Encash the participating bonus

Dear Mr Tan,

Thank you very much for your constant contribution to the insurance community.  Certainly, your perspective on a lot of the issues discussed provided many with good guidance on how one should approach insurance.

I noticed there is one topic that is seldom discussed and that is the idea of encashing one’s participating policy’s declared bonuses.  I was recently introduced to the idea and after a lot of thinking through, realised that this option provides a policy holder the ability to enjoy the benefit of a ‘partial claim’ without the need to fulfil a claim condition.  I am also unable to find a downside to this approach except for the possibility that the final terminal bonus may be adversely affected.  However, as terminal bonus are never guaranteed,  there is really no way one can verify that.

I would like to seek your insight and wisdom as to what you think are the possible downside of such an approach as compared to initiating a partial surrender, APL or terminating a policy in order to managed one’s obligation to pay the policy premium.  The way I see it, using this bonus encashment method would mean that one could continue to keep his whole life policy alive as it become self-funding as long as the bonus declared are sufficient to cover the premiums.  This is possible when a policy has been held for 20 plus years and has grown substantially in terms of its bonus.

Appreciate if you could enlighten me if my views above are in error.  If my above analyses is correct, then effectively, all participating policies (when the insurance company is honourable enough to declare fair bonus like those declared in the 1990s by NTUC)  would become self-funding after some time and that is a good basis for one to keep their participating insurance policies for lifetime cover.

REPLY
When you encash your bonus, the insurance company pays you a discounted value. For example, if your bonus is $5,000 and the maturity date is 10 years away, and the discount rate is 5% p.a., you will get only $3,069. You have to decide if it is better to get $3,069 in cash now, or wait and get $5,000 in 10 years time. 

If you encash your bonus, it may reduce your terminal bonus on the maturity date, as the terminal bonus may be calculated on your accumulated bonus. It will not affect your terminal bonus, if it is calculated on the face value of the policy. It depends on the practice of each company. It also depends on the type of policy that you have taken, as the practice may differ with different policies of the same company.

The answer to your question is that it depends on the terms that you are offered for encashing your bonus. It is not possible to rely on a general statement.

More companies report losses than profits

For every 1 company that makes a profit in Singapore, there are 2 companies reporting losses. Something is wrong with our economic system in Singapore. This proportion does not seem right.

It shows that the cost of doing business is too high,and the difficulty of earning revenue in a highly competitive environment.

Some companies have to resort to questionable methods to earn revenue to report a profit.

Where do I get the figures? From our IRAS.

http://c-onyx.com/page/1721

Express bus service

Should we have express bus service in Singapore?
cast your vote in this website:
http://wisdomofthecrowd.sg/issue_det.aspx?ID=44

Reduction in travel time on bus

I have calculated the reduction in travelling time by adopting the system of feeder and express bus, instead of the current system.
The average reduction is 20%. I think that this is under-estimated and the actual reduction could be higher at 30%.

http://c-onyx.com/page/2272

What's Wrong #14 - Long travelling time for a bus

Passengers find that a journey by bus takes a long time. It discourages them from taking the bus.

What's wrong?

Our bus has to stop at each bus stop every 400 meters.  A journey of 20 km will require the bus to stop at 50 bus stops. (I checked with service 163). Each stop will take an additional 1 minute for the bus to slow down, to wait for passengers to board and alight and to take off.

If the bus has to make many stops, it causes the journey to be jerky. It does not make good use of the dedicated bus lanes.

How to put it right

We can convert many of the bus services to be an express service that serves a limited number of major stops, e.g. every 2 km and to have feeder buses to serve the intermediate stops. A passenger can take a feeder bus to the next major stop and board an express service.

As the boarding and alighting is at the same stop, it should be quite convenient for the passenger to make this transfer. It is easier to transfer from a feeder bus to an express bus, compared to transfer to a MRT train.

Although the passenger has to wait for the feeder bus and the express bus and perhaps another feeder bus, the total travelling time should be reduced significantly using the new system.

As an experiment, we can transfer from of the buses that run a particular service to be an express service. For example, half of the buses that run service 163 (say) can be converted to 163E that will make a limited number of stops. 

Passengers can wait for the normal service 163 or take a feeder bus to the next major stop to take the express service 163E. We can gauge the preference of the public for this service.

What's Wrong #13 - Display in the bus to show the next bus stop

Our buses do not have a display to show the name of the next bus stop. 

The passengers may not be familiar with the bus stops. They do not know where to get off the bus. They can ask other passengers, but some of them don't know either. Some prefer not to be disturbed.

The bus driver may be unable to help the passenger, due to language barrier or if the bus driver is a foreigner who has only recently arrived into Singapore. In a crowded bus, the passenger cannot move to the front to talk to the bus driver.

Even if the passenger is familiar with the bus stops, they may still miss their bus stop when it is dark at night or it is raining heavily or when the bus is packed.

What's wrong?

This will discourage passengers from taking the bus, as they do not know where to get off to change to another bus or when reaching the destination. They will take the MRT trains even when it is not the best mode of transport. It also lead to over crowding of the train.

How to put it right

Have a display in the bus to show the name of the next bus stop and the KM reading of that bus stop.

This information is already available in the fare meter at the exit of the bus. It is relatively inexpensive to have a large display to show the information that is already available in the fare meters.

It is important to show the KM of the bus stop, together with the name of the bus stop. The passenger can take note of the KM of the desired bus stop. By watching the KM of the next bus stop, the passenger knows the remaining distance to the desired stop and also know if he or she had missed the bus stop.

How to calculate the yield for a limited payment policy

Hi Mr. Tan
I know how to use the "Rate" function in Excel to calculate the yield for an insurance policy where the premium is payable throughout the term.
A popular policy that is sold today have premium payable for 5 years, but the maturity benefit is payable after 10 or 15 years.
How can the yield be calculated for this type of policy?

REPLY
You have to use the IRR function in Excel. It allows you to indicate the cash flow for each year over a certain period. In the above example, you are paying a premium for 5 years, so this has to be entered in 5 rows. There is a gap of 10 years for which there is no premium payment, so you enter 0 for the next 10 rows. After 15 years (i.e the beginning of year 16), you have a cash payment back to you.

See this article for an explanation and example of how to use the IRR function.
http://c-onyx.com/pdf/2361

What's Wrong #12 - Badly designed business processes

Many companies and government agencies have business processes that are badly designed. They put all their forms and instructions in a poorly designed website that is difficult for their customers to navigate. It is also painful for customers to submit online forms. They need help and have to call the helpdesk anyway.

What's wrong?

The organizations try to save a few minutes of their staff's time. In the process, they require the customer to spend one hour or more to submit an online request. 

Often the customers need help, and have to contact the help desk. The organization have to provide staff to man the helpdesks. The total saving in staff time to the organization is negligible. They could be spending more staff's time in answering enquiries from their customers.

How to put it right

Have help desk staff that can help the customers to do the following:

a) Submit an online form. The staff is familiar with the requirements, as they handle the forms daily. The customer is not clear about the requirements and usually need someone to explain what needs to be done.

b) Help customers to locate an instruction PDF or an online form. Send a link by email to the customer. This is easier than helping the customer to navigate through a complicated website going through many webpages and links.

c) Where the front line staff is unable to handle a difficult enquiry, they can refer the case to an expert or specialist to call back the customer.

d) Provide a personal email or mobile phone number for an expert or specialist to provide support to the customer. The direct contact will be more efficient. 

What's Wrong #11 - Too much trouble to reach a person

I called Singapore Power Services to get help due to a bug in their website that disallowed me to submit an online application to open an account.

I have to go through a tiresome process to pass through six barriers in their interactive voice response (IVR) system.

List to 1 minute announcement on something that does not concern me.
Press 1 to select English language.

Press 2 to open or close a new account 

Press 1 to open or close a new residential account
Press 1 to open a new residential account 

Press 2 to open an account now.

As I had to contact SP Services a few times due to several problems with the process, I had to suffer the tiresome process each time.

What's wrong?

There is no need to require the caller to listen to  IVR  messages and press some many buttons. 

SP Services should simplify the process and avoid wasting so much time of the customer. They should be considerate in the design of their IVR system.

How to put it right

If there is really a need to segregate the handling of residential and commercial accounts, the customer should only be required to select the language and the type of account, i.e. 2 button presses instead of 6 presses.

It should be quite easy for the same team of staff to handle the opening, closing and general enquiry on an account. There is no need to segregate the work down to such a detailed level.

What's Wrong #10 - Too much trouble to open a utilities account

SP Services requires the owner or tenant to open an utilities account on each occasion where there is a change of tenancy. They have a complicated process to open an account. It includes providing documents to verify identity of the person who is paying the bills. The online website has bugs, even today. They also have a troublesome process to read the meters.

What's wrong?

The process is troublesome for the person for the owner and tenant. It took me more than one hour to handle the simple formality of opening the account and providing the information. This is more troublesome for the owner who has to make a special visit to complete the paperwork and to arrange the meter reading.

How to put it right

Just allow a change of name and billing address of the person who is paying the bills. This can be done by a simple online request or by a request sent by fax. 

If there is any issue about the ability to pay the bills, ask the payer to send a deposit. They are already required to pay the deposit anyway.

There is no risk that an unauthorized person who apply for utilities to the premise. Who wants to do such a thing? There is no need to check that it is the owner or the tenant who is applying for the supply. If this check is removed, the process can be simplified.

It is easy for the existing or new account owner to take a photograph of the meter reading and send to SP Services. There is no need to make a visit. Both the old and new account payers will probably not mind any small difference in the bill.

It is possible for SP Services to simplify this process for a transfer of name. There is no need to open or close an account, and to do it in a very troublesome way.

Singapore Power's IVR system beat them all!

Singapore Power's interactive voice response system beats all other companies for being tiresome.

After calling 1800 2222333, I get the following:

1 minute announcement on something that does not concern me.

For English press 1, for Chinese 2, etc
For billing enquiry press 1 for opening a new account press 2
For opening a new residential account, press 1 for opening a new commercial account, press 2
Open residential account press 1, close residential account press 2
To listen to procedure, press 1 to open an account now, press 2

Congrats to Singapore Power. They managed to ask the caller to go through 5 options just to talk to somebody.

1 - 2 - 1 - 1 2

As I have to call them 5 times today, due to problems with their website and other issue, it can be very frustrating to waste so much time.

When will Singapore Power think about the convenience of their customers?

How to make things difficult for the consumer

It is very common for simple matters to take a lot of time. I have another terrible experience, this time with Singapore Power. My tenant is moving out of my house. I have to submit an application to transfer the account to my name.

After a lot of trouble calling their call center, I was told that the easiest way was to fill up an online application form. They have to direct me to find that form, because it was hidden in their website "maze".

In filing up the form, I have to provide them with the date of issue of my NRIC (luckily I carried it with me) and also with the postal code of my tenanted home (which I had to take a lot of trouble to find this 6 digit code).

On submitting my application, I got this strange message, which must be a bug.

I could not submit the application. I had to waste one hour today calling your hotline

(which is another terrible experience). 

Finally, I have to fill up a paper form and send over to Singapore Power. It was difficult because they print the application form on two pages, and I have to find a fax machine that can handle two pages. 

Why does Singapore Power make it so difficult for the consumer?

Suggestion: It would be wonderful if I could call a hotline staff who can help me to complete this application. It will probably take the staff 5 minutes and save me one hour of my time.

Managing the property market

This article asks the question, "Will the average Signaporean get burnt if the ABSD is removed"?

http://blog.moneysmart.sg/opinion/will-the-average-singaporean-get-burnt-if-the-absd-is-removed/?utm_source=outbrain&utm_medium=cpc&utm_campaign=contentsg

He explained that the ABSD (Additional Buyer Stamp Duty) and the restriction on loans were introduced to reduce speculation in the property market. If the ABSD is reduced or removed, the impact on the property market is uncertain and different people would be affected differently..

His argument shows the difficulty of managing a complex market with buyers, sellers and speculators.

In the past, there was a solution to prevent this kind of erratic market. The government acted as a buffer. If there was an over supply, the government absorbed it and waited a few years for the market to reach its new equilibrium. If there was an increase in demand, the government increased the supply (and do not worry about facing a glut later on.

When a government takes on the task of managing the market cycle, it helped to create stability in the market. It worked in the best interest of all parties.

During the past three decades, the government reduced its role in the market. They decided that it is best for the market to take care of supply and demand. In some cases, the government acted as a participant in the market with the same mentality as the speculator!

It is time for the government to get back to play its fundamental role. It should act as a buffer to match changes in supply and demand.

Dispute on paying a third party claim

Mr Tan,
I read the letter in the Straits Times about the motor insurance claim handled by NTUC Income, the company that you were CEO previously.

Do you agree with the manner in which the claim manager handled the claim? He paid the claim (which the policyholder claimed to be fraudulent, based on the photos taken at the time of the accident).. He told the policyholder to dispute the case on his own in court, if he insist on fighting the claim.

http://www.straitstimes.com/forum/letters-in-print/why-was-claim-paid-out-when-car-was-not-damaged#xtor=CS1-10

REPLY

It is possible that NTUC had some reason to believe that the photos provided by the policyholder were not sufficient to dispute the claim.

But, if this was not the case, it would have been better for NTUC to pay the claim (if they decide that it was the best way commercially), and still allow the policyholder to keep his No Claim Discount and renew the policy without any loading.

The insurance agent sells a policy that is not affordable

Dear Mr. Tan
I need your advice.

I bought PruFlexiCash policy. The premium that I bought was extremely high for an average salaried worker. 

I thought I was misled into thinking that I can reduce my premium after 2 yrs and the premium difference will still be in my account. But this was not the case even after having repeatedly asked the agent about this issue. 

When I asked at the point of sale, she replied that I could reduce any time I want after 2 yrs. I had also asked about the penalty or implications for doing it, she answered no issues on the reductions.

I have filed a complaint with FIDREC but I sense that I will not succeed in the complaint. Can you advice me on what to do?

REPLY

You can resubmit your complaint to FIDREC. You can show evidence that the monthly premium is unaffordable based on your monthly income less the regular expenses. The agent has failed in her  duty to ensure that the policy was suitable to you, based on your net monthly income. 

This would support your point that you had the impression that you would not suffer a penalty by paying a higher premium during the initial years, out of your past savings. 

IRR function in Excel

This article shows you how to use the IRR function in Excel to calculate the yield on a life insurance policy that has premiums payable for a limited number of years.

http://c-onyx.com/page/2361

This Prusave policy should not be approved for sale to customers

This Prusave limited payment policy is being actively sold to many bank customers.

The writer of this article asked, "Is it suitable to any customer at all?

My answer is "no". Why should a customer buy this policy which gives such a poor deal? It virtually provides no protection and takes away a large part of the investment return.

My fear is that most customers do not understand the policy and might have bought it due to some mis-representation by the sales person.

But, I agree with the writer that such a "sub-par" policy should never have been approved for sale in the first place. This is a duty that falls on the Monetary Authority of Singapore, which they should not neglect.

http://dollarsandsense.sg/prudential-endowment-plan-a-simple-case-of-misselling/

Simple tips for Starhub to improve its service

A senior person in Starhub referred me to the person in charge of the Enterprise service. I sent this email to hi.

Dear XXXX

The problems that I faced (and it has been going on for a few years) are:

1. When I call 1631, the hotline staff does not know about the Argonar service.
2. When an expert calls me back, he does not give me a personal number that I can call him back (if there continues to be trouble).

Suggestion:
1. Give a separate number that your customer can call on Argonar. Do not ask your customer to call a general number - 1631.
2. Give a personal number to your experts that have to troubleshoot the issue with the customer.Do not waste the time of your customer in trying to call back an expert. You are a telephone company. Allow your customer to contact your expert directly. Millions of people have personal numbers for their friends to contact. Can Starhub also provide this essential service?

A simple case of mis-selling.

Read this article.
http://dollarsandsense.sg/prudential-endowment-plan-a-simp…/

Ugly truth behind investment linked policies.

Read this article:

http://dollarsandsense.sg/the-ugly-truths-behind-investmen…/

Starhub expert does not have a mobile number

Many customers have said that the service provided by Starhub and SingTel are terrible. M1 is supposed to be better, but some customers have also complained about M1.

It is so sad. These companies have the capability of provided better service. But they are obstructed by their SOP that are written by people who lack common sense. The staff follow the SOP blindly, when a more common sense approach would be excellent.

Here is an example. I had some problem with the Starhub cloud service. I called 1631 but most of their hotline staff don't know about this service.

Finally, someone called me back. I asked for his name and mobile number. But he could not give me his mobile number. I asked - "Are you a telephone company?" Millions of people, including a foreign worker has a personal number. You don't have one?

He gave me some suggestion to log into their website to reboot my server. it did not work. I could not contact him back. I spent 1 hour trying to reach him. His colleagues could not locate him also.

So, it is so simple for Starhub to provide a personal number for their expert to help customer solve a complicated problem. They make matters so difficult by not offering this form of communication. And they are a telephone company!

Bad service provided by Starhub

Starhub has a bad way to service their customer.

I had a problem with their cloud service. Their expert do not have any personal telephone number that I can call them. I have to call their general number and go from one person to another to reach the person that I talked to me earlier.

Their expert finally call me and told me to use Internet Explorer, instead of Chrome, to access their cloud service website.

I did. I got another problem and had to return the call. My mobile phone contained his number, 68097000.

When I called, I got an automated message, "Dear Customer. Our attempt to contact you was unsuccessful. We will call you again".

My mobile phone is now black listed. There is no way that I can call them.

Do the people in Starhub use any common sense? Why provide these kind of automation to cut off communication with their customer. My Cloud service is still down.

Older workers should use initiative

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

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

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

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

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

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

Misleading statements

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

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

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

Effect of deduction

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

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

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

See the example below.

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

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

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

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

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

Bad signages

I was confused with the signage in terminal 1 at Changi Airport. On returning from Jakarta last night, I looked for the Arrival Pickup Point.

At the escalator, the sign shown an up arrow. I remembered that the pickup point was at the lower level previously, but it now pointed to the higher level.

I checked and decided that the sign clearly pointed to the next level.

I went up the escalator and found that it was the departure level. There was no arrival pickup sign. I concluded that I was mistaken and went down to the arrival level.

I searched for other signs and found new signs further down the level. I followed them and went out to the road side. There was no pillars to show the pickup point.

After waiting for a few minutes, I decided that there was something wrong. I walked down the road and turned to the side of the building. I found the actual waiting areas with the different sections that are clearly marked.

I was clearly misled by the confusing signs.

I find signages to be generally bad and confusing in many places in Singapore. My earlier impression was that the signages were well designed in Changi Airport, until my experience last night.

Terrorist attack in Paris

When I visited Bali, I asked a friend, "How many people died during the Bali bombing?" He said that there were two terrorist attack. The first was in 2002. 200 people were killed. The second bombing occurred a few years later, but the casualties were lower.

I just read today the terrorist attacks in several locations in Paris. Over 120 people were killed. The scale is about half of Bali.

http://www.straitstimes.com/…/french-tv-says-100-dead-after…

It is so sad that the world has become so violent, and that the terrorists are getting out of control.

Water rationing in Singapore?

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

Will it happen again?

http://www.channelnewsasia.com/…/johor-s-ling…/2257892.html…

This is what someone remembered about water rationing 50 years ago.
http://www.singaporememory.sg/.../SMA-05d8bcb1-f780-4fc7...

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

Singapore is expensive to this Australian visitor

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

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

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

Understand the benefit illustration

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

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

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

This article explains how the read the benefit illustration.
http://www.straitstimes.com/business/invest/make-full-sense-of-insurance-policies

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

 .

Do you have a view on any of these issues?  Do you express your view or let other people decide for you?
http://wisdomofthecrowd.sg/view_issue.aspx

It is crazy for a customer to invest in this type of policy

Here is an example of a life insurance policy sold by a bank to its customers, who trusted the bank to offer them a reliable investment product. The product is designed by a life insurance company. The bank earns a commission from selling the product.

1. The customer pays an annual premium of $12,000 for 5 years. At the end of 5 years, the surrender value of the policy is $38,000. The customer loses $22,000 if he (or she) withdraws the money.

2. If the customer dies within this period, the customer gets a death benefit that is about 5% higher than the total premiums paid. This means that the life insurance policy effectively provides no insurance protection as the 5% is the interest that is earned from the premium.

3. Why does the customer wants to give away $60,000 to get back only $38,000? Who knows? Only an unsuspecting customer will buy such an investment product. But, many policies of this kind are being sold by our bank branches every day!

4. The customer has to wait for another 10 years to get back a modest return. At the end of 15 years, the projected maturity benefit is $80,000 of which the guaranteed sum is $44,000 and the non-guaranteed sum is $36,000. This means that after paying $60,000 and waiting for 15 years, the customer may not even get back the total amount of saving. The customer can only hope that the life insurance company will pay the non-guaranteed amount. If the company states that the investment earnings has been low, the poor customer does not have any right to demand payment of the projected amount.

5. The benefit illustration shows the surrender value based on a projected investment return of 4.75%. The sales representative points out this figure to suggest that the return on the life insurance policy is 4.75%. That is not true. The actual return for the 15 years is 2.2%.

6. There is a figure called "effect of deduction". This is the difference between the "accumulated premium" and the maturity benefit at the end of 15 years. Here is an explanation. If the insurance company was able to earn an annual yield of 4.75% over the 15 years, the accumulated premium with interest would be $110,000. This is $50,000 more than the premium of $60,000. The insurance company takes away $30,000 and gives only $20,000 to the customer.

7. Why should a customer leave the money to be invested by the insurance company and take all of the investment risk and allow the insurance company to take away $30,000 and leave only $20,000 for the customer? Who knows?

8. Why does the bank sell such an investment product to its customers and allow the insurance company to make the bulk of the profit? Well, the bank was interested to earn the commission by selling the policy. The distribution cost, which is the amount paid to the bank, is $5,000. The rest of the profit goes to the insurance company. It looks like the smartest party in the transaction is the insurance company. No wonder they make so much profit each year!

Misleading information given to entice a sale

I have received another request for assistance from an elderly lady. She went to United Overseas Bank to deposit a cheque for the sale of her HDB flat.

The sales representative and her supervisor, who holds the title of vice president, were persistent in getting her to buy a Prusave policy. (This is a nice way of saying that they "put a lot of pressure on her").

They told her that the saving is for 5 years and that the return is 4.75%. They should her a brochure to this effect. She bought the policy without understanding what the contract really was.

She decided to take the advice of the vice president and trusted that she would give the right advice.

After a year, she learned that the policy locked up her savings for 15 years (although the annual premium was payable for five years only), and that she would suffer a large loss of her savings if the policy is terminated before the end of 15 years.

She was not told about the poor surrender value at the time of buying the policy. When she asked about these figures, the sales representative told her to ignore them, as they were given as "standard figures" for formality only. She should focus on the return of 4.75%.

The return of 4.75% was also misleading. This was the "illustrated yield". The actual yield, after removing the "effect of deduction" was probably 2% per annum. A large part of the actual yield is not guaranteed anyway.

She wanted to stop the policy after paying one year's premium, but she would have suffered a large loss on the first year's premium.

Preparing for the economic downturn

Dear Mr. Tan
An economic downturn looks quite likely, especially in Singapore. We are affected by a weak global economy and weakness in China, but we also have our domestic factors to make the problem worse, especially in the property and new car sales.

What should ordinary people do to cope with the likely recession and increase in unemployment?

REPLY
From an individual perspective, it is time to reduce spending and to increase savings. If you lose your job, you have some savings to tide over the difficult time.

From a social perspective, this "increase saving" will cause further problems to a weak economy. If too many people cut down on their spending, the economy will weaken further. The businesses that depend on consumer spending will be badly affected. Many will have to close down. This will cause a spiral effect.

In most countries, the government can help to cushion off the impact by reducing interest rate to help the businesses to survive. The low interest rate may encourage the ordinary people to increase their spending, but this is not likely to happen due to the uncertainty in the economy.

However, the current interest rate is very low in Singapore now. A further reduction in interest rate will not help to reduce the business cost.

I guess that it will be more difficult to manage the economic downturn in Singapore. It might help if the government decides to give a monthly cash allowance to workers who are retrenched during the downturn. It is an unemployment benefit, but it should be considered for the short term.

The super rich pays little tax

Mr. Tan,
Singapore wants to attract the super rich to live in Singapore. We reduced our income tax rate to very low level and removed all estate duty. But, we do not tax the foreign income of the super rich. How does Singapore benefit from having this strategy to attract the super rich?

REPLY
You are correct that the super rich do not pay any income tax on their income that is earned from overseas and brought into Singapore. If they do not have any income from Singapore, they do not have to pay any tax. They also enjoy estate duty exemption when they pass away.

Perhaps they will benefit the Singapore economy indirectly. If they set up their headquarters here, they will employ people in Singapore. If they put their money here, they may use the wealth management services provided by our banks.

But, I suspect that many of the rich foreigners do not employ many people here, so their benefit to Singapore is questionable.

The real beneficiaries of the Singapore tax regime are the people who earn high income from Singapore, i.e the top earners in the legal and medical professional, the top ministers and civil servants and the top CEOs. They enjoy million dollar salaries and profits from their activities in Singapore and pay a low rate of tax here.

To compensate for the low tax from the top earners, the government introduced GST that is levied on everyone. But the low income people pay a higher proportion of their earnings in GST. They are badly off.

I dislike the GST and low income tax rates in Singapore.

High inequality of income is bad

Mr. Tan
You advocate greater equality of income and wealth. If someone wants to work hard and become rich, what is wrong with it? Don't you want to encourage people to work hard? Do you prefer them to be lazy?

REPLY
If someone wants to work hard and earn a higher income, it is all right. How much harder can they work,compared to others? Two or three times? It is all right for someone to earn 2 or 3 times of the ordinary wage.

However, if the income is 10, or 100 or 1,000 times of the ordinary income, it is too large a gap. In some cases, the high income could be earned through immoral means, e.g. to over charge a client in providing professional services. This happens when the high fees are not disclosed in advance, and are charged to the client who is not given a free choice. Examples are the high fees charged by doctors and lawyers.

There are other immoral ways to earn a high income, e.g. to sell misleading products to buyers, especially if the laws are inadequate in addressing the abuse. Examples are questionable financial products that are being sold to ignorant investors. Some of these products are outright scams.

When some people become super rich, and have assets worth billions, they will usually buy real estates and inflate their values. They sell these real estate to ordinary buyers at high prices and lock them in a heavy mortgage that will take a lifetime to pay. Or they rent the real estate to tenants at high rentals that take up a large part of their income, e.g. 50% or more. This is like a form of exploitation.

Extreme inequality of income of this nature is bad for society.

Issues affecting their the lives of Singaporeans

How do Singaporeans feel about the issues affecting their lives. Here is a summary of their votes.
http://wisdomofthecrowd.sg/summary.aspx

Private Shield is integrated with Medishield Life

Dear Mr Tan,
I have a Incomeshield Enhanced Basic plan which commenced every August. Now with the onset of Medishield Life, what should we do? Do we cancel the Incomeshield plan as Medishield Life is compulsory so that we don't pay premium on both sides?

REPLY
Incomeshield in integrated with Medishield Life. It means that you do not need to pay premium for Medishield Life when you have Incomeshield.

Example, if the Medishield Life premium is $500 and you pay $900 for Incomeshield, Income will pay $500 to Medishield Life and keep $400 to cover the additional benefits. So, you are covered both under Medishield Life and for additional benefits under Incomeshield.

How to prevent abuse by IPC charity

Mr. Tan
Is City Harvest Church a charity that enjoys tax privileges? Should the government regulate it more closely?

REPLY
I found this posting. It states the CHC is an "ordinary charity" and is not an "IPC-charity". Being a non-IPC, it does not enjoy any tax privileges and is not regulated by the Commissioner of Charities, who is a government official.

http://just-my-observation.blogspot.sg/2010/04/regulation-of-large-non-ipc-charities.html
We must remember that the government does not prevent the abuse of funds. In recent years, two IPC-registered charities were found to have breached the regulations, i.e. the National Kidney Foundation and the Ren Ci Hospital.

What is the problem and how can it be solved?

If the government grant IPC to a charity, it is contributing towards the funds collected by the charity through tax deductions. The government has a large financial interest in ensuring that the charity is managed properly.

The government should appoint a few directors to the board of the charity and make it clear that these directors are independent of the leaders of the charity and are responsible to look after the interest of the taxpayers.

This may be insufficient.

The government, through the Commissioner of Charities, may have to appoint the chief financial officer of the charity or have frequent and direct access to this person.

There is a similar practice in the commercial world. If a Singapore company enters into a joint venture with a foreign company, e.g. to manufacture or sell its product in the country of its foreign partner, the Singapore company will usually insist that they have the right to appoint the chief financial officer, while the foreign partner appoints the chief executive officer or the other way around. This ensures that the financial interest of both partners are protected.



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City Harvest Church - a moral issue

Mr. Tan
The question that I like to ask you can be quite sensitive, so you do not need to answer it if you find it too controversial.

You have written many times about bad practices in the financial industry, and that many people were "cheated". I did not see you write any comment about City Harvest Church. Do you think that the church leaders were morally wrong in abusing the funds contributed by their followers for the church? As you know, they have been found to be guilty by the court..

What are your views?

REPLY
The first question that has to be asked is - why is this church able to collect so much money? Sure, they are a mega church with many tens of thousand of followers, but still the funds are of a staggering amount.

My Christian friend told me that in the bible, there is a command from God that each person must contribute 10% of the income to the church. Although this is a high percentage of income, especially as the earnings are not sufficient to meet the high cost of living in Singapore, many fervent followers struggle to meet this command in the bible.

Although I am not familiar with the teaching in the bible, I believe that the church in the old days use the money to help the needy and the poor and to provide education and other services for the community.

The world today is different from the world when the bible was written. We now have a government that provide many of the welfare and education services that were done by the church of the old days. The government collect taxes to meet these needs.

If the church does not provide many of the traditional services, there is no need for the church to collect such a large percentage of the earnings. A smaller percentage would be sufficient.

Your question is - were the leaders morally wrong?

I guess that this question has to be answered by each member of the church, especially those who struggled to meet the expectation of the church. I will leave it to their judgement.

Perhaps, there are other churches that interpret the command in the bible more flexibly to allow for modern day circumstances.

Sold a bad policy at a bank

Dear Mr Tan,
I am one of the silly aunts who was being misled into buying this product. I went to UOB with the intention to open a fixed deposit after selling my flat but was recommend to buy prucash max limited pay. They only repeatedly highlight the investment return will be 4.75% much higher than the bank.

After agreeing to buy,they let me sign a stack of forms which are difficult to understand and didnt properly explained to me.Only recently after reading your article then I realise this product is very unfair to policyholder. Only win win situation for themselves. 

My total premium will be $60000 pa for 5year, how come guaranteed return only $43000 after 15 years. I thought of terminating but will lost $12000. Why MAS approved this kind of product. I am at a loss,pls advise. Thank

REPLY
Send an email to kinlian@gmail.com

Chart the nation's new direction

PM Lee says that Singaporeans must chart the nation's new direction together.
http://www.channelnewsasia.com/…/singaporeans-…/2215450.html


MY COMMENT:
Talk is easy.
But how can it be achieved?
As a first step, the government should make Parliament more active. Get the MPs to ask more questions. They are the representative of the people.
Respect all the MPs including those from the opposition parties.
As a second step, he should be prepared to put some key issues to a public poll. Let the people tell the government what they want for the future.
Here is an example of the issues that the government can ask the people to vote.
http://wisdomofthecrowd.sg/view_issue.aspx

A new approach for solving real world problems

Mr. Tan

I read your comment about "book smart" scholars with zero experience running our public transport operators. What's wrong with it?

Where can you find capable people with experience in Singapore? The engineers in SMRT may have the working experience but they are not able to take the top CEO position.

At least the top generals have high intelligence and experience in running a big organization like SAF. They can rely on the engineers to do the engineering work, while they look at the high level decisions.

Don't you agree, as you were a CEO before?

REPLY
I agree with half of your statement, i.e. that we need capable people to take the high level decisions.

The current approach adopted by the "book smart" scholars, as taught in the text books, is:

a. Prepare a detailed plan
b. Make sure that it work completely, i.e. zero tolerance for failure
c. Write the detailed SOP
d. Train the staff to implement it
e. Implement the plan.

This approach is possible in the SAF because they decide on the goal, give the command and the soldiers have to obey.

In the commercial world, there are a lot of uncertainty. There is also an extreme time pressure. Real problems crop up and have to be dealt with.

This requires a different approach. I call it the "do, learn, adapt" approach. But the "book smart" scholars do not like this "untidy" approach. That is why they have a lot of problem in addressing the real world problems.