Read the debate in this blog:
http://kwayteowman.blogspot.com/2008/05/to-regulate-or-not-to-regulate.html
Saturday, July 12, 2008
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:
http://news.asiaone.com/News/the%2BStraits%2BTimes/Story/A1Story20080712-76200.html
The article mentioned that my blog on public transport can be found in this website. The actual website is:
www.singaporepublictransport.blogspot.com
http://news.asiaone.com/News/the%2BStraits%2BTimes/Story/A1Story20080712-76200.html
The article mentioned that my blog on public transport can be found in this website. The actual website is:
www.singaporepublictransport.blogspot.com
Low yield for policies with restructured bonuses
FIRST POSTED ON 10 MAY 2008
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.
1. GROWTH (LG SERIES)
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.
2. LIVING (LW SERIES)
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.
CONCLUSION
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.
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.
1. GROWTH (LG SERIES)
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.
2. LIVING (LW SERIES)
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.
CONCLUSION
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.
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.
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.
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.
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.
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!
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
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.
http://invest.avivadirect.sg/SG/index.cfm?current=fasttrack/index
HK
REPLY
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.
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.
http://invest.avivadirect.sg/SG/index.cfm?current=fasttrack/index
HK
REPLY
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.
J
REPLY
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.
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.
J
REPLY
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".
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?
P
REPLY
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.
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?
P
REPLY
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?
L
REPLY
My advice is contained in these FAQs:
http://www.tankinlian.com/faq/choice.html
http://www.tankinlian.com/faq/savings.html
I prefer to avoid whole life or endowment plans, as they give a poor return to policyholders.
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?
L
REPLY
My advice is contained in these FAQs:
http://www.tankinlian.com/faq/choice.html
http://www.tankinlian.com/faq/savings.html
I prefer to avoid whole life or endowment plans, as they give a poor return to policyholders.
Wednesday, July 09, 2008
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
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.
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
LIFE INSURANCE ASSOCIATION OF MALAYSIA
http://www.liam.org.my/cms/layout/Printer.asp?ProductID=237&catid=13
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
http://www.liam.org.my/cms/layout/Printer.asp?ProductID=237&catid=13
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
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
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