insurance protection immediately.

*Issued by LIAM - 4 July 2005

FAQ: Traded Endowment Policies

1. What is a traded endowment policy?

A traded endowment policy is a policy that is sold by the policyholder to an investor. The investor pays a sum that is higher than the surrender value offered by the insurance company.

The investor will continue to pay the premium under the policy and will collect the death or maturity benefit on the policy.

The investor expects to get a good rate of return on the amount paid to buy over the policy, and the future permiums paid.

2. Is it advisable to invest in a fund of traded endowment policies, where the fund manager undertakes to manage these policies?

It depends on the following:

> Is the fund manager reliable and trustworthy?
> What are the charges taken away by the fund manager?
> What is the underlying gross and net yield of the fund, after deducting the charges?
> What is the underlying risk of the traded endowment policies?

3. What is the underlying risk of the traaded endowment policies?

These traded endowment policies carry the following risks:

> The future bonuses paid under the policies may be reduced.
> The insurance company may become insolvent
> The fund manager may overlook to keep the policy in force, leading to its termination

These risks have to be factored in considering the net yield on the fund.

4. What is a satisfactory rate of return, considering the risk?

If the investment is in the UK, you should compared the expected yield on the traded endowment fund with the yield from UK Government Bonds.

You should expect to get at least 2% to 3% higher than the bond yield of similar duration, to compensate for the higher risk.

If the fund has a duration of 5 years and the UK bond yield for 5 years is 5%, you should expect to get a net yield (after deducting the fund manager’s fees) of 7% or 8% from the traded endowment fund, to make it worth the risk.

5. Do you invest in traded endowment policies?

I avoid investing in this type of policy as I am not familiar with the risk, the yield and the integrity of the fund manager.

I prefer to invest in Government bonds or equities, as these products are traded on the exchange and there is liquidity. flexibility and price transparency.

Tan Kin Lian

Universal Life

Dear Mr. Tan,

What is your opinion on the use of "universal lifeinsurance" as a retirement tool. It is highly recommended if the objectives of retirement is to be able to maintain a comfortable lifestyle during retirement and to also preserve wealth to pass it on. Let me have your comments. Thanks


Universal life in a life insurance product. It is likely to have high charges taken away from your savings to pay commisison to the agent. You should ask the agent about the charges.

You can read about the charges on investment-linked plan from this FAQ A universal life policy is likely to have similar charges.


Source: Wikipedia.

In law, defamation (also called slander, and libel) is the communication of a statement that makes a false claim, expressively stated or implied to be factual, that may give an individual, business, product, group, government or nation a negative image.

Slander refers to a malicious, false, and defamatory statement or report, while libel refers to any other form of communication such as written words or images. Most jurisdictions allow legal actions, civil and/or criminal, to deter various kinds of defamation and retaliate against groundless criticism.

Related to defamation is public disclosure of private facts which arises where one person reveals information which is not of public concern, and the release of which would offend a reasonable person. Unlike libel or slander, truth is not a defense for invasion of privacy.

Tuesday, July 08, 2008

How to reduce petrol and gas price..Egg logic


A man eats two eggs each morning for breakfast. When he goes to the grocery store he pays 60 cents a dozen. Since a dozen eggs won't last a weekhe normally buys two dozens at a time. One day while buying eggs he notices that the price has risen to 72 cents. The next time he buys groceries, eggs are 76 cents a dozen.

When asked to explain the price of eggs the store owner says, 'The price has gone up and I have to raise my price accordingly'. This store buys 100 dozen eggs a day. He checked around for a better price and all the distributorshave raised their prices. The distributors have begun to buy from the huge egg farms. The small egg farms have been driven out of business. The huge eggfarms sell 100,000 dozen eggs a day to distributors. With no competition, they can setthe price as they see fit. The distributors then have to raise their prices to t hegrocery stores. And on and on and on.

As the man kept buying eggs the price kept going up. He saw the big egg trucks delivering 100 dozen eggs each day. Nothing changed there. He checked out the huge egg farms and found they were selling 100,000 dozen eggs to thedistributors daily. Nothing had changed but the price of eggs.

Then week before Thanksgiving the price of eggs shot up to $1.00 a dozen. Again he asked the grocery owner why and was told, 'Cakes and baking forthe holiday'. The huge egg farmers know there will be a lot of baking going on andmore eggs will be used. Hence, the price of eggs goes up. Expect the samething at Christmas and other times when family cooking, baking happen.

This pattern continues until the price of eggs is 2.00 a dozen. The man says, ' There must be something we can do about the price of eggs'. He starts talking to all the people in his town and they decide tostop buying eggs. This didn't work because everyone needed eggs.

Finally, the man suggested only buying what you need. He ate 2 eggsa day. On the way home from work he would stop at the grocery and buy two eggs. Everyone in town started buying 2 or 3 eggs a day.

The grocery store owner began complaining that he had too many eggsin his cooler. He told the distributor that he didn't need any eggs. Maybe wouldn't need any all week. The distributor had eggs piling up at his warehouse. He told thehuge egg farms that he didn't have any room for eggs would not need any for at least two weeks.

At the egg farm, the chickens just kept on laying eggs. To relieve the pressure, the huge egg farm told the distributor that they could buy the eggs at a lower price. The distributor said, ' I don't have the room for the eggs even if they were free'.

The distributor told the grocery store owner that he would lower the price of the eggs if the store would start buying again. The grocery store owner said, 'I don't have room for more eggs. Thecustomers are only buying 2 or 3 eggs at a time. Now if you were to drop the price of eggs back down to the original price, the customers would start buying by the dozen again'.

The distributors sent that proposal to the huge egg farmers but theegg farmers liked the price they were getting for their eggs but, those chickens just kept on laying. Finally, the egg farmers lowered the price of their eggs. But only a few cents. The customers still bought 2 or 3 eggs at a time. They said, 'when the price of eggs gets down to where it was before, we will start buying by the dozen.'

Slowly the price of eggs started dropping. The distributors had toslash their prices to make room for the eggs coming from the egg farmers. The egg farmers cut their prices because the distributors wouldn't buy at a higher price than they were selling eggs for. Anyway, they had fullwarehouses and wouldn't need eggs for quite a while. And those chickens kept on laying.
Eventually, the egg farmers cut their prices because they were throwing away eggs they couldn't sell.

The distributors started buying again because the eggs were priced to where the stores could afford to sell them at the lower price. And the customers starting buying by the dozen again.

Now, transpose this analogy to the gasoline industry. What if everyone only bought $10.00 worth of gas each time they pulledto the pump? The dealer's tanks would stay semi full all the time. Thedealers wouldn't have room for the gas coming from the huge tank farms. The tank farmswouldn't have room for the gas coming from the refining plants. And therefining plants wouldn't have room for the oil being off loaded from the hugetankers coming from the oil fiends.

Just $10.00 each time you buy gas. Don't fill it up. You may have to stop for gas twice a week but, the price should come down. Think about it.

As an added note...When I buy $10.00 worth of gas that leaves my tanka little under quarter full. The way prices are jumping around, you can buygas for $2.65 a gallon and then the next morning it can be $2.15. If you have yourtank full of $2.65 gas you don't have room for the $2.15 gas.

You might not understand the economics of only buying two eggs at atime but, you can't buy cheaper gas if your tank is full of the high priced stuff. Also, don't buy anything else at the gas station; don't give the many more of your hard earned money than what you spend on gas, until the prices comedown.' Just think of this concept for a while.

Avoid high charges of investment-linked plans

Hi Sir,
May I know if these plans are good or not? (details of plans provided)

I suspect that the charges are high and take away a large part of your savings and potential returns.

Read this FAQ:

And my blog:

Avoid policies with high terminal bonus

An independent financial adviser shared this view with me. Most insurance plans now have a high terminal bonus that is not guaranteed.

He finds it difficult to recommend this plan, as the policyholder can not be sure if he will get a fair return on the policy. The percentage of terminal bonus vary from one policy to another. The policyholder may wonder why some other policies are given a higher terminal bonus than his policy.

He has decided that he will not sell any life insurance policy. He prefers to sell unit trust, as it is more transparent and fair to the policyholder, and more flexible.

I agree with his views. It is best for the consumer to avoid all life insurance policies with high terminal bonus, unless the cash and maturity payouts are required to follow the "asset share" method, as adopted in Malaysia.

Avoid private Shield plan

Dear Mr. Tan,
I am currently under a private Shield program with Plus Rider (the premium has gone up quite a lot as compare to last year) with one exclusion condition. I am also cover under my company's hospitalisation scheme. Do you think I should downgrade to Assist Rider with a lower premium but have to co-pay of up to $2,000 - or should I move back completely to Medishield.

It is better to move back completely to Medishield. there is no need to pay a lot of premium for a private Shield plan, when you are covered by your employer.

If you are healthy when you retire, you can upgrade to a private Shield plan at that time. If you are not healthy, you can stay on Medishield. For older people, Medishield is quite satisfactory. Private Shield is very costly.

Monday, July 07, 2008

Negligence and insurance

Hi Mr. Tan

Kindly advise me on the following :-

(a) Under S'pore Insurance laws, is payment made out of Medisave of a plaintiff (pedestrain) claimable against the Insurer of a defendent motorist?

(b) What if payment is paid out of any Medishield / Healthshield policy of the patient first, is it claimable against the Insurer of a defendent motorist?

(c) In the above cases, which Insurer is the first party to bear the claim? Insurer of the defendent motorist or Medishield insurer of the pedestrain?

(d) If the a company has a welfare scheme and paid a sum to assist an employee (pedestrain) due to the accident due to financial hardship, and that sum is used to pay part of hospital costs first, can that employee still claim against the insurer of the motorist ? Any implication if the welfare assistance is paid direct to the hospital instead of direct payment to that employee?

Hope you can clarify.



This is a legal issue. I am not familiar with this matter. In my view, and I am not a legal expert, the position will be as follows:

> You are entitled to claim for your loss, due to the negligence of the other party
> You are certainly allowed to claim for payment made from Medisave (which is your own savings)
> You can also claim for expenses that are paid by your insurance policy (e.g. Medishield) or by the company's welfare scheme
> The liability for the payment by the negligent party applies to the total expenses (regardless of the status of insurance)
> I do not know if the insurer (of Medishield) or employer will ask you to repay back the expenses that have been successfully claimed from the negligent party - but it is a separate matter.

Who's really looking after your money?

There is an excellent article by John Bittlestone in Today paper, 7 July. It shows a list of improvements that should be made by the finance industry. Although the suggestions are made to the banking sector, they apply to the insurance sector as well.

The topics are:
> Drop the jargon
> Cut the "products" by 95 percent
> If a bank wants to act as a broker
> Treat us as customers
> Be transparent
> Make your charges realistic
> Re-examine your "relationship manager" practice
> Reduce your paper chase
> Look at your bonus system
> You are already over-regulated

Here is the soft copy of the article:

Logic Quiz

Try the logic quiz:

It is challenging and fun.

Politician and accountant

It is easy for a beggar to tell the difference between a politician and an accountant. If he asks a man for money for a meal saying that he hasn't eaten all day and the man replies, "Sorry, no. But things will be better for you tomorrow" - that man must be a politician.

If the beggar asks the same question and the man replies, "Sorry, no. But I am interested to know how your financial situation compares with the same period last month" - that man must be an accountant.

Sunday, July 06, 2008

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