COMMENT POSTED IN MY BLOG:
A few months ago, you said that a life insurance plan that gives out a regular payment reduces the return to the policyholder. NTUC has now introduced a new plan that pays out 5% of the sum asssured each year. Does your remark apply to this plan as well?
REPLY:
According to the advertisement, the potential return of the new NTUC plan is 3.7% per annum. This return is lower than the return on an endowment plan. The guaranteed payout seems to reduce the return to the customer.
If you are saving for the next 25 years, you should aim for a higher return, say 5% or more. Compared to 3.7%, the difference can be quite substantial (say 17% more). Read this FAQ.
Monday, August 20, 2007
Comparing annuity with bank deposits
Hi,
I saw your article comparing annuity to bank deposits. Shouldn't it be compared to CPF Special Account (SA) guaranteed 4% pa ? In fact, CPF-SA should be compared to annuity with Capital Protection (returning the balance money to beneficiaries upon death) which has lower monthly payments.
You mentioned that annuity is like a pooling of risk, interest earned is left inside the pool upon death. For CPF-SA, interest earned is returned to beneficiaries right?
REPLY:
The article was written to explain the difference between investing in a life annuity and in a bank deposit. This applies to the free investible savings for most people.
I have a separate article which compares the life annuity with the CPF Retirement Account. This is relevant for people who have to decide between the two options to invest their minimum sum.
I saw your article comparing annuity to bank deposits. Shouldn't it be compared to CPF Special Account (SA) guaranteed 4% pa ? In fact, CPF-SA should be compared to annuity with Capital Protection (returning the balance money to beneficiaries upon death) which has lower monthly payments.
You mentioned that annuity is like a pooling of risk, interest earned is left inside the pool upon death. For CPF-SA, interest earned is returned to beneficiaries right?
REPLY:
The article was written to explain the difference between investing in a life annuity and in a bank deposit. This applies to the free investible savings for most people.
I have a separate article which compares the life annuity with the CPF Retirement Account. This is relevant for people who have to decide between the two options to invest their minimum sum.
Value of the Tail of the Lease
The Prime Minister has announced that HDB will be willing to allows certain categories of owners to keep the next 30 years lease on their HDB flat and sell the tail of the lease back to HDB for its present value. Part of this value can be taken in cash, while the remainder has to be kept in the CPF account.
Several people have asked me for the formula to calculate the value of this tail of the lease.
It depends on two factors:
* The current remaining lease (which can be from 50 to 80 years)
* The interest rate used to compute the value of the tail
I do not know what interest rate will be used by HDB for the calculation. It could be from 1% to 3%. In my view, an interest rate of 2% or 3% would be appropriate (but this is just a personal view).
The following table shows how much you can get by selling off the tail of the lease:
Value of tail of lease, assuming the owner retains the next 30 years:
For example, if the remaining lease is 70 years and the interest rate used for the calcuation is 2% p.a., the value of the 40 year tail (i.e. 70 years less 30 years) is 40.3% of the current value of the property.
If the HDB flat is worth $160,000, the value of the tail is $64,480.
If a higher interest rate of 3% p.a. is used in the calculation, the value of the tail is 32.7% of $160,000 or $52,320.
Let us wait for the announcement by the HDB.
Several people have asked me for the formula to calculate the value of this tail of the lease.
It depends on two factors:
* The current remaining lease (which can be from 50 to 80 years)
* The interest rate used to compute the value of the tail
I do not know what interest rate will be used by HDB for the calculation. It could be from 1% to 3%. In my view, an interest rate of 2% or 3% would be appropriate (but this is just a personal view).
The following table shows how much you can get by selling off the tail of the lease:
Value of tail of lease, assuming the owner retains the next 30 years:
Remaining Value of Tail using
lease 2% p.a. 3% p.a.
60 years 35.6% 29.2%
70 years 40.3% 32.7%
80 years 43.6% 35.1%
For example, if the remaining lease is 70 years and the interest rate used for the calcuation is 2% p.a., the value of the 40 year tail (i.e. 70 years less 30 years) is 40.3% of the current value of the property.
If the HDB flat is worth $160,000, the value of the tail is $64,480.
If a higher interest rate of 3% p.a. is used in the calculation, the value of the tail is 32.7% of $160,000 or $52,320.
Let us wait for the announcement by the HDB.
Do It Yourself Insurance
Dr Money has written an interesting article on "Do It Yourself" insurance. You can read it here.
It saves you on the high charges. There are some tips on the types of product to buy.
It saves you on the high charges. There are some tips on the types of product to buy.
Capital protection for Life annuity
Hi Mr Tan,
I read your article in the Straits Times concerning Annuities. I have a question concerning longevity risk. If I were to take up an Annuity of $100K at the age of 62 but I die 5 years later. Does that mean my wife and children won't get back $100K?
REPLY:
If you buy a capital protected annuity, your family will get back the amount invested, less the payments that you have received.
A capital protected annuity pays about 12% less than a pure annuity (ie without capital protection).
Read this article.
I read your article in the Straits Times concerning Annuities. I have a question concerning longevity risk. If I were to take up an Annuity of $100K at the age of 62 but I die 5 years later. Does that mean my wife and children won't get back $100K?
REPLY:
If you buy a capital protected annuity, your family will get back the amount invested, less the payments that you have received.
A capital protected annuity pays about 12% less than a pure annuity (ie without capital protection).
Read this article.
Life Annuity
You can buy a life annuity with:
* The CPF Minimum Sum
* Your own cash savings (i.e. other than the Minimum Sum).
What is a life annuity? Is it a good form of investment? Read about it from this FAQ.
This article is also published in MyPaper.
* The CPF Minimum Sum
* Your own cash savings (i.e. other than the Minimum Sum).
What is a life annuity? Is it a good form of investment? Read about it from this FAQ.
This article is also published in MyPaper.
Invest in a low cost fund
I have recommended that you buy term insurance and invest the difference in a low cost fund.
Some investment-linked products (ILP) in the market have high charges, and give a poor return. You have to avoid these products. This website shows a comparison of the charges.
You have to be careful about the three levels of charges:
* upfront charge to pay commission to the agent or broker
* annual charge on the investments, and policy fee
* mortality charges (to pay for the insurance cover)
The best is a "do it yourself" unit trust. If this is too difficult, you can take the next best, which is a low cost ILP.
You can buy the term insurance separately. If you wish to buy it as part of the same ILP product, you should compare the premium rates. Make sure that you are allowed to cancel the term insurance, if the cost is too high.
Some investment-linked products (ILP) in the market have high charges, and give a poor return. You have to avoid these products. This website shows a comparison of the charges.
You have to be careful about the three levels of charges:
* upfront charge to pay commission to the agent or broker
* annual charge on the investments, and policy fee
* mortality charges (to pay for the insurance cover)
The best is a "do it yourself" unit trust. If this is too difficult, you can take the next best, which is a low cost ILP.
You can buy the term insurance separately. If you wish to buy it as part of the same ILP product, you should compare the premium rates. Make sure that you are allowed to cancel the term insurance, if the cost is too high.
Insurance protection for new-born baby
Hi Mr. Tan,
Now I am planning to get a protection insurance for my newborn baby.... After listening to many insurer and products, I have finalised the below plan.... need your advise which is the best?
My main concern is I want a protection for my baby of sum assured of 100k with critical illness for whole life and my budget is hope to be within $100 monthly.
Initially I have decided to take up ILP. I met some friends who are over 50yrs old and they warned me against it as they are holding some ILP and regret it because of the high cost..... so should i spend another $20 more in other to get a traditional life policy?
(details removed)
Looking forward to your advise.
REPLY
Please read this FAQ on saving for your child's education.
If you decide to buy an ILP (which I recommend), you should choose one with low expenses. This website shows you the front end charges of several products in the market.
The best is a "do it yourself" unit trust. The next best is a low cost ILP offered by NTUC Income.
For your baby, I suggest that you buy a Medishield or private Shield plan, to cover the cost of medical treatment. The premium is very low, i.e less than $100 a year.
Now I am planning to get a protection insurance for my newborn baby.... After listening to many insurer and products, I have finalised the below plan.... need your advise which is the best?
My main concern is I want a protection for my baby of sum assured of 100k with critical illness for whole life and my budget is hope to be within $100 monthly.
Initially I have decided to take up ILP. I met some friends who are over 50yrs old and they warned me against it as they are holding some ILP and regret it because of the high cost..... so should i spend another $20 more in other to get a traditional life policy?
(details removed)
Looking forward to your advise.
REPLY
Please read this FAQ on saving for your child's education.
If you decide to buy an ILP (which I recommend), you should choose one with low expenses. This website shows you the front end charges of several products in the market.
The best is a "do it yourself" unit trust. The next best is a low cost ILP offered by NTUC Income.
For your baby, I suggest that you buy a Medishield or private Shield plan, to cover the cost of medical treatment. The premium is very low, i.e less than $100 a year.
What causes the mess in sub-prime mortgages?
The sub-prime mortgages are given to low income people who are not able to service the mortgage loans. There is a high default rate on these loans. The losses are affecting meltdown in the global stock markets.
How did this mess come about? There are two main factors:
1) The mortgage brokers earn an attractive commission to sell the sub-prime mortgages. They are not concerned about the ability of the customer (i.e. borrower) to repay the loan, or if the property is good for the customer. The brokers are motivated by the sale, and the attractive commission.
2) The lender should be the party that is interested to ensure that the borrower can repay the loan. This was the situation in past years. In recent years, they have changed to a "broker" mindset. They sell the loans, and re-package and re-sell them to the market through the asset backed securities and the collaterised debt obligations. The original lenders earn an attractive margin for providing this re-packaging service, and do not take any risk.
This is quite sad. The mortgage brokers and mortgage lenders, in their eagerness to earn the commision and the margin, have created products that are bad for the customers (i.e. the people who borrowed on the sub-prime mortgage to buy expensive property) and bad for the ultimate investors (i.e. the people who bought the ABS and CDOs in the market).
Unfortunately, there are many other financial products in the market that fall in the same category. They include high cost life insurance products and structured products.
How did this mess come about? There are two main factors:
1) The mortgage brokers earn an attractive commission to sell the sub-prime mortgages. They are not concerned about the ability of the customer (i.e. borrower) to repay the loan, or if the property is good for the customer. The brokers are motivated by the sale, and the attractive commission.
2) The lender should be the party that is interested to ensure that the borrower can repay the loan. This was the situation in past years. In recent years, they have changed to a "broker" mindset. They sell the loans, and re-package and re-sell them to the market through the asset backed securities and the collaterised debt obligations. The original lenders earn an attractive margin for providing this re-packaging service, and do not take any risk.
This is quite sad. The mortgage brokers and mortgage lenders, in their eagerness to earn the commision and the margin, have created products that are bad for the customers (i.e. the people who borrowed on the sub-prime mortgage to buy expensive property) and bad for the ultimate investors (i.e. the people who bought the ABS and CDOs in the market).
Unfortunately, there are many other financial products in the market that fall in the same category. They include high cost life insurance products and structured products.
Treasury Bill
Hello Mr. Tan,
May I ask for your guidance on what is a treasury bill and how do you invest on it? How does it work?
REPLY:
A treasury bill is issued by the government, and is usually for a few months. You get the interest (which is usually quote low) but the investment is very secure. You can ask your bank or stockbroker about it.
May I ask for your guidance on what is a treasury bill and how do you invest on it? How does it work?
REPLY:
A treasury bill is issued by the government, and is usually for a few months. You get the interest (which is usually quote low) but the investment is very secure. You can ask your bank or stockbroker about it.
Two ways to monetarise your flat
A journalist asked me, "Is it better for a HDB flat owner to take a reverse mortgage or sell of the tail of the lease back to HDB?"
My reply is, "They serve two different needs".
If the owner needs some money and has not decided on what to do with his future home, it is better to take a reverse mortgage. This is a temporary arrangement. He can repay the loan when he decides to sell his flat.
If the owner is certain that he wish to keep the current flat, and be needs money to spend, then it is better to sell of the tail of the lease. I estimate that he can get between 33% to 40% of the current value of the flat. This arrangement is likely to be permanent. He will find it difficult to sell the flat, if the remaining lease is only 30 years.
Both methods cater to different groups of people.
My reply is, "They serve two different needs".
If the owner needs some money and has not decided on what to do with his future home, it is better to take a reverse mortgage. This is a temporary arrangement. He can repay the loan when he decides to sell his flat.
If the owner is certain that he wish to keep the current flat, and be needs money to spend, then it is better to sell of the tail of the lease. I estimate that he can get between 33% to 40% of the current value of the flat. This arrangement is likely to be permanent. He will find it difficult to sell the flat, if the remaining lease is only 30 years.
Both methods cater to different groups of people.
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