Terminate an existing policy?

Dear Mr. Tan,
Please advice if it's good for me to terminate this policy (benefit illustion attached) which I hold since 1993. I intend to buy term and invest the cash in ETF STI. Appreciate what you are doing…

REPLY
Please follow this guide and let me have your preliminary conclusion:
http://www.tankinlian.com/faq/existinglife.html

Being accessible to customers

Dear Mr. Tan,
I was reading your blog entry titled: Excellent Customer Service. I also understand that you used to communicate with customers directly when you were a CEO, is that what you mean by being "accessible"?

I can't figure out the rationale behind needing to have top people who are accessible to customers. Personally, as a buyer of a service or product, I do not really care about who solved my problems when they arise, I do not go directly to the highest level but work my way up until my problems are fixed. So if an organisation is able to hire and train good customer service officers, I do not see the need to have access to the top people.

I must say though, to have a very good customer service team is not easy. As a customer or shareholder of a company, I don't think it's a good idea to have the top people handling customers, as I think the cost will have to be passed on somehow, either to the customer or the organisation's bottom line will suffer. I hope and would appreciate if you could enlighten me.

REPLY
Most customers have their issues solved at the lower levels. Only a small number of cases go to the top. Some customers write an email to me (3 to 5 per day). It was quite easy for me to handle them.

I give them an immediate reply (usually a partial reply) and forward the issue to the right people to handle it. It worked quite well.

Immediate or deferred annuity

An immediate annuity pays the annuity payment immediately. A deferred annuity pays the annuity payment at a specified date in the future. During the deferred period, the invested sum is invested to earn interest.

If you do not need the annuity payment immediately, you have the following options:
a) buy a deferred annuity
b) invest your money separately and buy an immediate annuity at the future date

Your choice depends on the terms that you are offered. For example, if the insurance company pays 2.5% per annum for the deferred period, it will be attractive compared to leaving the money in the bank to earn 1%.

If you buy the deferred annuity, you are locked into the contract now. If you wish to withdraw from it later, you may be subject to penalty. You should choose the deferred annuity only if you are sure that it is what you really want.

My preference is to invest separately and buy an immediate annuity at the time that you need the annuity payment. For example, it is better to keep your minimum sum in the Central Provident Fund until 62 or 65 years, and earn interest at 4% plus bonus of 1%. You can decide at 62, if you wish to switch to an immediate annuity at that time.

Lesson: Keep the flexibility. Do not be locked into a contract that you cannot change. If you buy an annuity contact, stick to it for the entire period.

Lyxor Exchange Traded Funds (ETFs)

Hi Mr. Tan,
I read your blog. You said that it might be better to buy into ETF such as STI ETF to reduce expenses and upfront loading. Recently, there has been a number of Lyxor ETFs listed on SGX and they are denominated in USD. What is your opinion of such ETFs, in particular that the exchange rate risk of such ETFs seemed particularly high in current market?

REPLY
The Lyxor ETFs are denominated in USD for the purpose of trading only. The underlying risk depends on the asset class that the fund is invested in, and is not affected by the traded currency. For example, if the USD weakens and the underlying fund is performing well, the unit price denominated in USD will increase to compensate for it.

I am not familiar with the Lyxor ETFs, but if they are widely diversified, invested in good quality stocks (i.e. non speculative) and have low expense ratios, then these ETFs are suitable for long term investors.

Future role of the intermediary

Hi Mr. Tan
If more insurance companies offer their products through the internet, is there a need for insurance agents?

REPLY:
Insurance agents will continue to play a useful role. They have to advice the customer on making the final decision, after the customer has obtained most of the information from the internet. As the insurance agent takes less time to make the sale, the commission rate can be reduced.

This is similar to the situation with buying shares from a stockbroker. The brokerage is now 0.3% (as compared to 1% previously). The stockbroker continue to do well through a larger volume of business.

I use a stockbroker to obtain relevant information and handle the transactions. This is more convenient than searching for the information by myself. I do not mind paying a slightly higher brokerage (compared to transacting through the internet), as the service is valuable.

There is a role for insurance agents in the new environment. The new system will be more efficient and will reduce cost for the benefit of everybody. The agent can earn a fair rate of remuneration, but should not be placed in a conflict of interest.

The challenge is making the change to move forward.

Excellent Customer Service

Excellent customer service is built from the following components:

a) A genuine belief in doing the best for customers
b) Simple and efficent processes
c) People who enjoy serving customers
d) Teamwork among the service providers
e) Competent leadership, who knows the business

It is not possible to have excellent customer service under the following environment:

a) When an organisation wants to increase profit at the expense of customers
b) When there is high turnover of managers and staff
c) When people look after their individual performance, rather than work as a team
d) When the top people are not accessible to customers

There are so many organisations that fall into this trap. The leaders think that excellent customer service can be achieved by engaging consultants to improve the processes. It hardly works.

It takes man years to build an organisation that has excellent customer service. It can take a short time to destroy it.

5 year Single Premium Endowment

Hi Mr. Tan,
I wish to seek your advice on the best return single premium endownment for 5 years. This sum of money is mean for housing which i intend to use it after 5 years.

My objective is to treat the single premium endowment as a form long term fixed deposit for high return as compare to the current fixed deposit rate. Thank you for your advice.

REPLY
You have to do some work. Call the telphone numbers of the life insurance company directly. Tell them that you have $x and wish to have a 5 year single premium endowment. Let me quote the best terms to you.

You can show me the figures (of guaranteed and non-guaranteed benefit). I will help you to make a decision. The telephone numbers of the insurance companies are found in this FAQ:
http://www.tankinlian.com/faq/termd.html

Alternatively, you can ask a bank or stockbroker to find a government bond that will mature in 5 years time. You will probably get a yield of about 3%. Over 5 years, the gain should be about 16%.

Should MAS ban high cost products?

Someone posted a comment about an ILP product that gives poor cash value after two years. He asked, "Why doesn't MAS (i.e. Monetary Authority of Singapore) ban this type of product, or set some limit on the commission that can be paid to the agent?"

It seems that many consumers are not aware about the high charges of an ILP product, and now learn to their regret that so much of their savings is taken away from them.

If you are in this category, and you felt that the insurance agent has not been fair in disclosing this important point to you, should write to MAS. If enough people write to MAS, maybe, they will take actions to protect the interest of consumers.

Alternatively, you should write a letter of complaint to the newspapers and wait for MAS to reply to your letter.

High charges of ILP policy

There are many stories about consumers who bought the ILP policy from several insurance conmpanies and agents, only to find the cash value to be so low after paying permiums for two years. Read this website to learn about the high cost:
http://www.askdrmoney.com/Ins_ILP_RP.htm

According to this survey by Dr. Money, the insurance proeuct can take away 19 months of your savings. If you save $300 a month, you will lose more than $5,000. It is a lot of hard work for you to earn this money. It is taken away to pay the insurance agent and the marketing cost of the insurance company.

You should avoid these high cost insurance products. Please help to tell your friends and relatives. They should avoid ILP policies sold by insurance agents.

It is better for you to invest in a low cost fund, such as the STI exchange traded fund (i.e. managed by StateStreets).

You can also wait for a few months, and invest in the Wealth Accumulator which will be introduced later this year. Read this FAQ:
http://www.tankinlian.com/faq/low.html

Keen interest in Wealth Accumulator

Hi Mr. Tan,
I follow your blog, and there's more and more story about ILP charges. Sadly, I also have ILP policy with this "P" insurance company. When I signed the policy, I thought that's the only insurance model I can have with some value return. As for term insurance, initially, I thought it's not good since the policy doesn't return any value at the end.

But, as I read your blog, I understand that "Buy Term and Invest the Rest" might be a better model. However. it's too late for me, as the ILP has been signed about 1.5 years ago, and as you already know, the cash value is so little at this time. As I will still be charged by premium cost for another 1-2 years (which might be around 50%), do you think I should surrender this policy now?

Since current ILP model mostly doesn't give proper benefit to customer, and only gives heavy benefit to insurance agent, why don't the government ban this insurance model? Or at least make some regulation for the size of the initial premium charge? Government has done similar to the Sales Charge of Unit Trust, which only allows 3% sales charge to the Unit Trust (if it's invested using CPF), which as expected, followed by the reduction of sales charge by almost all institution or bank.

I look forward to your "Wealth Accumulator" product. Hope it will be an "innovation" that will be followed by other insurance company to provide better benefit for customer. May I know how you will realize/market this product?

REPLY
If you are willing to cut loss, you can terminate the ILP policy now and save on the high charges for the next few years. I hope to get a new insurance company to offer the Wealth Accumulator product later in 2008.

Read this FAQ to learn about the Wealth Accumulator:
http://www.tankinlian.com/faq/low.html

Disappointing service at Business Center

Dear Mr. Tan,
Firstly, I will like thank you for your blog, which Ibelieve is beneficial to consumers.

I have visited a business centre of an insurance company on two occasions. Both times, the business consultants wanted to sell the idea of Life insurance to me. They looked disappointed when I insisted on a low cost term policy instead.

The moral of the story is;
1) Even though the consultants are earning mostly afixed salary (a small component in commission), it is difficult to be objective when commissions no matter how small or targets are involved.

2) Consumers have to take some responsibility in educating themselves and study the product before purchasing any products. It is difficult to obtain objective advice.

REPLY
Thank you for your feedback. I hope to get a new life insurance company to offer low cost insurance and low cost investment funds. They can be bought over the telephone or its office. This will happen later in 2008.

Mobile phone and car model

Which popular mobilephone is the opposite of a car model?

Dollar Averaging

Hi Mr Tan,
I have an investment link policy. My advisor has advised me to invest on a yearly basis to enjoy better allocation rates (i.e. at the moment, I am doing regularly investment on a yearly basis).
My question is for dollar cost averaging to work best (i.e. for long term investment), it is advisable to invest on yearly or monthly basis? You advice is appreciated.

REPLY

Both methods should produce neutral results. The effect of dollar averaging depends on the level of the market at the time of each investment

It is more important for you to buy an ILP that invest 100% of your annual or monthly premium. Do not buy an ILP that takes away two years of your savings.

Read this FAQ:
http://www.tankinlian.com/faq/ilp.html

I have posted two cases in my blog of policyholders who were shocked to discover that after investing over $2000 for 2 years, they cash value is less than $400 today. You should not fall into the same trap.

ILP policy takes away most of the premiums

Dear Mr. Tan,

I've bought an ILP policy. My premiums are $1200 per year and have paid it for two years. I has cash value of about $310 now. The sum insured is 100k. It is a yearly premium and the third one is going to be due soon.

After reading about the charges and feasibility of ILPs, I'm sceptical that I should keep this policy. Would you advise me to give it up or continue with it?

REPLY

I suggest that you ask the insurance company about the charges for the next three years, i.e. what percentage of your premium will be invested. If the charges are small, it is probably better for you to continue the policy, as you have already incurred most of the front end charges.

It is quite sad that an insurance company can take away so much of a person's savings. You should tell your family and friends to avoid this type of policy in the future.

I intend to get a new life insurance company to introduce an ILP that has no front end charge. 100% of the premium will be invested. Tentativelyly, this is called the Wealth Accumulator.

Read this FAQ:
http://www.tankinlian.com/faq/low.html

Makeover of Orchard Road

I read about the $40 million makeover of Orchard Road.

Here are my wishes for this project:
a) Have a second level covered walkway to allow people to connect the whole stretch of Orchard Road. This can be linked to all the buildings.
b) Build a light monorail to run down Orchard Road connected to the walkway.
c) Have large multi-storey carparks on the fringe of Orchard Roads, connected to the monorail.

This will reduce the traffic congestion on Orchard Road. It will make shopping in Orchard Road more pleasant.

Change of address

The authority now requires a resident to provide documentary proof for a change of address in the NRIC records. The documents could be a bill sent to the resident in the new address. This can caused timing problem.

I wish to suggest a practical solution. The new resident can ask two neighbours to be witnesses to the residency. The neighbours particulars can be provided for the authority to make the verification.

This is simple and effective. It also encourges the new resident to knock on the doors of the neighbours.

Local Bus Services

I wish to introduce the concept of local bus services. I propose that it operates as follows:

a) Use light buses
b) Runs a specific route in a town
c) Uses the existing bus stops
d) Actively publicised through maps at bus stops
e) Operated by small operators
f) Licences to be given based on service level and commuter demand
g) Can be exempted from road tax and ERP, so as to bring down the cost for commuter
h) Fares to be controlled

Some taxi drivers may be interested to be operators of these light buses. This will reduce cost and create a more efficient public transport system.

Premium Bus Services

Is there a website that shows all the premium bus services that are available in Singapore?

It should show the pickup areas, drop off points, and the fares. Commuters can have an easy acces to the information instead of searching the many websites of the operators.

I hope that Land Transport Authority can be the central source of this information.

Loading for term insurance

If you are a smoker, or have an adverse family history of cancer or heart disease, you may have to pay a loading of up to 100% on the standard premium for term insurance. As the premium rate is quite low, this loading may be still quite affordable.

Read this article: http://www.tankinlian.com/course/usa.html

High unemployment among youths in S Korea

My friend in South Korea told me that there is a high rate of unemployment of youths. Employers are reluctant to increase employment as it is costly to downsize the workforce during economic slowdown. The trade unions are strong and impose high cost for termination of workers.

Some employers will recruit young workers as temporary employees and pay wages that are half the rate of permanent workers.

Lesson: If trade unions are too strong, employers are afraid to recruit more people. If trade unions are too weak, employers pay low wages. The soceity has to find the correct balance between what is good for business and fair wages for workers.

Leverage

Leverage is the amount of loans compared to equity. If the leverage is 1 time, the amount of loan is the same as the amount of equity.

Some hedge funds are leveraged by 10 times. The borrowing is 10 times of the equity of the investors. This is risky.

I recalled that at the time of its collapse, Bear Stearns was leveraged 30 times. This is far, too high. To make matters worse, the borrowings are short term and their investments are long term. When the lenders refused to refinance the borrowings, Bear Stearns become insolvent. If they had to sell their investments, the markets would collapse. Bear Strearns had to be rescued by J P Morgan.

Lesson: It is very bad for hedge funds and investment banks to be highly leveraged. Leverage of 10 times is too high. Leverage of 30 times is madness.

Personal savings for retirement

Hi Mr. Tan Kin Lian
I enjoyed your blog. My friend told me that the savings in CPF is not sufficient for retirement needs. I have to supplement it with personal savings to be invested for my retirement. What is the amount that I should save? How is this computed?

REPLY
I usually advice people to save 10% to 15% of their regular earnings for the future. This should be invested in a low cost fund, preferably an equity fund to obtain the best return.

This is explained in this FAQ:
http://www.tankinlian.com/articles/savings.html

Low cost funds

Dear Mr. Tan,
You referred to a low cost fund. What is the expense ratio that can be considered "low cost"? How do you find the expense ratio for a life insurance policy?

REPLY
If you are investing for the future, you should look for a fund that have an expense ratio of less than 1%. If you earn 6% and deduct an expense ratio of 1%, you get a net yield of 5%.

For a life insurance policy, the front end and other charges will reduce your yield by about 2.5%. It is quite high.

Read this FAQ:
http://www.tankinlian.com/faq/expense.html

Difficult to find parking space

I visited a friend at his office in Bukit Merah. There is no parking space in his building or in the large building next to it. I had to park at a multi-story car park a few blocks away.

I concluded that it would have been more convenient to use public transport or to travel by taxi (in spite of the high fare). It is becoming quite inconvenient (and expensive) to use a private car.

Singapore and Global Equities

Hi Mr. Tan,
You advised many people to invest in the STI ETF. This is invested only in Singapore. Should they be more diversified and invest in global equities? What are your views?

REPLY
It is all right for a Singapore resident to invest in Singapore equities. If you invest in the STI ETF, you are quite well diversified.

If you wish to take a global perspective, or you wish to reside abroad, it is all right to be invested in global equities.

This FAQ shows the past yields of the various asset classes, including Singapore and global equities:
http://www.tankinlian.com/faq/returns.html

Professionally managed funds

Dear Mr. Tan,
Is it better to buy a long term investment portfolio offered by banks or to buy company shares directly from a broker? What's your advise?

REPLY
It is better to invest in a professionally managed fund, provided that the expense ratio is kept below 1%.

The advantages are:
a) Diversification. You are invested in a large number of shares, and not in a few shares
b) Stock picking. You do not have to worry about stock picking. It is done by the fund manager
c) Transaction. You do not have to take care of collecting dividends, subscribing to rights issues, paying for share purchases and other tedious tasks. They are done by the fund.

Let the professionals take care of the investments (if the fees are modest).

However, if you have a large sum to invest (say, more than $1 million) and you can afford to spend the time to take care of the investments, you can buy the shares through a stockbroker. You will save the fees charged by the fund, but you have to do the work on your own.

Hedge Funds

Someone asked me to explain a hedge fund. Here is an explanation from Wikipedia, accessed through Google.

A hedge fund is a private investment fund that charges a performance fee and is typically open to only a limited range of qualified investors.

Hedge fund activity in the public securities markets has grown substantially as it constitutes approximately 30% of all U.S. fixed-income security transactions, 55% of U.S. activity in derivatives with investment-grade ratings, 55% of the trading volume for emerging-market bonds, as well as 30% of equity trades.

Hedge Funds dominate certain specialty markets such as trading in derivatives with high-yield ratings, and distressed debt.

Alfred Winslow Jones is credited with inventing hedge funds in 1949.

In the United States, in order for an investment fund to be exempt from direct regulation, it must be open to accredited investors only and only a limited number of investors can belong to it.

While there is no legal definition of "hedge fund" under U.S. securities laws and regulations, typically they include any investment fund that, because of an exemption from the types of regulation that otherwise apply to mutual funds, brokerage firms or investment advisors, can invest in more complex and riskier investments than a public fund might.

Hedge funds managed from other countries have similar relationships with their national regulators. As a hedge fund's investment activities are therefore limited only by the contracts governing the particular fund, it can make greater use of complex investment strategies such as short selling, entering into futures, swaps and other derivative contracts and leverage.

As their name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods, most notably short selling.

However, the term "hedge fund" has come in modern parlance to be applied to many funds that do not actually hedge their investments, and in particular to funds using short selling and other "hedging" methods to increase risk, and therefore return, rather than reduce it.

Hedge funds have acquired a reputation for secrecy. Being outside the regulatory regime that applies to retail funds greatly reduces the information a hedge fund is legally required to make public. Additionally, divulging trading methods and positions would compromise the business interests of many types of hedge fund, tending to limit the information they want to release.

The assets under management of a hedge fund can run into many billions of dollars, and this will usually be multiplied by leverage. Their sway over markets, whether they succeed or fail, is therefore potentially substantial and there is a continuing debate over whether they should be more thoroughly regulated.

COMMENT BY TAN KIN LIAN
A big risk in hedge fund is that its investment is "multipled by leverage". They borrowed additional funds at the market rate of interest to increase their investments. During the market downturn, the borrowers refused to refinance the short term loans. This caused the liquidity crisis.

Delay in issuing a policy

Hi Mr. Tan,

Could I seek your advise on this issue. My husband and I went down to one of the Business Centre in NTUC and sign off and make premium payment for Living Benefit policy under the Family Policy.

Yesterday, we received a letter to ask us to go for routine checkup and that NTUC will decide if they will take on the policy with us. Is it right for the insurance company to receive premium payment and then 3 weeks later sent us a letter of such?

What if something happens during this period? After making the premium payment, I thought I am covered under the policy and was shocked when I received the letter yesterday..

REPLY
The coverage will commence on the commencement date shown in the policy. This will be after the acceptance of your application, including medical checkup. In the meantime, the premium is received as an "advance premium" and is refunded in full if the application is rejected.

During my time, NTUC Income offered coverage against accident from the time of payment of the premium until acceptance of the application. I am not sure if this practice is still being continued. You can ask the business center about it.

Normally, there should not be a delay of 3 weeks. It should have been processed much earlier. It must have been an oversight.

What you may lose is the interest on the premium paid for a few days or weeks. As the interest rate is quite low, the lost interest is not significant. If you get accident coverage, it should make up for this lost interest.

6 digit postal code

The 6 digit postal code used in Singapore is organised as follows:

a) A specific code is given to each building or residential block, e.g. 560207 is block 207 in Ang Mo Kio. The individual units are identified by the unit number, e.g. #12-456 for level 12, house 456.

b) Each landed property has a separate 6 digit number, e.g. 8098xx is for xx Begonia Drive.

In my view, it is inefficient to allot a 6 digit number for each house. It is better to allocate a 6 digit code for each street, e.g. Cactus Crescent and to identify each house by the house number. All the houses in the street share the same 6 digit code.

This new method has the following advantages:

a) Reduce the size of the postal code directory by as much as 90% (my estimate)
b) Allows the use of 6 digit postal code and house number for mailing.

A letter can be sent to

Lee Kim Teck
15
Singapore 809001

809001 could be the name of a street, say Begonia Drive.

Letter with postal code only

I send a letter addressed to the following:

Tan Kin Lian
Singapore 809744

The letter finally arrived after 20 days. The post office searched for my house address and street address, using my postal code, and wrote it on the envelope. This is necessary for the postman to deliver the letter to my house (i.e. the "last mile").

Congratulations to Singapore Post. They did take the trouble!

Investing in resource and commodity

Hi Mr. Tan,
What is your view about investing in resource and commodity sector? I understand that this sector has appreciated fast during turmoil in the financial market, caused by high price of oil, gold, and other commodities. However, there's also a recent correction, which might give a better opportunity to enter.

What is your view of this sector fund? Currently I am looking at First State Global Resource, which has 1.5% annual management charge, and 1.74% expense ratio. The United Global Resource Fund has 8.63% expense ratio (which I think it's too high).

REPLY
I am not familiar with investing in the resource and commodity sector. I heard the comment of an analyst on CNBC. He said that commodities are bullish now, but investors should be ready to sell at short notice. He reminded investors about what happened on the bursting of the dotcom bubble.

I prefer to invest in a well diversified equity fund.

Investing in hedge funds

Hi Mr Tan,

Hope to seek your advice on my queries:
1) What is a hedge fund?
2) There are many investment portfolios offered by banks, are any of these considered as hedge fund?
3) Can you give an example of a hedge fund?
4) Is it safe to buy investment portfolios offered by banks such as UOB, OCBC?
5) Is it better off buying a long term investment portfolio offered by banks or is it better off buying company's shares directly from a broker? What's your advise? Note that I'm not one person who market watch.

REPLY
I suggest that you search for "Hedge Funds" in Google. You will come across several references in the internet. You can read the articles on hedge funds there.

If you are picking a unit trust offered by a bank, you should look at the initial spread, the annual expense ratio and other factors. Most of these funds have high charges that reduce the return on your investments.

You should avoid investing in an investment that you are not familiar, such as a hedge fund. There are many types of hedge funds. They take money from the investors and borrow additional money (i.e. leveraged) to make risky investments. Many hedge funds performed badly during the past year, as their investments lost money.

I usually advice people to buy a low cost diversified fund, such as the STI ETF, as a long term investment. Read this FAQ:
http://www.tankinlian.com/faq/savings.html

Invest in a life annuity

Dear Mr. Tan,

I am 61 year old. I have around $100,000 to invest. I need your advise on a better investment compared to the low interest rate for fixed deposit.

I am thinking of putting the sum to a deferred anunity with NTUC Income. Am I able to withdraw the full amount from NTUC when I reach 65 years old. What are the likely return I will be getting in 4 year time?

REPLY
I suggest that you call the business center of NTUC Income and ask them about the return on the deferred annuity.

Please read this FAQ
http://www.tankinlian.com/faq/life.html

Poor return on ILP policy

Hi Mr. Tan,
Great to chance upon your website!

I have an issue with my ILP investment. My annual premium is $1200, and I have been paying it for 2 years and eight months, current cash value at only $600.

I'm aware it's too late to cancel the account. Even though my monthly premium is not high, I still don't like the idea of paying for mortality charges.

Do you think it's more worthwhile to cancel now, suffer some loss and start investing in better products for a longer term gain? Does this make sense?

REPLY
As you have paid two years of premium, most of the upfront charges have already been incurred. I suggest that you keep the current investment account.

You can ask the insurance company for the mortality charges for the next five years and compare them with the benchmark rates shown on the attached.
http://www.tankinlian.com/faq/benchmark.html

If the mortality charges are too high, you can cancel the life insurance cover and buy a term insurance policy. You can still keep the investments.

If the mortality charges are reasonable, you can continue the policy for the next 5 to 10 years. You can cancel it when you reach age 60 or 65.

Public Tender

Singapore is used to the public tender system. The business is awarded to the tenderer who submitted the most competitive (lowest) bid. In some cases, the tenderer have to bid below cost, to win the tender. They find ways to cut corners to meet the low budget, leading to a poor quality of work.

Someone observed that the public tender system favours the large companies. They have the financial resources to spend money to submit the bid. The smaller companies are not able to compete.

I hope that there is another way for the principal to offer a reasonable price, and select the contractor based on their ability to deliver a better quality of work.

Walkways in Hong Kong

My friend worked in Hong Kong a few years back. When he arrived in Hong Kong, he was provided with a car. After two months, he sold off the car. He preferred to use the Hong Kong MTR (Mass Transit Railway).

It was possible to walk to a nearby MTR station from most parts of Hong Kong. He could walk through the underground or overhead walkways. It was quite comfortable during most months of the year, due to the congenial weather.

He observed that many people in Hong Kong and Japan were quite slim. The walking is good for their health and keep them fit.

I hope that all MRT stations in Singapore have underground or overlink walkways. If commuters can walk in these sheltered walkway at a different level from the road traffic, more people will be willing to take the train. This has been proven by the Hong Kong experience.

Interest rate on CPF savings

Mr. Tan,
From 1 January this year, interest rate for savings in the Special, Medisave and Retirement Accounts (SMRA) is pegged to the 12-month average yield of the 10-year Singapore Government Security (10YSGS) plus 1%. The average yield of the 10YSGS over one year, from 1 March 2007 to 29 February 2008, plus 1% works out to be 3.75%.

According to the news, CPF Board will only provide a floor of 4% for the Special, Medisave and Retirement Accounts rate for 2008 & 2009 only. The 4% will be lifted after 2 years, and the 2.5% floor rate will apply for all CPF accounts thereafter.

In view that the average yield of 10YSGS from Mar 07 to Feb 08 is only 2.75%, I'm kinda worry about this lower rate.

Furthermore, remember that last year, CPF Board encourage members to transfer their OA to SA and earn a 4% steady yearly compound interest seems to be no longer valid after 2010.

Care to share you comments?
http://mycpf.cpf.gov.sg/CPF/News/News-Release/N_10Mar2008.htm

REPLY
I recommend the following:
1. Transfer your OA to SA to earn a higher rate of interest
2. Do not worry that the interest rate will drop below 4% as you still getting 1% higher than the market rate for govt bonds
3. I expect the interest rate to increase, due to higher inflation.
4. If you wish to earn a higher return on your OA, I suggest a low cost diversified fund.

See this FAQ:
http://www.tankinlian.com/faq/savings.html

CPF Life Annuity

Hello Mr. Tan
I am 59 years of age and am interested in participating in the CPF annuity scheme. As I have full faith in our government and when given the choice, I will always opt for a government managed program than a private company's.

However, I have been told by a CPF counter staff that the details are still being finalised and that this program will only start in 2013. I am not sure if the staff has given me the right information - why would the government take such a long time to start this program? I wouldn't know if 2013 will be too late for me.

REPLY
The CPF Lfe Annuity scheme is intended for people who reach age 50 in a few years time. You exceed this age. So, it is not intended for you.

You can leave your money in the CPF retirement fund to be drawn down in installments. It will earn an attractive rate of interest, currently at 4% plus 1% bonus on $40,000.

You can buy a life annuity from a private insurance company with your personal savings.

Two layer upfront charge

If you invest in a regular premium investment linked product (which is commonly sold in the market), you are hit with a two layer upfront charge, namely:

a) Distribution charge
b) Spread

The distribution charge is the proportion of the premium that is taken away from your savings during the first few years. Typically, this proportion is about 80% during the first year, 50% in the second year and 25% in the third and fourth years. The total taken away is 180% of the annual premium.

If you invest $500 a month, the amount taken away during the first 4 years is 180% of $500 X 12 or more than $10,000. This is the money that is taken away from your savings to pay commisison to the agent and other marketing expenses.

The net amount that is invested is subject to another upfront charge, called the spread. This could be as high as 5% of the invested amount.

For example, if you invest $500 a month during the first year, only 20% or $100 is invested each month. This invested sum has to buy the units at a spread of 5%. This is another upfront charge. After taking away this charge, the actual amount that is invested is only $95. You pay $500 and only get units worth $95.

If you are buying a regular premium ILP, you should ask about these two layer upfront charge. It is too costly. I advise you to avoid this type of investment.

Low cost products

What are the low cost products?

They are:

a) Low cost insurance, i.e. term insurance
b) Low cost, diversified fund

Find out more from this FAQ:
http://www.tankinlian.com/faq/low.html

Financial planning for the young

I recommends that a young person should save 15% of the earnings. This FAQ shows how this saving rate can contribute towards an income after retirement at age 65:

http://www.tankinlian.com/faq/finplan.html

Alternative Investments

Alternative investments are hedge funds, managed futures and managed currency funds. The proponent of this asset class argues that it is not correlated to the traditional asset classes, for example, they can move in the opposite direction to equities.

This is suitable for short term investors, including professional fund managers, who are required to avoid showing a portfolio loss during a year.

For a long term investor, it is better to take the volatility and benefit from the average higher return over the long term. There is no point in investing in equities and than offsetting them by alternative investments. This strategy incurs high costs and reduces the return to the long term investor. It gives good fees to the professionals (i.e. fund managers).

If the investor wish to avoid volatility, it is better to invest in fixed income bonds, and accept a lower long term return. Do not invest in complicated structured products (including alternative investments) that gives you an even lower return.

Ku Li

Who is Ku Li?
Clue: He is a Malaysian politician, and not Chinese.

Benefit, insight, honesty

Dear Mr Tan,
I have been reading the articles on your site and found them to be of great benefit, insight and honesty. I wish to commend you on your efforts which many of us could certainly benefit from.

Amazing Numbers

Try this puzzle:
http://www.tankinlian.com/amazing/index.html

Do you want to know the secret behind the Amazing Numbers? Send an e-mail to me. If you know the secret, you can make the cards (using the numbers from my website) and amaze your friends!

Walk half of the distance

You are in a large hall. There is a pretty girl at the other end of the hall. You are old that it takes 10 seconds to walk half of the distance to the girl, another 10 seconds to walk half of the remaining distance, another 10 seconds to walk half of the remaining distance, and so on. How long will it take you to reach the girl?

Most people will say that you will never reach the girl. No matter where you are, it will take 10 seconds to walk half of the remaining distance.

What is the practical answer?

Asset Allocation

Dear Mr. Tan,
I read a comment in the blog from someone who said that a long term investor should look at asset allocation, which accounts for most of the yield. Can you explain this concept?

REPLY
Asset allocation means choosing the class of assets to invest in. The main classes are:
a) Equity
b) Bonds
c) Property
d) Cash

Within each class, there are sub-classes to choose from, e.g. different markets or sectors.

If you are focusing on asset allocation, you are giving less emphasis on stock selection, i.e. choosing the specific shares or bonds within the sub-class. You can invest in a fund that is invested in many shares or bonds within the sub-class. This is called diversification.

For a long term investor, the yield on equity is higher than bonds. I advice long term investors to invest in equities and ride out the volatility, i.e. average out the good and bad years.

Read this FAQ to get some information about the long term yield on various asset classes:
http://www.tankinlian.com/faq/savings.html

For my long term investments, I prefer to invest in Singapore equities, e.g STI ETF or in global equities, e.g. S&P 500. The S&P 500 are the largest US companies, which have global operations. I prefer indexed funds, as they have low charges.

Investing at a low level

Hi Mr. Tan,
I read your comment about two weeks ago, when someone asked you if it is all safe to invest in the stockmarket. You said that for a long term investor, the market represents good value as it is 30% below its recent peak.

I decided to take the plunge and invest my cash at that level over a few days. My investments have shown an appreciation of over 5%. Thank you for your good advice.

REPLY
Congratulations on making a good investment decision. The market is still quite uncertain and volatile, so you should be prepared in case there are some negative surprises over the next few weeks.

Do not be worried about the volatility, provided that you are well diversified. I hope that you have invested in a low cost, diversified fund, such as the STI ETF. If you are investing for the long term, you will ride over the current downturn.

Intramuros, Manila

Intramuros means "inside the wall". It is the old walled city of Manila. The buildings are old, in Spanish style. I find them to be quite enchanting. Here are some pictures.

Invest in a diversified fund for the long term

Dear Mr. Tan,
I have just opened an investment account with fund supermart. I wish to begin my first investment in unit trust. I am an moderate aggressive player and high returns are important to me. I am willing to take higher risks for significantly higher returns over time (above 10% p.a.). I am willing to take the risk of downside around 20% in 1 year. Can you please provide me with some suggestion on what fund to invest in the year 2008?

REPLY
My advise is to invest in low cost, diversified funds. You can aim for a more modest target of 6% to 8% p.a. for the long term. You have to deduct about 1% to cover the expenses.

Read this FAQ:
http://www.tankinlian.com/faq/savings.html

Diplomat and the lady

This story is told by a diplomat.

If you ask a favour from a diplomat and he says "yes", he means "maybe". If he says "maybe", he means "no". If he says "no", he is not a diplomat.

If you ask a favour from a lady and she says "no", she means "maybe". If she says "maybe", she means "yes". If she says "yes", she is not a lady.

Quotes on History

George Bernard Shaw:
We learn from history that we learn nothing from history.

George Bernard Shaw:
We are made wise not by the recollection of our past, but by the responsibility for our future.

George Santayana:
Those who cannot learn from history are doomed to repeat it.

George Wilhelm Hegel:
What experience and history teach is this -- that people and governments never have learned anything from history, or acted on principles.

Gerda Lerner:
We can learn from history how past generations thought and acted, how they responded to the demands of their time and how they solved their problems. We can learn by analogy, not by example, for our circumstances will always be different than theirs were. The main thing history can teach us is that human actions have consequences and that certain choices, once made, cannot be undone. They foreclose the possibility of making other choices and thus they determine future events.

Karl Marx:
It is not "history" which uses men as a means of achieving -- as if it were an individual person -- its own ends. History is nothing but the activity of men in pursuit of their ends.

Kurt Vonnegut:
History is merely a list of surprises. It can only prepare us to be surprised yet again.

Mark Twain:
To arrive at a just estimate of a renowned man's character one must judge it by the standards of his time, not ours.

Oscar Wilde:
Anybody can make history. Only a great man can write it.

Pearl S. Buck:
One faces the future with one's past.

Percy Bysshe Shelley:
Fear not for the future, weep not for the past.

Ralph Waldo Emerson:
All history becomes subjective; in other words there is properly no history, only biography.

Winston Churchill:
History will be kind to me for I intend to write it.

Medical insurance and large bills

An insurance agent said that a good medical insurance policy will cover the large bill of $150,000.

This may not be the case. Some of the expensive treatments exceed the limits in the policy or are excluded from the policy.

Before you incur expensive treatment, it is necessary to consult your insurance company and check on the items that are covered. This is to avoid the shock of being landed with a bill that you cannot afford.

I have come across many cases of unhappy customers who find that only a small part of the bill is covered by insurance, in spite of what they were told by the insurance agent!

Most importantly, you should spend your money wisely. Do what is best for your loved one, but do not waste money on expensive treatment with a slim chance of recovery.

Escalation of medical bills

Someone asked the question, "Why was the original estimate of $50,000 allowed to escalate to a bill of $150,000?

This is the real, commercial world. This is how some private sector doctors can make millions of dollars in income.

I have high respect for many doctors who earn a modest income and practice medicine in the best interest of their patients.

Evaluate your options

Someone asked me what I would do, if I were in my friend's situation and expensive medical treatment is needed for a loved one.

Here is my approach:
a) I will evaluate various alternatives, from various doctors
b) I seek advice from independent and knowledgeable people
c) I will not depend on the advice of an adviser (doctor) who has a conflict of interest

I wish to share this story.

A few years ago, Dr. Ee Peng Liang, the "father of charity" in Singapore, told me, "Kin Lian, my doctor told me that I had stomach cancer. But I have decided not to be treated as I am already over 80 years. I will leave this matter in the hands of God". Dr. Ee passed away peacefully after a year or two.

There are many ways to "do the best" for a loved one. Spending money on expensive medical treatment, with a slim chance of recovery, is only one way.

Expensive medical treatment

My friend's wife passed away recently from cancer. She was in her early 50s.

This was the third cancer attack over the past 15 years. My friend appointed a private cancer specialist to treat her. The initial estimate was $50,000. The total medical bill increased to $150,000.

My friend knew that the chance of recovery was very slim. When the initial estimate was exceeded, he found it difficult to decline the suggestion of further treatment. He had to spend so much money, when there was virtually no hope. He earned a modest income, so the medical bill represented many years of his earnings.

He had made an insurance claim on an earlier cancer treatment. The latest episode was not covered by insurance.

Lesson: There is no point in spending so much money for treatment, when there was virtually no chance of recovery. He should have obtained independent, objective advice from another specialist (other than the specialist that treated his wife).

Learn about property derivatives

Dear Mr. Tan,
I would like to ask about property derivatives. How are they used (examples) and valued? Could you explain them in detail? Please recommend some journals which could help me to find the answers of the questions above. Your efforts will be greatly appreciated. With many thanks.

REPLY
You are probably referring to the asset back securities and collaterilised debt obligations (CDO) in the USA. I suggest that you search Google for these items, and read the writings from the experts. All the best.

Government Bonds

Dear Mr. Tan
I am interested to buy Singapore Government Bonds for investment. Can you please tell me more about it as to where, how can when should I buy the Bonds.

REPLY
You can approach a bank or a stockbroker.

Invest your SRS

Dear Mr. Tan,
I am 47 yrs old and have been contributing regularly in cash to my SRS account so as to lower my income tax. I have been using the money to buy NTUC Income Growth policies for 15 to 17 years' term. The projected return is about 4 %. Do you think I am making a wise investment decision? Are there better ways to invest the cash in my SRS account?

REPLY
Read this FAQ:
http://www.tankinlian.com/faq/savings.html

Poor value from USD policies

Dear Mr. Tan,
I have been a regular reader of your blog since recent months. and found it is very informative and helpful. Thank you so much for your invaluable sharing.

I understand more about how insurance works, but start to struggle about the policies bought for my families now. We bought the whole life plan for my husband and myself since 2004. The coverage is US $50,000. The premiums total USD 2000 for both policies. The breakeven is 12 years in USD, but we are also losing on the depreciation of USD.

What will be your advice on these policies? Stop? Reduce the coverages? I know the current value of them should be very poor.

REPLY
I am sorry that I do not have the time to give specific advice of this kind.
I suggest that you read the FAQ in my blog and see if you can get any answers from there.
www.tankinlian.com/faq

Set a realistic goal

Dear Mr. Tan
What ETF should I be looking at if I would like to achieve a return of 10-15% p.a. Thanks.

REPLY
I am not able to advice on any product that can offer 10% to 15% p.a. I only aim for 5% to 6% p.a. for my personal investments.

Read this FAQ about investing for the long term:
http://www.tankinlian.com/faq/savings.html

If you wish to invest in the STI ETF, you have to approach a stockbroker.
Wish you all the best.

Defamatory comments

I have blocked defamatory comments posted by visitors. These defamatory comments are directed at specific persons or organisations. They attack a person's character.

I allow comments that are fair and substantiated by facts.

Honesty is the best policy

Dear Mr. Tan,

I would like to extend my warm thanks for your honest insights into the insurance sector. Your advice correlates with what I have personally experienced and discovered through readings.

I'm afraid that while many agents state that they have the interests of the consumer at heart, in reality, they're more concerned about the commission.

I'll be recommending your blog to all of my friends. I hope more insurance agents will realise that "honesty is the best policy".

Thank you for your honesty. It is much appreciated in present times.

Stamp duty on purchase of property

I hope that the government will remove the stamp duty on purchase of property. The removal of this cost will encourage some people to change their homes to be closer to their place of work. This will reduce the number of people that have to commute long distance to work and reduce the congestion on the road.

If there is a loss of revenue, it can be compensated by an adjustment to the property tax. (In my opinion, this is not necessary).

The government has removed estate duty. It is time to take the next step, in the interest of reducing road congestion and travelling time and cost.

Mall of Asia, Manila

I visited the SM Mall of Asia in Manila. My host said that it is the largest mall in Asia.

It has an ice skating rink, cinemas, entertainment outlets, many stores, restaurants, a large department store and a hypermart.

Although the mall is large, it is easy to move around. The signage are excellent. In contrast, I often get lost in many of the smaller shopping malls in Singapore.

The mall is across a park and beach at the side of Manila bay. Here is a picture of sunset at the bay.

Role of agents

Dear Mr. Tan,
Is there a role for agents to sell low cost insurance and investment funds?

REPLY
The customer can buy from the following channels:
a) call center
b) internet
c) agent

As the agent earns a low commission, the customer has to contact the agent by telephone or visit the agent's office to complete the transaction.

Read this FAQ:
http://www.tankinlian.com/faq/lower.html

Cost of insurance

Dear Tan Kin Lian
My agent said that my ILP covers are personal accident, medical card, 36 disease and permanent disability. If I want to buy a separate policy to cover the above, I have to pay a higher premium. Is this true?

REPLY
You can compare the cost of the insurance covers under your ILP with the benchmark premium mentioned in this FAQ:
http://www.tankinlian.com/faq/benchmark.html

You can use the term insurance rates to compare with the death benefit, including permanent disability. The premium to cover 36 critical illness is 1.5 times of the term insurance rates (as a rough guide).

The ILP will probably charge you a rate that increases each year. The benchmark premium shows the level premium for the period. You can add the total premium for the period (say 20 years) to make a comparison.

Best insurance plan for your child

As a parent, you will probably ask the following questions:

a) What insurance protection should I buy for my child?
b) How can I save for my child's education fund?

An insurance agent will usually sell an endowment or critical illness to you to cover your child. The agent can earn commission of one or two years of your premium. The plan will give a low return to you.

Read this FAQ for an alternative approach:
http://www.tankinlian.com/faq/childlife.html

Earn a return of 6% to 24% per annum?

How can you earn this high rate of return?

By lending to yourself. Read this FAQ:
http://www.tankinlian.com/faq/return.html

Fuel consumption for your car

Here is a method to calculate the fuel consumption for your car:

a) Each time you top up the tank, record the mileage meter and litres of petrol filled
b) Find the distance travelled between two top-ups, and the litres of petrol used
c) Calculate the number of kilometers travelled for each liter of petrol

If you know the fuel consumption of your car (i.e. the number of kilometers travelled per litre of petrol), you can work out the cost per kilometer based on the current price of petrol.

Record the results for your car in the comment below.

Sunset at Manila Bay

Here is a picture of the sunset at Manila Bay, taken from a yacht.

Later, when the yacht was out in the bay and the night has fallen, there was a 4 string quartet playing nostalgic songs on the yacht. It was nice to feel the breeze as the yacht sailed slowly in the bay and hear the captivating sounds of the violins.

This experience reminds me of the song... You belong to my heart, now and forever .... And our love has its start, not long ago ... We were gathering stars while a million guitars played our love song ... When I said I love you, every beat of my heart said it too ....

Good advice from an uncle

Dear Tan Kin Lian,
I purchase the investment link policy(ILP) for 1 year. My uncle told me that ILP is not worth to buy. The insurance company and agent earn more commission. His advise is:

1) Don't join investment and insurance together, will definitely not benefit the policy holder.
2) For insurance, buy term life insurance which is cheaper and coverage higher.
3) For investment, buy mutual funds by our own.
Then I consult my agent and told him what my uncle told me.

My agent said that:
1) Term life policy do not cover the 36 diseases and medical card.
2) ILP coverage are Personal Accident(PA), Medical Card, 36 disease, Permanent Disability.
3) If I want to buy a policy which cover up all the above without investment, the premium pay is even more higher than ILP.
4) He will get higher commission if I buy all those policy separately.

Is that true? Hope can receive your valuable advise.

REPLY
I agree with your uncle. The agent does not give you the best advice.
Read these FAQs:
http://www.tankinlian.com/faq/savings.html
http://www.tankinlian.com/faq/choice.html

1,027 visits on Mar 26, 2008

There were 1,027 visitors to my blog yesterday. It is the highest over the past year. I seem to get a lot of visitors each time that I am overseas. (I am now in Manila, Philippines).

Universal Life - look at the charges

Dear Mr. Tan,
What is your opinion on the use of "universal life insurance" 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

REPLY
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. A universal life policy is likely to have charges similar to an investment-lined plan.

You can read about the charges on investment-linked plan (ILP) from this FAQ
http://www.tankinlian.com/faq/ilp.html

Simpler way to mail a letter

I sent a letter addressed to:

Tan Kin Lian
Singapore 809744.

10 days have passed. It never arrived!
Singapore Post must have decided that this address is incomplete and thrown the letter away!

Low cost products

I wish to give an idea of the type of products that give good value to consumers. I hope that these products will be available through a new life insurance company later this year.

This company will offer the products through the internet and call center, making it easy for consumers to buy the products.

LOW COST INSURANCE

1) Term insurance
Pays the sum assured in the event of premature death during the insurance period The sum assured is level during the period. Example: insure $200,000 for 20 years.

2) Reducing Term Insurance
Pays the reducing sum assured in the event of premature death during the insurance period. The sum assured starts at a higher amount and reduces each year during the period. Example: insure $400,000 reducing by $20,000 yearly over 20 years.

3) Family Income Benefit
Pays a monthly income in the event of premature death during the insurance period. The income is payable for the remainder of the period. Example: insure $2,000 payable monthly for the remainder of 20 years.

4) Family Protector
Combines a term insurance and a family income benefit. Example: insures $50,000 plus $2,000 a month for 20 years.

LOW COST DIVERSIFIED FUND

5) Wealth Accumulator
Allows you to invest in a diversified investment fund (i.e. equity, bond or treasuries) to earn the market rate of return. Reduces the risk by diversifying over a large number of quality investments. You can invest for the long term to average out the good and bad years. There is no front-end load. The expense ratio is probably the lowest in the market (e.g. 0.6% for an equity fund).

Financial planning can be confusing

Hi, Mr. Tan,
I spent two hours with an insurance agent to do a financial planning exercise. We went through many projections using different rates of inflation and insurance products. I find the projections to be quite confusing as they produce different results.

To meet my target of retiring at age 60 with a monthly income of $x (adjusted for inflation), I have to save $y (about 30% of my salary) each month. I cannot afford to save this amount. If I save a smaller sum, I need to invest my savings more agressively to earn 10% per year. Is this realistic? Can you advice?

REPLY
I find this approach to be quite speculative. The results differ according to the assumptions on:
a) inflation
b) investment return
c) period of investment (or retirement age)

Here are my general tips:
a) Save 10% to 15% of your monthly salary, if your budget is tight
b) Save more, if your regular expenses take a smaller share of your salary (for singles and high earners)
c) Invest your savings in a low cost, diversified fund
d) Buy low cost insurance, to provide a payment in event of premature death
e) Retire at an age when your accumulated savings (with yield) is sufficient to meet your future lifetime expenses
f) Be flexible on your retirement age and the amount of retirement income (i.e. live within your means)

Using my guidelines, you will be able to retire quite comfortably at the age of 65 years. You can retire earlier, if you are prepared to accept a more frugal lifestyle.

Read this FAQ:
http://www.tankinlian.com/faq/fptips.html

Petrol cost per kilometer travelled

With the increase in petrol price, do you know what is the petrol cost per kilometer for your car?

Here is a simple way to calculate this cost factor:

a) When you next top up to full tank, record the kilometer reading.
b) On the following top up to full tank, record the kilometer reading and the amount paid
c) Subtract the difference between the reading to get the kilometer travelled
d) Divide the petrol bill by the kilometer reading to get the cost per kilometer travelled.

If you have done this calculation, please post a comment showing the following: your model of car, petrol cost per kilometer travelled.

Travel to Manila, Philippines

I will be in Manila for the next four days. I shall present a paper to a meeting organised by the regional office of the International Cooperative Alliance. During this period, I shall be updating my blog less regularly.

Switching into the Wealth Accumulator plan

Dear Mr. Tan,
I am interested in your Wealth Accumulator plan, which is to be introduced later this year. I am now invested in the Combined Fund of NTUC. Should I switch to this new plan?

REPLY
The expense ratio of the low cost funds that can be purchased under the Wealth Accumulator plan is likely to be 0.3% lower than the Combined Fund. There is a small advantage in making this switch, but it is a recurring annual saving.

For new investments, the Wealth Accumulator plan has no front end charge (except for a small transaction fee). New investments into the Combined Fund attract a front end charge of 3% (invested through Flexi-Link) or 18.5% for the first three years and 3.5% for subsequent years (invested through the Ideal plan).

It is better to switch to the Wealth Accumulator plan, if you expect to make new investments. There is no penalty on withdrawal from the Combined Fund.

A similar advantage applies to switching form the ILP funds of other insurance companies.

Note: The Wealth Accumulator plan is not available at this time. Please wait for it to be available and details to be confirmed, before you make your decision.

Investing in REITS

Dear Mr. Tan,
Thank you for maintaining your blog. I have learned a lot from your experience, observation and answers to other people's questions..

May I know your views on Real Estate Investment Trusts (REIT) for long term investment as compare to STI ETF?

There are 20 REITs listed on SGX
http://stquote.sgx.com/live/st/STREIT.asp.
At the current price, their average return is about 6.8% p.a
http://www.reitdata.blogspot.com/

REIT would meet some of your criterias for long-term investment:
a) A diversified fund
b) Blue chip investments, i.e. non-speculative
c) Low cost, i..e. less than 1% per annum
d) Low upfront fee, less than 1%

REPLY
REITS are invested in properties. This is an asset class separate from equities.

Properties are also suitable for long term investments. You can have some of your long term savings in REITS. A suitable proportion is 25% in REITS and 75% in equities and bonds.

You are right that REITS offer an attractive yield. Part of the yield represents a return of your invested capital, as the properties are a depreciating assets.

After allowing for this factor, the yield is still attractive. I have invested part of my savings in REITS. If you search my blog and look for REITS, you will get a few postings.

Quality of a Good Leader in Science

Mrs Lee Kum Tatt has dug up some scripts of her husband which she wants to share with us. It will be interesting to find out how some of the values which Dr. Lee selected have affected his life and work.

This is meant to encourage, if not inspire, those who are pursuing a Science profession and career to be courageous to pursue their ideals and dreams. If handled properly it is a small prize to pay to be a good scientist.

www.leekumtatt.blogspot.com

Price subsidy for essential products

A newspaper report explained the difficulty faced in Malaysia about handling price control for fuel and essential products. It appears that price control distorts the distribution of the products and cause artificial shortages.

Is there any other way to provide relief to ordinary people from high prices, apart from price controls?

During war time, the distribution of essential products were done through coupons. This is the rationing system. People can buy the products only through coupons. This system also has its problems. A black market is created for the sale of these coupons.

In today's world, there is a better system to handle this problem. It involves the use of low-cost technology.

Anyone like to suggest what is a workable system?

Life insurance products

There are three main types of life insurance products:

a) Term insurance - pays the sum assured on death during the period of insurance. The policy ceases at the end of the period. There is no savings in this policy.

b) Whole life insurance - pays the sum assured on death. The policy can be continued for a lifetime. The policyholder has the option to terminate the policy and receive a cash value.

c) Endowment insurance - pays the sum assured on premature death or on the maturty date (i.e. at the end of the period of insurance). This policy combines the term insurance together with a savings element that accumulates the benefit payable on maturity.

The premium paid under whole life or endowment insurance is higher than term insurance. The excess premium, less charges, is accumulated to produce the cash value or maturity benefit. Due to the high charges, the yield on this savings portion is generally poor.

If you buy a participating or with-profits policy (i.e. whole life or endowment policy), your policy will earn an annual bonus that depends on the profits of the insurance company. This bonus is added to the policy. The yield on a participating policy is marginally higher, but is still low compared with other financial products.

It is better to pay a separate premium for the term insurance, and invest the remaining savings in a low cost investment fund, which can produce a higher yield on the investments.

The annuity is a different product. I shall explain its features separately.

Know What's Ethical

Minister for Health Khaw Boon Wan said,

"Doctors should be aware that they should not prescribe procedures of dubious benefits to their patients, exposing them to unnecessary risk or financial cost. If they do so, they will be considered unethical."

I hope that MAS Chairman Goh Chok Tong will say the following:

"Financial advisers should be aware that they should not prescribe financial and insurance products of dubious benefits to their clients, exposing them to unnecessary risk or financial cost. If they do so, they will be considered unethical."

This message, coming from the highest level in MAS, will address the marketing abuses in the financial services market.

Take the risk and get a higher return

A whole life or endowment policy will lock you into a low yield, for the following reasons:

a) the insurance company has to invest 70% of the money in low yielding bonds (to provide the guarantee), and only 30% in equity or property (which gives a higher yield)

b) up to two years of the premium is used to pay commission and marketing expenses.

Here are the yields that you can get on your savings (excluding the portion used to pay for the insurance cover):

3% - from an insurance product, after deducting marketing expenses
4% - from a no-load investment fund, invested with the same mix
6% - from a no-load investment fund, invested 100% in equity.

Here is the amount that you can get by investing $6,000 a year

Duration       3% pa     4% pa        6% pa
10 years      $70,800    $74,900     $83,800
20 years     $166,000   $186,000    $234,000
30 years     $294,000   $359,000    $503,000

An investment fund has risk, but it can be reduced by diversification and investing for the long term.

Question: Do you want a "safe" investment, that gives you $294,000 when a "no-guarantee" investment can give you much more, say $503,000?

Lesson: Take the risk and enjoy a higher return. Avoid paying high front end charges.

Creaming off the customer

Dear Mr. Tan,
Is an insurance product that offers a return of less than 2% over 20 years considered as "creaming off" the policyholder?

REPLY
Over a 20 year period, the expected return should be 5% per annum, considering the current rate of inflation and other factors.

If the product offers less than 2%, then the difference of 3% is taken away for the following:
a) cost of insurance protection
b) commission to the sales agents
c) advertising expenses
d) high salaries and other expenses.

The cost of insurance protection should taken away only 0.5%. The remaining 2.5% is large wasted on the marketing and other expenses.

The product is usually marketed with "gimmicks" that hide the real cost. This can be considered as "creaming of" the customer.

Planning for financial security of family

Dear Mr Tan,
Your blog have been most invaluable in helping me with my current review of all the policies bought by my family.

1) You mentioned so frequently about the monthly income benefit but I realised this product is not common among the insurers. From what I gather, only Aviva, GE and TM Asia (together a term or whole life policy) have it. The cheapest I found was fom GE: $3000 monthly income benefit till age 60yrs old, with waiting period of 90 days for $630 p.a. Is this a reasonable price to pay? Why isn't there more of this product in the market since it is quite essential to a person with family?

Reply:
The GE product appears to be a disability income product. It pays the monthly income during disabilty for a certain period and ceases on death.

You need a family income product, which pays a monthly income to the family on the death of the policyholder. The income is payable for the remainder of the period of insurance.

2) Also in your past entries where you mentioned we should aim for coverage of about 5x our annual income. Should we also include the coverage given by our employers in this case?

Reply:
You can include the coverage provided by your employer to make the target of 5 years. It is all right to insure for a higher sum, say up to 8 years of your income.

3) Is there any difference when insurers say Terminal Illness and Critical Illness?

Reply
The definitions of critical illness and terminal illness are different. Many people can claim for critical illness earlier, before they can claim for terminal illness.

Can you trust your insurance company?

Can you trust your insurance company on the following:

a) give you a fair deal?
b) keep your cost low?
c) handle your insurance claims fairly?
d) give you the best possible return?

Your insurance company can be trusted only if:

a) it operates efficiently
b) keeps its cost low
c) gives a fair deal to customers
d) communicates openly with you
e) makes it convenient for you to reach the right people
f) does not lock you up in a long term contract with termination penalty

The trustworthy insurance company can still make a fair profit for its shareholders, but this is done by giving good value to its customers (and not by "creaming off" the customers).

Invest for the long term

Hi Mr. Tan,
As current market was already so volatile, some says that this time around may be the bottom, and even predicted that stock market will surge, like in this article: http://www.reuters.com/article/hotStocksNews/idUSN0732951420080323.
What is your opinion about this?

REPLY

If you are investing for the long term, the current level is a good time to make the investment. It is now 30% below the previous peak.

Disability income and family income

There is a difference between disability income benefit and family income benefit.

A disability income benefit pays a monthly benefit during the period of disabilty and ceases on death or for a specified benefit period, e.g. 60 months. The extent of the disability is defined in the policy. The payment starts after a waiting period, e.g. 90 days.

A family income benefit pays a monthly benefit to the family following the death of the policyholder, and is payable for the remainder of the insurance period. If the insurance is for 30 years and death occurs at the end of 20 years, the monthly benefit is payable for 10 years.

Submit income tax return by e-filing

I submitted my income tax return by e-filing. This is the first time that I filed my income tax return way ahead of the deadline.

My previous employer made a mistake with my income statement. The e-filing does not allow me to correct the figure. It was quite troublesome for me. I hope that people who design website think about the customer, and not about their own convenience.

Term insurance with income benefit

If you have young children, you can provide low cost, adequate financial security to your family by buying a term insurance policy combined with a monthly income benefit.

Here are some examples:

Entry age 30
Period of insurance: 25 years
Lump sum benefit: $50,000
Monthly income benefit: $2,000 payable for remainder of term
Initial coverage = $50,000 + $2,000 X 12 X 25 = $650,000
Annual premium: $303 X 2 = $606 (male).
Annual premium: $184 X 2 = $368 (female).

Entry age 35
Period of insurance: 20 years
Lump sum benefit: $50,000
Monthly income benefit: $2,000 payable for remainder of term
Initial coverage: $50,000 + $2,000 X 12 X 20 = $530,000
Annual premium: $331 X 2 = $662 (male).
Annual premium: $187 X 2 = $374 (female).

If your children are older, you need insurance for a shorter period.

These benchmark rates are calculated based on the current mortality rates, and a fair loading for expense and profit margin. It may not be the actual rates now charged in the market.

See this FAQ:
http://www.tankinlian.com/faq/termassurance.html

Estate duty in Singapore

Hi,
I missed out the news on Estate Duty of Death Tax. Can someone fill me up with more information?

REPLY
Estate duty has been abolished on 15 Feb 2008. This was announced by the M of Finance in the recent budget speech.

Here are the announcements:
http://www.simplywills.com.sg/node/25
http://www.prlog.org/10051481-singapore-abolished-estate-duty-tax-with-immediate-effects.html

Low cost insurance

Dear Sir,
I would like to register my interest for insurance planning. Over time, I have bought some policies mainly from insurers. I have also obtained assessment from independent advisor such as Provident.

However, I still would like to look around some cheap term insurance to further strengthen my coverage. If I have understood your message correctly, you are in the middle of setting an insurance operation. How could I proceed to learn more about your products?

REPLY

If you want low cost insurance, you can contact the companies listed below:
http://www.tankinlian.com/faq/termd.html

Some future products, which I hope will be available in Singapore soon, are shown in:
http://www.tankinlian.com/faq/btid.html
http://www.tankinlian.com/faq/termassurance.html

Keep your money in CPF

Hi, Mr. Tan
I need your advice. I have just signed up for a $30,000 Growth policy using my OA. The insurance agent told me that I must sign up before 1 April to beat the deadline. It offers a projected return slightly more than 4%.

My friend told me that this policy locks me up for the period of 20 years. If I need the money to buy a property or to contribute towards the monthly payment (in case I lose my job), I will have to suffer a loss. Is this correct? Can I withdraw from my policy now?

REPLY
Most people uses the ordinary account to pay the down payment for a property and to service the monthly repayments.

If you invest in the Growth policy, it is locked up for the period of 20 years. If you decide to terminate the policy (e.g. to use the funds for a property), you will have to suffer a loss, as part of your investment is used to pay commission to the insurance agent.

If you keep the money in the ordinary account, you will earn 3.5% (i2. 2.5% plus 1% bonus on $20,000). If you invest in the Growth policy, you will get a return between 2% to 4% (plus) depending on the future rate of bonus. If interest rate remains at a low level (as it has been during the recent years), the return on the Growth policy is likely to be lower than projected.

In my view, it is better to keep your money liquid, rather than be locked up in a long term contract that offers only a marginal increase in yield. If you decide to cancel the policy, you can do it within the 14 day cooling off period, and get a full refund.

More options for low cost funds

Hi Mr. Tan,
I refer to your earlier post on no load financial products. In addition to such products, I think local investors also have an extremely poor choice when it comes to low-cost index funds or ETFs in mid and small cap companies, or in growth and value companies, unlike in the US.

Currently, we only have the STI-ETF which includes big-cap companies and where 40% of the index is already made up by the big 3 local banks.

As you're aware, a good and effective asset allocation plan, involving various asset sub-classes such as big, medium and small companies will help greatly in reducing volatility and increasing an investor's returns. And traditionally, of course, value and growth companies also offer higher returns than big-cap companies, albeit with higher risks.

I hope these products, including also a REIT-index-based product, will be introduced in the market soon, maybe by you? Thanks.

REPLY
Thank you. I hope that there will be more options for low-cost funds for the public in the near future.-

Immigration Card - Malaysia

Visitors to Malaysia are not required to complete an immigration card. Entry into Malaysia is hassle free. Congratulations to the Malaysian Government for taking this simple and practical step.

I hope that Singapore will adopt this new practice. Do away with the immigration card. There is no need for this card, as the particulars in the passport are scanned into the computer system.

There is also no need to collect tourist statistics. So many people travel today, that the statistics have become meaningless.

I hope that Indonesia will also adopt this new method. Get rid of the immigration card and customs forms. They are a big waste of time, and hassle to the visitors.

When is a good time to enter the market?

Dear Mr. Tan,
I am thinking of investing in the STI ETF. As a beginner to investment, how would I gauge when is a good time to enter the market?

REPLY
Nobody knows when is a good time.

My guess is that this is now a good time, as the market has corrected and the financial crisis is likely to stablise now. If you are a long term investor, it should be quite safe to invest now.

Wish you all the best.

Bernanke's plan is working

Here is a brief description of the current problem in the US financial system.

a. It started with the subprime mortgages, which saw high default rates

b. The value of the "asset backed securites" and the "collaterialised debt obligations" linked to these mortgages dropped significantly

c. The problem spread to the other sectors. Many "special investment vehicles" and hedge funds had been set up to use borrowed money, i.e. "leveraging", to invest in higher risk assets to earn a margin. These SIV and hedge funds could not refinance their borrowings, as the lenders got scared.

d. Investors starting to withdraw their money from hedge funds, SIV and the investment banks.

This led to the collapse of Bear Stearns. There was fear that they have to sell their illiquid assets at depressed prices, causing a collapse of the entire global financial system.

The US Fed, under the chairman Bernanke, came out with a plan to provide up a 6 months facility for investment banks to allow them to borrow from its "discount window" i.e. at the Fed discount rate, by pledging their illiquid assets.

Some experts believe that this plan is working and that the markets will stabilise and recover from now. This is expected to solve the "liquidity crunch". Let us hope that they are right!