Insurance fund adds an additional layer of cost to the investor

Hi Mr Tan,

Whilst I agree that investing through life insurance entails large (and hidden) transaction cost, S’pore REITs also exact multiple layers of fees. However, investors generally overlook this and just focus on dividend yield.

REPLY

The insurance fund also invest in REITS.  The policyholder has to bear an additional layer of expenses when they invest in an insurance fund. The policyholder can invest directly in the REITS and save on the additional layer of expenses charged by the insurance fund.

You should look at the calculations in this way.

The REIT earn a rental yield of 7% per annum. Their expenses take away 2% from the gross yield. The REIT pays a dividend of 5% to the investors. 

It the investor invest directly in the REIT, the investor gets a yield of 5%. If the investor buys a life insurance policy and the fund invest in the REIT, the fund earns a yield of 5%. However, the insurance fund deducts 2.5% for their expenses, giving a net yield of 2.5% (or less) to the policyholder.

The insurance fund also invest in listed companies. The listed company earns a margin of (say) 7% on their sales. It also has operating expenses that takes away 2% from the gross margin. The listed company is able to give a return of 5% to its shareholder.

However, the listed company may distribute only half of its net profits as dividends. The shareholder then gets a yield of 2.5%. However, the undistributed profit goes back to the company to increase its future profits. This is why the share price is likely to increase over the years.

The investor has the choice of investing directly in REITS and shares and earn a yield of 5% (in my example) or invest through an insurance fund and suffer a further cut of 2.5%, leaving a net return of  2.5% from their insurance policy.