Author Archive

Posted on August 13, 2010 - by Tan Kin Lian

High deduction for investment linked plan

A graduate, who recently got a job, was approached by a friend to invest $300 a month in an investment linked policy. His friend showed him the colorful brochures of three funds with projections of yields of 5% and 9%. The graduate sought my views about these funds.

I asked him to send the benefit illustration to me. He initially sent me the fund brochures (which he mistook to be the benefit illustration). Later, he found the benefit illustration. Here is my reply to him:

1) The distribution cost for 5 year sis $6,383, representing 177% of your annual savings. Do you really want to give so much of your saving away?

2) Based on 9% yield (which is not guaranteed and over-optimistic), the accumulated premium at the end of 25 years is $332,366. However, the amount that is taken away from you is $131,966 (39% of total), leaving you with a net amount of only $200,400. This is a lot of money to be taken away. According to the benchmark in my book, an acceptable deduction is 20%. Read more…

Posted on July 27, 2010 - by Tan Kin Lian

Wait for market correction

If you have cash that is earning 0.5% per annum, and you are worried about the current level of the stock market and the uncertainty in the global economy, which option would you prefer?

• Invest the money for 5 years to get a guaranteed return of 10% (i.e. 2% per year)
• Keep the money in cash and wait for the market to drop by 10%, i.e. ST index of 2,600
• Wait for the market to drop by 20%, i.e. ST index of 2,350
• Invest in preference shares or REITS to earn a yield of 4% p.a. or more

Posted on June 8, 2010 - by Tan Kin Lian

Life time savings

I posted a story of a non-working woman who invested all of her savings in a 21 year endowment policy. She would have paid $18,000 in premium and obtained a return of $16,000 on maturity. This gave a negative return. Part of the premium went into paying for a rider to provide additiona insurance protection, but this was over-priced.

She obtained a meagre return of less than 1% per annum on the savings portion of the premium. The insurance company would probably have earned an average yield of 5% per annum. More than 80% of the gains went into the commission, expenses and profit. The meagre return could not even cover the inflation during the years. To this woman, it represented most of her lifetime savings, which has been denied of a fair return for a financial plan that was traditionally supposed to be trustworthy. Read more…

Posted on May 12, 2010 - by Tan Kin Lian

Commission for life insurance agents

A life insurance agent argued that the agent has to incur high expenses and deserve the commission that is paid. This is only one part of the story, as seen from the perspective of the agent.

The agent should also see this issue from the perspective of their client. The agent has a duty to take care of the interest of the client. This includes recommending a suitable life insurance product that is good for the client. In the case of an investment plan, there is a duty to advice a plan that offers a fair return for the long term savings. In the case of a term insurance policy, the agent has to recommend a policy that charges a fair rate of premium (but does not need to be the lowest).

The problem arises when there is a conflict of interest. Many agents recommend a policy that pays a high  commission but this is at the expense of the client (who trusted the agent). The agent is trained to give the marketing  reasons to sell the policy, but they are not honest advice. Read more…

Posted on April 21, 2010 - by Tan Kin Lian

Tips for young people

I wrote the book, Practical Guide on Financial Planning to educate young people who has just started work, about the importance of savings and the need to invest the savings in a liquid form so that they can be withdrawn without any penalty for urgent cash needs. You can save lot of money by avoiding high interest payments on borrowings or installment payments.

You should NOT lock up their savings in a life assurance policy that has a high distribution cost, poor liquidity and a heavy penalty on withdrawal. Be careful of insruance agents who will approach you soon after you started work. They are well trained to tell one-sided stories about the benefits of life insurance, but not the serious drawbacks. Read more…

Posted on April 8, 2010 - by Tan Kin Lian

Tell a blatant lie

The benefit illustration of a life insurance policy showed the distribution cost to be 7.3% of the total premium paid over 25 years. If the total premium amounted to $100,000, the distribution cost was $7,300. The insurance agent twisted the figures and said that the cost was only $292 a year and amount to 0.3% of the invested sum (i.e. similar to the cost of investing in a exchange traded fund).

This is a blatant lie, as the annual cost of $292 is still 7.3% of the annual investment of $4,000. The agent twisted the figure to confuse the clients. Read more…

Posted on April 4, 2010 - by Tan Kin Lian

Poor financial future for Singaporeans

I feel sad for the people of Singapore. Most of them work hard and are frugal. They save for their future and for their children. But, when they come to retire, you do not have enough savings and are asked to continue to work longer.

What went wrong? Most of them get a poor deal from the financial products that they invested in. Take an example of a family which saves $500 a month over 35 years. They should have earned a return of 5% p.a. and received $570,000 for retirement,. But the yield obtained by most of them would probably be 2% p.a. giving them only $306,000 (or 54%). The difference of $264,000 (i.e. 46% of the total) went to pay the high earnings and profits of the financial services industry. I am not aware of any other country in the developed world where as much as 46% is taken away from the hard earned life time savings of the people. Read more…

Posted on March 24, 2010 - by Tan Kin Lian

Managing personal risks

A working person faces the following risks:

a) premature death

d) insufficient income during retirement

The chance of (a) and (b) occurring during the working life is quite low, perhaps less than 5%. By getting bad advice from insurance agents, they spend too much of their savings to insure against these risk.

Most people (i.e. 95%) are likely to face the risk of (c) and (d). This risk can be best managed through personal savings. The savings should be invested to earn a good rate of return and can be withdrawn without penalty, e.g. through a low cost investment fund.  The personal savings can be used to cover cash flow needs during a temporary period of unemployment, without the need to depend on borrowings which incur a high interest burden. If the savings are invested prudently, they will provide an adequate amount for retirement. Read more…

Posted on March 14, 2010 - by Tan Kin Lian

Pay TV operators to carry contents of third parties

The Media Development Authority has announced that they will require pay TV operators to carry the contents of third parties, but this will only apply to future contents.

This is a good move, but does not go far enough. The biggest damage is going to occur in respect of existing content, specifically the English Premier League. Over the next few months, many households will have to go through the expensive exercise of switching their platform (from Starhub to Singtel) or installing a new set of cables. It is wasteful and inconvenient.

Singtel is likely to face serious resource issues in meeting the heavy demand and also in addressing the technical issues of connectivity and customer experience. Already, they faced glitches. This is bound to increase significantly. Read more…

Posted on February 16, 2010 - by Tan Kin Lian

Achive top position in life insurance sales

Life insurance companies compete yearly to achieve the top position in life insurance sales. This is an indicator of success and the productivity of the sales force. Several decades ago, the competition was based on annual premium on new policies, but in recent years, 10% of the single premiums are added to the annual premium to get the weighted premium as a measure of the sales.

To achieve sales and energize the sales agents, the life insurance companies introduce new and innovative products every year. These new products are variations of the old products, but have some changes to allow the agents to market the product. The variations may take the following forms:

a) a shorter period to pay the insurance premium
b) additional risks that are being covered
c) change from guaranteed to investment-linked payouts or back
(more…)