When I give financial planning talks to the general public, I get approached by many people who ask my advise on the insurance policies that they have bought.
Here are the common faults of insurance agents:
1. Over-selling. Selling more life insurance than is needed, e.g. too much critical illness coverage.
2. Unsuitable products. The agent sell products that earn a high commission, but do not serve the important needs of the customer.
3. Fail to explain the product. Many customers are not clear about the product that they have bought.
4. Unrealistic projections. For example, stop paying premiums on reaching the critical year.
Clearly, the high commission that is paid to the agent is responsible for these unethical practices.
The blame is not entirely on the agent. The insurance company that design the products and "motivate" the agents to sell aggressively and meet high sales target are also responsible.
Some agents act professionally and look after the interest of their clients. I hope that all agents can fall in this category - but this may be just wishful thinking.
Friday, August 31, 2007
Several living policies
Question:
I presently have a few living policies paying about $2,000 yearly for each policy. Should I terminate them and convert them to term insurance policies?
REPLY:
You have probably over-invested in the living policy. It has high charges and give a low return, as a large part of the premium goes towards the critical illness coverage.
You should have more of your savings to earn a high return for your retirement. You can buy decreasing term insurance for your protection. A sum insured of $50,000 is probably adequate to provide for critical illness.
I presently have a few living policies paying about $2,000 yearly for each policy. Should I terminate them and convert them to term insurance policies?
REPLY:
You have probably over-invested in the living policy. It has high charges and give a low return, as a large part of the premium goes towards the critical illness coverage.
You should have more of your savings to earn a high return for your retirement. You can buy decreasing term insurance for your protection. A sum insured of $50,000 is probably adequate to provide for critical illness.
Saving for a child's education
Question:
What is an education policy? I was told by my agent that I should buy a living policy for my child instead of an education policy as it serves the same function and have life coverage. Your advice?
REPLY:
An education policy is for the parent to save for the expenses of sending a child to university. As this is quite expensive, the parent has to save in advance for many years.
It is better to invest in a low cost investment plan, and get the best return on your savings. A living policy is not appropriate. It has high expenses and gives a poor return.
Read this FAQ.
What is an education policy? I was told by my agent that I should buy a living policy for my child instead of an education policy as it serves the same function and have life coverage. Your advice?
REPLY:
An education policy is for the parent to save for the expenses of sending a child to university. As this is quite expensive, the parent has to save in advance for many years.
It is better to invest in a low cost investment plan, and get the best return on your savings. A living policy is not appropriate. It has high expenses and gives a poor return.
Read this FAQ.
Equity or Currency Link Insturments
Dear Mr Tan,
I like to know your views about equity and current linked investments that are issued by the banks. There are for a period of 2 to 4 weeks. They estimate a return from 4 to 15%.
For example, Product X with a spot price $3.60 is offered with a strike price of $3.40. If, after 4 weeks, the securities is above 3.40 your get 13.7% yield. If the security falls below $3.40 you will get the securities and of course suffer a paper loss.
What do you think of this type of instruments and are worthed investing in?
REPLY:
This is a structured financial product. My views of this type of product, in general, are described in the following FAQ.
Generally, I advise people to avoid any product that they do not understand. It is difficult to calculate the probability of a negative event, and the potential amount of the loss. So, you should avoid this type of product.
I believe that the issuing bank takes away a large margin for their profits. They will leave you with a low return and a high risk.
I like to know your views about equity and current linked investments that are issued by the banks. There are for a period of 2 to 4 weeks. They estimate a return from 4 to 15%.
For example, Product X with a spot price $3.60 is offered with a strike price of $3.40. If, after 4 weeks, the securities is above 3.40 your get 13.7% yield. If the security falls below $3.40 you will get the securities and of course suffer a paper loss.
What do you think of this type of instruments and are worthed investing in?
REPLY:
This is a structured financial product. My views of this type of product, in general, are described in the following FAQ.
Generally, I advise people to avoid any product that they do not understand. It is difficult to calculate the probability of a negative event, and the potential amount of the loss. So, you should avoid this type of product.
I believe that the issuing bank takes away a large margin for their profits. They will leave you with a low return and a high risk.
Compulsory Annuity
Dear Mr Tan,
I refer to the government proposed compulsory annuity for those below 50 years and payable after 85 years.
How will this be fair to those who are currently in poor health which will
impact their longevity? What is the criteria for poor health, if such people can be exempted from the scheme?
Although in theory and policy it looks good, is it practical and fair to implement and administer such a scheme which is across the board?
REPLY:
I do not have the solution to your particular situation. Anyway, the compulsory scheme will only take effect in 15 years time. It may be too early to declare that a particular person is in poor health.
I refer to the government proposed compulsory annuity for those below 50 years and payable after 85 years.
How will this be fair to those who are currently in poor health which will
impact their longevity? What is the criteria for poor health, if such people can be exempted from the scheme?
Although in theory and policy it looks good, is it practical and fair to implement and administer such a scheme which is across the board?
REPLY:
I do not have the solution to your particular situation. Anyway, the compulsory scheme will only take effect in 15 years time. It may be too early to declare that a particular person is in poor health.
Money market Fund
Q1. Money market fund (pertaining to Flexi cash) is a type of unit trust. If I buy at 100 units at an offer price of $1.10, my total investment is $1,100. If I decide to sell it at a bid price is $1.09, my proceeds will be $1,090. So I have make a loss of capital of $10. That means a person have to time his withdrawal to make sure that his capital is preserved.
Reply: It is possible, but unlikely, for the money market fund to drop in value. Even if it does drop (due to a rise in interest rate), the drop is temporary and it will recover its value in a few days or weeks time.
Q2. Can the bid price drops for a money market fund? So does that mean that one should buy when the offer price is low?
Reply: If you look at the price over the past few months, you will find it it increases by 0.1 cents very 5 to 15 days. If you time it, you may save a few days of interest.
Q3. In Singapore, the money market fund is packaged as unit trust. The value of the unit is determine by the bid/offer price?
Reply: You are right.
Reply: It is possible, but unlikely, for the money market fund to drop in value. Even if it does drop (due to a rise in interest rate), the drop is temporary and it will recover its value in a few days or weeks time.
Q2. Can the bid price drops for a money market fund? So does that mean that one should buy when the offer price is low?
Reply: If you look at the price over the past few months, you will find it it increases by 0.1 cents very 5 to 15 days. If you time it, you may save a few days of interest.
Q3. In Singapore, the money market fund is packaged as unit trust. The value of the unit is determine by the bid/offer price?
Reply: You are right.
Hedge Fund Managers
In good times, when the bubble was growing, hedge fund managers made tens of millions of dollars. They invested the funds in sub-prime mortgages and collaterialised debt obligations. They were able to show a good return on a growing bubble.
When the crunch comes, who takes the loss? The investors. The hedge fund managers were not required to pay back the tens of millions of dollars that they earned.
Lesson: Do not invest in hedge funds.
When the crunch comes, who takes the loss? The investors. The hedge fund managers were not required to pay back the tens of millions of dollars that they earned.
Lesson: Do not invest in hedge funds.
Impartial advice
There is a useful role for financial advisers (and insurance advisers) in giving impartial advice to customers. They should be paid a fee for the time spent.
Many people told me that they are willing to pay a fee of $200 for financial advice. The fee of $500 or more that is currently charged by some advisers is too high for most customers.
It is possible for the adviser to reduce the fee to $200, if they are not required to spend too much time with the client. The client can be asked to read a FAQ (frequently asked question) on financial matters before they see the adviser. It will be possible for the adviser to do a good job within 2 hours.
My ideas are set out in this paper.
Many people told me that they are willing to pay a fee of $200 for financial advice. The fee of $500 or more that is currently charged by some advisers is too high for most customers.
It is possible for the adviser to reduce the fee to $200, if they are not required to spend too much time with the client. The client can be asked to read a FAQ (frequently asked question) on financial matters before they see the adviser. It will be possible for the adviser to do a good job within 2 hours.
My ideas are set out in this paper.
Look for low cost products
Dear Mr Tan,
There are many investment products in the market. But, it seems that the life insurance product (ie endowment policy) has the biggest upfront cost to the consumer. Even the ILP has 19 months of upfront cost, according to Dr Money's website. Why are the charges so high?
REPLY
Many years ago, the governments in most countries wanted to encourage people to buy life insurance to provide protection to the family. They offered an attractive incentive - the life insurance premium can be deducted from taxable income.
Life insurance companies paid high commissions to agents to sell this product. The high cost is offset by the tax savings. The product still give good value to the consumer.
The situation changed, when most governments withdraw the tax savings. Without the tax savings, the high commission makes the product unattractive for consumers. Many insurance companies contined to sell these "poor value" products, instead of changing their product and marketing strategy.
Some companies adopt a different approach. They sell term insurance to provide the low cost protection. The consumer can invest their money in other investment funds. Some of these funds have low cost and give good value to the consumer. (But, there are high cost investment funds - which should also be avoided).
Lesson: Look for low cost insurance products (e.g. term insurance) and low cost invsetment funds (e.g. indexed funds). Avoid high cost products
There are many investment products in the market. But, it seems that the life insurance product (ie endowment policy) has the biggest upfront cost to the consumer. Even the ILP has 19 months of upfront cost, according to Dr Money's website. Why are the charges so high?
REPLY
Many years ago, the governments in most countries wanted to encourage people to buy life insurance to provide protection to the family. They offered an attractive incentive - the life insurance premium can be deducted from taxable income.
Life insurance companies paid high commissions to agents to sell this product. The high cost is offset by the tax savings. The product still give good value to the consumer.
The situation changed, when most governments withdraw the tax savings. Without the tax savings, the high commission makes the product unattractive for consumers. Many insurance companies contined to sell these "poor value" products, instead of changing their product and marketing strategy.
Some companies adopt a different approach. They sell term insurance to provide the low cost protection. The consumer can invest their money in other investment funds. Some of these funds have low cost and give good value to the consumer. (But, there are high cost investment funds - which should also be avoided).
Lesson: Look for low cost insurance products (e.g. term insurance) and low cost invsetment funds (e.g. indexed funds). Avoid high cost products
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