Saturday, November 14, 2015

Older workers should use initiative

Mr. Tan
I like to share this experience with you and to get your views.

A year ago, I employed an  admin staff who was in her early forties. She had been out of work for many years. I provided training to her and paid her an allowance. She was slow, and lacked initiative, I did not mind, as she was not earning much.

Later, she complained that she was earning less than another younger worker and that her pay did not reflect her working experience. She resigned shortly afterwards.

A few months later, she asked if she could come back and work for me. Should I take her?

If you need her service, you can discuss with her and see if she had changed her attitude. She must have realized that it is not easy to find a job.

Her priority should be to improve her productivity and show initiative, by using her working experience in a positive manner.

Misleading statements

When a sales person tells you that you are investing for 5 years, be careful. You may be paying premium for 5 years but you may have to wait for 10 or 15 years for the policy to mature. If you terminate the policy earlier, you may have to suffer a large loss, maybe up to 50% of what you have invested.

The sales person may tell you that the policy provides a yield of 4.75%. He (or she) might be able to point out this figure in the brochure or benefit illustration. Be careful. This is the yield that is used to illustrate the projected benefit. It is the yield before deducting the charges, also called "the effect of deduction". After the deducting, you net yield may be only 2%.

The sales person may give you convincing explanation verbally. Be careful. The verbal statements are different from what is written in the document that you are asked to sign. And you are signing a statement that you understood what the investment in, and you actually don't understand how it works, because you rely on the verbal explanation. And the verbal explanation is likely to be different from the written statements.

Effect of deduction

Mr. Tan
You explained that a life insurance policy using a yield of 4.75% actually work out to 2% after removing the "effect of deduction". Surely, a 2% yield is satisfactory compared to 1% (or less) paid by bank deposit? The policyholder also get life insurance protection.

If you are investing for 10 or 15 years, a yield of 2% is not satisfactory. You should aim for a yield of 5%. The difference between a yield of 2% and 5% can be a large sum. Here is a way for you to find out.

In the benefit illustration, you can see a page called "Table of Deduction". It shows you the "Value of Premiums Paid to Date", "Effect of Deduction" and "Total Surrender Value".

See the example below.

On the maturity date (i.e. end of 15 years), the value of premiums paid to date is $110,238, the effect of deduction is $29,488 and the total surrender value is $80,750. The total premiums paid is $60,000. The insurance company took your premium and invest them to earn 4.75%, and at the end of 15 years, they take away $29,488 and leave you a net return of $20,750.

If you invest the money on your own, you will get $50,238 on top of the $60,000. Why give away $29,488 to the insurance company when they do not provide any tangible benefit?

IF you invest on your own in the STI ETF, you should be able to get a return of 5% or more, and the risk is not different from the risk that is inherent in the insurance policy, i.e. the surrender value is not guaranteed and is subject to the insurance company earning 4.75% yield.

If you terminate the policy before maturity, you suffer a bigger effect of deduction. Look at the figures for year 5 to 15. You could be losing 50% of your premium.

For this policy, there is virtually no life insurance protection. The death benefit is only 5% more than the total premium paid.

Bad signages

I was confused with the signage in terminal 1 at Changi Airport. On returning from Jakarta last night, I looked for the Arrival Pickup Point.
At the escalator, the sign shown an up arrow. I remembered that the pickup point was at the lower level previously, but it now pointed to the higher level.
I checked and decided that the sign clearly pointed to the next level.
I went up the escalator and found that it was the departure level. There was no arrival pickup sign. I concluded that I was mistaken and went down to the arrival level.
I searched for other signs and found new signs further down the level. I followed them and went out to the road side. There was no pillars to show the pickup point.
After waiting for a few minutes, I decided that there was something wrong. I walked down the road and turned to the side of the building. I found the actual waiting areas with the different sections that are clearly marked.
I was clearly misled by the confusing signs.
I find signages to be generally bad and confusing in many places in Singapore. My earlier impression was that the signages were well designed in Changi Airport, until my experience last night.

Terrorist attack in Paris

When I visited Bali, I asked a friend, "How many people died during the Bali bombing?" He said that there were two terrorist attack. The first was in 2002. 200 people were killed. The second bombing occurred a few years later, but the casualties were lower.
I just read today the terrorist attacks in several locations in Paris. Over 120 people were killed. The scale is about half of Bali.
It is so sad that the world has become so violent, and that the terrorists are getting out of control.

Water rationing in Singapore?

Will we be subject to water rationing? I remembered that we had water rationing some 50 years ago, but did not have to resort to this measure since.
Will it happen again?

Friday, November 13, 2015

The military government in Myanmar is willing to give up power peacefully. This is a big boost for democracy in Myanmar.…/myanmar-generals-set-stage-the…

Singapore is expensive to this Australian visitor

I met an Australian who visited Singapore recently. She told me that Singapore is now "very expensive" compared to her previous visit few years ago. 

Although she is used to the expensive prices in Australia, she still found Singapore to be "very expensive". Perhaps, the recent drop in the value of the Australian dollars contributed to this observation. 

The "very expensive" image could be felt by people from many countries. It could harm our reputation as a nice place to visit. The damage could have a long term impact.

Thursday, November 12, 2015

Understand the benefit illustration

Mr. Tan,
Is it safe to rely on the projected return shown in the benefit illustration? I heard that many policyholders had complained that the actual return was lower than projected?are

The real misunderstanding is "outside of the benefit illustration". The benefit illustration is quite reliable, but the insurance agent may have explained the figures wrongly. For example, the insurance agent may state that the insurance policy provides a return of 4.75% on the savings, but the actual return, as shown in the benefit illustration is much lower, after deducting the "effect of deduction".

If the consumer reads and understands the benefit illustration, the consumer would know that the actual return is around 2% at the time of maturity, but would be much lower, and even negative, if the policy is withdrawn before the maturity date.

This article explains how the read the benefit illustration.

In most cases, if the consumer understands the benefit illustration, they will not not buy the insurance policy, because the terms of the policy are unfair to consumers. So, the insurance company will continue to rely on mis-selling by the agent to catch the unwary customers. Sometimes, the agent deliberately mis-sell, but at other times, they might not even by aware that they were mis-selling, as they were trained to "sell" based on the "benefits" which might not be an accurate description of the product.

Do you have a view on any of these issues?  Do you express your view or let other people decide for you?

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