Dear Mr. Tan,
I read several comments in your blog from other people, that the new products launched by NTUC Income pays higher commission and gives a poorer return to the policyholder. Is this true?
REPLY
I believe that the new products incurs higher marketing expenses, including agent's commission.
Generally, most of the products in the market are high cost and give a poor return to the policyholder. Many products have "special features" that are really of not much use to the policyholder. It distracts the policyholder from the low return given by these products.
It is better to buy Term insurance and invest the difference. Read this FAQ:
http://www.tankinlian.com/faq/savings.html
Thursday, January 24, 2008
Living Benefit
Hi Mr Tan,
I currently have the Living Policy and an IncomeShield policy. I am planning to cancel the living policy and get a pesonal accident insurance and i-term from NTUC Income. I understand that i-term does not provide coverage for critical illness. May I know if there is any affordable insurance for critical illness?
REPLY
You can buy the Living Benefit under the Family Insurance plan. It is similar to Term insurance, but covers critical illness as well.
You can ask their business center to give you a quote, and compare it with the benchmark premium shown here:
http://www.tankinlian.com/faq/choice.html
I currently have the Living Policy and an IncomeShield policy. I am planning to cancel the living policy and get a pesonal accident insurance and i-term from NTUC Income. I understand that i-term does not provide coverage for critical illness. May I know if there is any affordable insurance for critical illness?
REPLY
You can buy the Living Benefit under the Family Insurance plan. It is similar to Term insurance, but covers critical illness as well.
You can ask their business center to give you a quote, and compare it with the benchmark premium shown here:
http://www.tankinlian.com/faq/choice.html
Avoid these financial products
Dear Mr. Tan,
I read your FAQ on Investing Your Savings. You advice to avoid the following products:
a) Difficult to understand
b) Lacks transparency
c) Lock you for a long period
d) Imposes a penalty on termination
e) Lacks flexibility
It seems that most life insurance products fit into this description. Is it correct?
REPLY
The financial products that fit into this description are:
a) Most life insurance products
b) Most structured products (which locks you for 3, 5 or more years).
Read this FAQ to find out about other options to invest your savings:
http://www.tankinlian.com/faq/savings.html
I read your FAQ on Investing Your Savings. You advice to avoid the following products:
a) Difficult to understand
b) Lacks transparency
c) Lock you for a long period
d) Imposes a penalty on termination
e) Lacks flexibility
It seems that most life insurance products fit into this description. Is it correct?
REPLY
The financial products that fit into this description are:
a) Most life insurance products
b) Most structured products (which locks you for 3, 5 or more years).
Read this FAQ to find out about other options to invest your savings:
http://www.tankinlian.com/faq/savings.html
Whole life premium payable for 10 years
Dear Mr. Tan,
I have been offered the following product:
Plan: Whole life, premium payable for 10 years only
My age: 37
Sum insured: $25,000
Monthly premium: $100
Estimated cash value at end of 10 years: 9,800
Estimated cash value at age 65: $29,000
Is this good for me?
REPLY:
Here is another alternative, ie buy Term and invest the difference:
a) Buy 10 year Term insurance to cover $25,000: annual premium of $40.
b) Invest the balance ($100 X 12 - 40) over 10 years to earn 4% per annum: estimated $13,900.
c) Keep the $13,900 invested at 4% for another 18 years to age 65: estimated $28,100.
The projected cash value of the whole life policy after 10 years ($9800) is much lower than the alternative ($13,900).
The projected cash value at age 65 (i.e. $29,000) looks quite attractive, compared to the alternative ($28,100). However, you have to find out what portion is guaranteed and what portion is non-guaranteed.
If you compare the projected cash value after 10 years ($9,800) with the cash value after 28 years ($29,000), the insurance company is assuming a yield of 6.2% over the 18 years. I find this projection to be too optimistic.
I have used 4% to project the yield on the investment fund. This is not guaranteed, but is quite conservative. There is a good chance that you can earn a higher return, say 5% p.a. This will give much better projected values.
I prefer to buy Term and invest the difference in a low cost, diversified fund.
Read these FAQ:
http://www.tankinlian.com/faq/term.html
http://www.tankinlian.com/faq/savings.html
All the best in your decision.
I have been offered the following product:
Plan: Whole life, premium payable for 10 years only
My age: 37
Sum insured: $25,000
Monthly premium: $100
Estimated cash value at end of 10 years: 9,800
Estimated cash value at age 65: $29,000
Is this good for me?
REPLY:
Here is another alternative, ie buy Term and invest the difference:
a) Buy 10 year Term insurance to cover $25,000: annual premium of $40.
b) Invest the balance ($100 X 12 - 40) over 10 years to earn 4% per annum: estimated $13,900.
c) Keep the $13,900 invested at 4% for another 18 years to age 65: estimated $28,100.
The projected cash value of the whole life policy after 10 years ($9800) is much lower than the alternative ($13,900).
The projected cash value at age 65 (i.e. $29,000) looks quite attractive, compared to the alternative ($28,100). However, you have to find out what portion is guaranteed and what portion is non-guaranteed.
If you compare the projected cash value after 10 years ($9,800) with the cash value after 28 years ($29,000), the insurance company is assuming a yield of 6.2% over the 18 years. I find this projection to be too optimistic.
I have used 4% to project the yield on the investment fund. This is not guaranteed, but is quite conservative. There is a good chance that you can earn a higher return, say 5% p.a. This will give much better projected values.
I prefer to buy Term and invest the difference in a low cost, diversified fund.
Read these FAQ:
http://www.tankinlian.com/faq/term.html
http://www.tankinlian.com/faq/savings.html
All the best in your decision.
Personal accident by telemarketing
Hi Mr. Tan,
I received a call from my agent. She is offering this limited promotion personal accident policy to selected clients. Currently, I have a Prime Life policy with them. She is offering me a personal accident policy: $36/mth for $200k, $29/mth for $100k.
With additional benefits like cash rebate per year around 1 month of the premium. I am currently schooling and will only be entering the workforce 3 years down the road.What do you think?
REPLY
The plan offered by the agent will cost about $319 (after rebate) for $100,000 cover. It is too expensive. A similar personal accident policy, available from NTUC Income and a few other insurers, will cost you only $72 a year (applicable to a student).
Read this FAQ:
http://www.tankinlian.com/faq/pa.html
Lesson: Avoid buying a product straight away from a commissioned agent. Always compare with similar products in the market before you buy.
I received a call from my agent. She is offering this limited promotion personal accident policy to selected clients. Currently, I have a Prime Life policy with them. She is offering me a personal accident policy: $36/mth for $200k, $29/mth for $100k.
With additional benefits like cash rebate per year around 1 month of the premium. I am currently schooling and will only be entering the workforce 3 years down the road.What do you think?
REPLY
The plan offered by the agent will cost about $319 (after rebate) for $100,000 cover. It is too expensive. A similar personal accident policy, available from NTUC Income and a few other insurers, will cost you only $72 a year (applicable to a student).
Read this FAQ:
http://www.tankinlian.com/faq/pa.html
Lesson: Avoid buying a product straight away from a commissioned agent. Always compare with similar products in the market before you buy.
Low cost Endowment and Whole Life policies
Dear Mr. Tan,
Is it possible to find an endowment or whole l ife policy with low cost? For example, some unit trusts have no upfront load and low expense ratios, but others have high loads and charges. Is there a similar situation for life insurance policies?
REPLY
Technically, it is possible for an insurance company to design an endowment or whole life policy with no-load, i.e. no commission payable to the agent.
As there is no agent to sell the product, the insurance company will have to find a way to get people to buy the product directly from them. Alternatively, they have to incur advertising cost to make the product known to the potential customers.
To my knowledge, no insurance company has tried to design a product in this manner. But, it is technically possible.
At present, most endowment and whole life products in the market give a net return of about 2.5%. The investment return is about 5%, but 2.5% is deducted to pay agent's commission and other expenses.
If the customer is willing to buy the product directly, they should be able to get an average return of 3.5% on these products, as only 1.5% is needed to cover the other expenses, including advertising. The advantages of endowment and whole life policies is that there is a capital guarantee.
Is it possible to find an endowment or whole l ife policy with low cost? For example, some unit trusts have no upfront load and low expense ratios, but others have high loads and charges. Is there a similar situation for life insurance policies?
REPLY
Technically, it is possible for an insurance company to design an endowment or whole life policy with no-load, i.e. no commission payable to the agent.
As there is no agent to sell the product, the insurance company will have to find a way to get people to buy the product directly from them. Alternatively, they have to incur advertising cost to make the product known to the potential customers.
To my knowledge, no insurance company has tried to design a product in this manner. But, it is technically possible.
At present, most endowment and whole life products in the market give a net return of about 2.5%. The investment return is about 5%, but 2.5% is deducted to pay agent's commission and other expenses.
If the customer is willing to buy the product directly, they should be able to get an average return of 3.5% on these products, as only 1.5% is needed to cover the other expenses, including advertising. The advantages of endowment and whole life policies is that there is a capital guarantee.
Investing through the ETF
Dear Mr. Tan,
I read your blog about investing in the STI ETF. Can I ask you the following questions?
1. What is the difference between investing in a unit trust and an ETF?
Reply: When you buy or sell a unit trust, the price is based on the Net Asset Value at the end of the day, plus a spread (if applicable). If buy buy or sell a ETF, the price is based on the actual price that has been traded. You need to offer an attractive price that the other party is willing to trade with you.
2. The liquidity for the ETF is low. The difference between the buy and sell price is high. What price should I buy? Will there be someone else willing to transact with me at my price?
Reply: You should offer a price between the buy and sell price quoted in the exchange. For example, if the prices are 3.00 and 3.08, you should offer a price at 3.04. If you keen to buy, you can offer 3.05. Similarly, if you are keen to sell, you can offer 3.03. You may be able to find another party willing to trade with you at that price. This will help to create the interest and liquidity in the market.
I read your blog about investing in the STI ETF. Can I ask you the following questions?
1. What is the difference between investing in a unit trust and an ETF?
Reply: When you buy or sell a unit trust, the price is based on the Net Asset Value at the end of the day, plus a spread (if applicable). If buy buy or sell a ETF, the price is based on the actual price that has been traded. You need to offer an attractive price that the other party is willing to trade with you.
2. The liquidity for the ETF is low. The difference between the buy and sell price is high. What price should I buy? Will there be someone else willing to transact with me at my price?
Reply: You should offer a price between the buy and sell price quoted in the exchange. For example, if the prices are 3.00 and 3.08, you should offer a price at 3.04. If you keen to buy, you can offer 3.05. Similarly, if you are keen to sell, you can offer 3.03. You may be able to find another party willing to trade with you at that price. This will help to create the interest and liquidity in the market.
Common Sense Investing - John C Bogle (3)
Here are some more quotes:
Among intermediate-term taxable bond funds, the low-cost index fund is truly a superior performer.
Among long-term tax-exept bond funds, once again, indexing wins.
Among short-term Treasury funds, the lowest cost option wins again.
Among money market funds - surprise! - low cost wins again.
No one would have the temerity to promote a new strategy that has lagged in the past.
The greatest enemy of a good plan is the dream of a prfect plan. Stick to the good plan.
Typical ETF investors have absolutely no idea what relationship their investment return will have to the return earned by the stock market.
A "double whammy": betting on hot sectors (emotions) and paying heavy costs (expenses) are sure to be hazardous to your wealth.
ETFs are an entrepreneur's dream come true. But are they an investor's dream come true?
The majority of investors should be satisfied with the reaonsably good erturn obtainable from a defensive portfolio.
Unsoundly managed funds can product spectacular but largely illusionary profits for a while, followed inevitably by calamitous losses.
The real money in investment will be made not out of buying and selling but of owning and holding securities.
I see no reason why investors should be content with results inferior to those of an indexed fund.
To achieve satisfactory investment results is easier than most people realize.
The two sources of the superior returns of the indexed fund: (1) the broadest possible diversification; and (2) the tiniest possible costs.
No business can forever ignore the interest of its clients.
While an index-driven strategy may not be the best investment strategy ever devised, the number of investment strategies that are worse is infinite.
In your Serious Money Account, 50 to 95 percent in classic index funds. In your Funny Money Account, not one penny more than 5 percent.
For all the inevitable uncertainty amidst the externally dense fog surrounding the world of investing, there remains much that we do know.
Among intermediate-term taxable bond funds, the low-cost index fund is truly a superior performer.
Among long-term tax-exept bond funds, once again, indexing wins.
Among short-term Treasury funds, the lowest cost option wins again.
Among money market funds - surprise! - low cost wins again.
No one would have the temerity to promote a new strategy that has lagged in the past.
The greatest enemy of a good plan is the dream of a prfect plan. Stick to the good plan.
Typical ETF investors have absolutely no idea what relationship their investment return will have to the return earned by the stock market.
A "double whammy": betting on hot sectors (emotions) and paying heavy costs (expenses) are sure to be hazardous to your wealth.
ETFs are an entrepreneur's dream come true. But are they an investor's dream come true?
The majority of investors should be satisfied with the reaonsably good erturn obtainable from a defensive portfolio.
Unsoundly managed funds can product spectacular but largely illusionary profits for a while, followed inevitably by calamitous losses.
The real money in investment will be made not out of buying and selling but of owning and holding securities.
I see no reason why investors should be content with results inferior to those of an indexed fund.
To achieve satisfactory investment results is easier than most people realize.
The two sources of the superior returns of the indexed fund: (1) the broadest possible diversification; and (2) the tiniest possible costs.
No business can forever ignore the interest of its clients.
While an index-driven strategy may not be the best investment strategy ever devised, the number of investment strategies that are worse is infinite.
In your Serious Money Account, 50 to 95 percent in classic index funds. In your Funny Money Account, not one penny more than 5 percent.
For all the inevitable uncertainty amidst the externally dense fog surrounding the world of investing, there remains much that we do know.
A taxi without a driver?
How do you like to use a taxi that is automatic, and does not have a driver?
This is possible under the PAT (personal automated transport). The vehicle appears on your call and takes you to your destination (entered into the control panel). It moves along elevated guideways and does not require a driver.
The PAT is similar to the unmanned LRT (light rail transport). The LRT operates on fixed routes and schedule, like a bus. The PAT is like a taxi.
The PAT is now being developed for London Heathrow Airport. It is called ULTra (urban light transport). If successful, we can expect it to be implemented in other cities.
It is costly to set up the infrastructure for a PAT system, but it is less costly than a LRT or MRT line. The operating cost of a PAT should be lower than a taxi, as it does not require a driver. The system can be operated efficiently, as it does not have to cope with taxi drivers trying trying to compete for business.
You pay for the use of the PAT using an electronic card, such as ez-Link. It is similar to paying for the fare for a LRT ride. The fare is paid at the vehicle.
This is possible under the PAT (personal automated transport). The vehicle appears on your call and takes you to your destination (entered into the control panel). It moves along elevated guideways and does not require a driver.
The PAT is similar to the unmanned LRT (light rail transport). The LRT operates on fixed routes and schedule, like a bus. The PAT is like a taxi.
The PAT is now being developed for London Heathrow Airport. It is called ULTra (urban light transport). If successful, we can expect it to be implemented in other cities.
It is costly to set up the infrastructure for a PAT system, but it is less costly than a LRT or MRT line. The operating cost of a PAT should be lower than a taxi, as it does not require a driver. The system can be operated efficiently, as it does not have to cope with taxi drivers trying trying to compete for business.
You pay for the use of the PAT using an electronic card, such as ez-Link. It is similar to paying for the fare for a LRT ride. The fare is paid at the vehicle.
Common Sense Investing - John C Bogle (2)
Here are some more quotes from the book:
Managed mutual funds are astonishing tax inefficient.
Fund returns are devastated by costs, taxes and inflation.
Common sense tells us that we are facing an era of subdued returns in the stock market.
If rational expectations suggest future annual returns of about 7 percent on stocks, what does this imply for returns on equity funds?
Unless the fund industry begins to change, the typical actively managed fund appears to be a singularly unfortunate investment choice.
Only three out of 355 equity funds that started the race in 1970 (i.e less than 1%) have survived and mounted a record of sustained excellence.
Before you rush out to invest in these three funds with such truly remakrable long-term records, think about the next 35 years.
Funds with long serving portfolion managers and records of consistent excellence are the exceptions rather than the rule in the mutual fund industry.
"The first shall be last." And they were.
The stars produced in the mutual fund field are rarely stars; all too often they are comets.
Average return of funds recommended by adviers: 2.9 percent per year. For equity funds purchased directly: 6.6 percent.
The New York Times contest: Funds chose by advisers earned 40 percent less than an index fund.
Index funds endure, while most advisers and funds do not.
Common sense tells us that performance comes and goes, but costs go on forever.
The index fund's risk adjusted return: 194 percent: average managed fund, 154 percent.
All indexed funds are not created equal. One xample: the difference between $122,700 and $99,100.
Your index fund should not be your manager's cash cow. It should be your own cash cow.
In inefficient markets, the most successful managers may achieve unusually large returns. But common sense tells us that for each big success, there must also be a big failure.
Managed mutual funds are astonishing tax inefficient.
Fund returns are devastated by costs, taxes and inflation.
Common sense tells us that we are facing an era of subdued returns in the stock market.
If rational expectations suggest future annual returns of about 7 percent on stocks, what does this imply for returns on equity funds?
Unless the fund industry begins to change, the typical actively managed fund appears to be a singularly unfortunate investment choice.
Only three out of 355 equity funds that started the race in 1970 (i.e less than 1%) have survived and mounted a record of sustained excellence.
Before you rush out to invest in these three funds with such truly remakrable long-term records, think about the next 35 years.
Funds with long serving portfolion managers and records of consistent excellence are the exceptions rather than the rule in the mutual fund industry.
"The first shall be last." And they were.
The stars produced in the mutual fund field are rarely stars; all too often they are comets.
Average return of funds recommended by adviers: 2.9 percent per year. For equity funds purchased directly: 6.6 percent.
The New York Times contest: Funds chose by advisers earned 40 percent less than an index fund.
Index funds endure, while most advisers and funds do not.
Common sense tells us that performance comes and goes, but costs go on forever.
The index fund's risk adjusted return: 194 percent: average managed fund, 154 percent.
All indexed funds are not created equal. One xample: the difference between $122,700 and $99,100.
Your index fund should not be your manager's cash cow. It should be your own cash cow.
In inefficient markets, the most successful managers may achieve unusually large returns. But common sense tells us that for each big success, there must also be a big failure.
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