Here is a guide to measure if your life insurance policy gives good value to you.
Calculate the yield on the policy, using your annual premium and the cash value at the end of the premium payment period.
If you get a yield of 4% or higher, the policy gives good value. If it is lower than 3.5%, the policy does not give good value (i.e. high cost).
Here is the reasoning:
1. If you invest for 20 years or longer, you can get a return of 5% or more.
2. The yield on your life insurance policy is due to the expenses and the mortality cover.
3. A significant part of the reduction in yield is used to pay marketing expenses.
4. The reduction should not exceed 1.5%
If you buy Term insurance and invest the difference, you can get a net yield of more than 4%.
Monday, February 11, 2008
Risk Management & Insurance, SMU
I now teach a course on risk management and insurance at the Singapore Management University. Some of the points posted in this blog are taken from the text book used for my course. It gives a good description of the key concepts in risk management.
Sharp drop in AIG shares
I read a Bloomberg report that AIG shares dropped by 30 percent since the change of CEO from Hank Greenberg.
The recent drop was due to the losses on credit default swaps issued by AIG. This protects the buyer from credit defaults, e.g. due to subprime mortgages.
AIG is the parent company of AIA in Singapore. It has a AA credit rating (previously AAA), but analysts expect the rating to be further downgraded.
More details:
http://www.bloomberg.com/apps/news?pid=20601087&sid=axfNBsHVBagY&refer=home
The recent drop was due to the losses on credit default swaps issued by AIG. This protects the buyer from credit defaults, e.g. due to subprime mortgages.
AIG is the parent company of AIA in Singapore. It has a AA credit rating (previously AAA), but analysts expect the rating to be further downgraded.
More details:
http://www.bloomberg.com/apps/news?pid=20601087&sid=axfNBsHVBagY&refer=home
Visit to Jakarta
I will be visiting Jakarta for the next four days. During this time, I may have difficulty in accessing the Internet and updating my blog.
On my last visit in mid January, some people in Jakarta were worried about any possible unrest when the former president Suharto passed away. He passed away shortly thereafter, but Indonesia had been peaceful. The only problem was the heavy flooding in Jakarta.
On my last visit in mid January, some people in Jakarta were worried about any possible unrest when the former president Suharto passed away. He passed away shortly thereafter, but Indonesia had been peaceful. The only problem was the heavy flooding in Jakarta.
Best terms for a car loan
Dear Mr. Tan,
What should I look out for when buying a new car? How can we have a better deal like car insurance, car loan etc?--
REPLY:
Read this faq about motor insurance:
http://www.tankinlian.com/faq/motord.html
I suggest the following approach to get your car loan.
Ask your dealer what is being offered with the package. They usually include a car loan offered by their tied up bank.
Ask for the following:
What is the amount of the loan
What is the monthly replayment and the number of repayments
What are the additional charges (if any).
You can then call 3 other banks and ask them to offer their loan to you for the same amount of loan and number of repayments.
You can compile the differences between the offers as follows:
Amount of loan: $xx,xxxx
Nr of monthly replayments: xx repayments
X is the bank tied up with your motor car dealer. Usually, they offer the best terms (but not always).
When you have obtained the information, you can share with me.
What should I look out for when buying a new car? How can we have a better deal like car insurance, car loan etc?--
REPLY:
Read this faq about motor insurance:
http://www.tankinlian.com/faq/motord.html
I suggest the following approach to get your car loan.
Ask your dealer what is being offered with the package. They usually include a car loan offered by their tied up bank.
Ask for the following:
What is the amount of the loan
What is the monthly replayment and the number of repayments
What are the additional charges (if any).
You can then call 3 other banks and ask them to offer their loan to you for the same amount of loan and number of repayments.
You can compile the differences between the offers as follows:
Amount of loan: $xx,xxxx
Nr of monthly replayments: xx repayments
Bank Amount of Additional
monthly repayment charges
X
Y
Z
X is the bank tied up with your motor car dealer. Usually, they offer the best terms (but not always).
When you have obtained the information, you can share with me.
Term insurance rates are fixed
Dear Mr. Tan,
Question 1: Term insurance are designed to disappear as we grow older. Term insurance rates are often non guaranteed, the rates will be reviewed on a annual or a 5-yearly basis. The premium increases as we grow older. Is this correct?
Reply: You can buy a Term insurance with the rate fixed for 30 years. Read this FAQ:
http://www.tankinlian.com/faq/choice.html
Question 2: In comparison with a limited payment (maybe 20 year) whole life insurance policy, the coverage may start small, and because of it's contractual base, premiums remains constant. And sum assured increases with age (due to addition of bonus). When death occurs, the life plan will pay the full sum.
Reply: The return from a limited payment whole life is poor. This is due to the high charges deducted to pay agent's commission, expenses and profit for the insurance company. Some examples are given in my blog.
It is better to invest your savings in a separate investment fund. Read this FAQ:
http://www.tankinlian.com/faq/savings.html
Question 1: Term insurance are designed to disappear as we grow older. Term insurance rates are often non guaranteed, the rates will be reviewed on a annual or a 5-yearly basis. The premium increases as we grow older. Is this correct?
Reply: You can buy a Term insurance with the rate fixed for 30 years. Read this FAQ:
http://www.tankinlian.com/faq/choice.html
Question 2: In comparison with a limited payment (maybe 20 year) whole life insurance policy, the coverage may start small, and because of it's contractual base, premiums remains constant. And sum assured increases with age (due to addition of bonus). When death occurs, the life plan will pay the full sum.
Reply: The return from a limited payment whole life is poor. This is due to the high charges deducted to pay agent's commission, expenses and profit for the insurance company. Some examples are given in my blog.
It is better to invest your savings in a separate investment fund. Read this FAQ:
http://www.tankinlian.com/faq/savings.html
Claim settlement service
Here is an example of the claim settlement service provided by an insurance company.
If you drive a motorcar and was involved in an accident, you may receive a letter from the other party's lawyers making a large claim for damages from you. It will be quite troublesome for you to handle the claim, as you have to deal with the following uncertainties:
1. Which party is negligent and responsible for the accident?
2. How much is the fair amount of compensation? Is the repair cost a fair price or exaggerated?
If you buy insurance, the task of claim settlement is passed to the insurance company. They have lawyers and loss adjustors to handel the negotiation and settlement. They also pay the acmount of the claim.
It is useful to have insurance to take care of these matters.
If you drive a motorcar and was involved in an accident, you may receive a letter from the other party's lawyers making a large claim for damages from you. It will be quite troublesome for you to handle the claim, as you have to deal with the following uncertainties:
1. Which party is negligent and responsible for the accident?
2. How much is the fair amount of compensation? Is the repair cost a fair price or exaggerated?
If you buy insurance, the task of claim settlement is passed to the insurance company. They have lawyers and loss adjustors to handel the negotiation and settlement. They also pay the acmount of the claim.
It is useful to have insurance to take care of these matters.
Loss control measures
Here are some examples of valuaable advice on loss control that is given by insurance companies. As they have access to experts, the advice is useful to the insured policyholders.
1. If you wish to insure a factory, the insurance company sends a surveyor to look at the housekeeping and safety measures in the factory. The surveyor will make recommendations on reducing the probability and severity of losses. If you implement the recommendations, the insurance company will offer you a lower rate to insure your risks.
2. If you insure your life, the insurance company will advise you keep to a healthy weight and control your chronic conditions. The premium loadings will be reduced.
1. If you wish to insure a factory, the insurance company sends a surveyor to look at the housekeeping and safety measures in the factory. The surveyor will make recommendations on reducing the probability and severity of losses. If you implement the recommendations, the insurance company will offer you a lower rate to insure your risks.
2. If you insure your life, the insurance company will advise you keep to a healthy weight and control your chronic conditions. The premium loadings will be reduced.
Useful functions of insurance
Insurance performs three useful functions:
a) Pooling of risks. Each policyholder pays a small premium into a pool, to be used to pay for the losses suffered by a some policyholders and the expenses of operating the pool.
b) Settlement of claims. The insurance company is experienced in handling the settlement of claims on behalf of the policyholders.
c) Loss control measures. The insurance company can advise the policyholders on measures to reduce the occurence of losses and their severity.
For these valuable functions, the policyholders are willing to pay a fair loading (of up to 35%) over the cost of claims to buy the insurance.
For example, if the average share of the claim per policyholder is $300, the policyholder is usually willing to pay $400 to buy the insurance. This allows $100 to be used to pay the expenses of operating the pool, including the useful services of claim settlement and loss control.
If the loading is more than 35% of the amount of claim, many people will find the insurance to be too costly and will prefer to be un-insured. This benchmark applies to motor, medical, fire and accident insurance.
In the case of life insurance, a different benchmark applies.
a) Pooling of risks. Each policyholder pays a small premium into a pool, to be used to pay for the losses suffered by a some policyholders and the expenses of operating the pool.
b) Settlement of claims. The insurance company is experienced in handling the settlement of claims on behalf of the policyholders.
c) Loss control measures. The insurance company can advise the policyholders on measures to reduce the occurence of losses and their severity.
For these valuable functions, the policyholders are willing to pay a fair loading (of up to 35%) over the cost of claims to buy the insurance.
For example, if the average share of the claim per policyholder is $300, the policyholder is usually willing to pay $400 to buy the insurance. This allows $100 to be used to pay the expenses of operating the pool, including the useful services of claim settlement and loss control.
If the loading is more than 35% of the amount of claim, many people will find the insurance to be too costly and will prefer to be un-insured. This benchmark applies to motor, medical, fire and accident insurance.
In the case of life insurance, a different benchmark applies.
Legal doctrines in insurance
Moral hazard: behaviour of the policyholder, who becomes less willing to spend money to prevent or reduce losses, after obtaining insurance.
Adverse selection: when policyholders are better informed about expected claims and higher risk policyholders are more likely to buy insurance, compared to lower risk policyholders.
Deductible: the amount that the insured is required to pay for the initial portion of each loss, before a claim can be made on the remaining loss.
Policy limits: the maximum amount payable by the insurance policy on the loss. The excess cannot be claimed.
Exclusions: events that are not covered under the policy, such as war or natural disaster under a property insurance policy.
Indemnity contract: pays up to the actual amount of the loss, even though the sum insured may be higher. Applies to motor and medical expense insurance, but not to life and personal accident insurance.
Insurance-t0-value: if a property has been insured for less than its actual value, the policyholder is allowed only to claim for only a proportion of each loss, and has to bear the proportion that is under-insured.
Contract of adhesion: if the standard policy wording is vague, the court will intepret the wording in favour of the policyholder, as the insurance company is expected to be more familiar with the contract and is expected to write the terms more clearly.
Reasonable expectation: the contract will be interpreted according to the expctation of a reasonable person who is not trained in law.
Adverse selection: when policyholders are better informed about expected claims and higher risk policyholders are more likely to buy insurance, compared to lower risk policyholders.
Deductible: the amount that the insured is required to pay for the initial portion of each loss, before a claim can be made on the remaining loss.
Policy limits: the maximum amount payable by the insurance policy on the loss. The excess cannot be claimed.
Exclusions: events that are not covered under the policy, such as war or natural disaster under a property insurance policy.
Indemnity contract: pays up to the actual amount of the loss, even though the sum insured may be higher. Applies to motor and medical expense insurance, but not to life and personal accident insurance.
Insurance-t0-value: if a property has been insured for less than its actual value, the policyholder is allowed only to claim for only a proportion of each loss, and has to bear the proportion that is under-insured.
Contract of adhesion: if the standard policy wording is vague, the court will intepret the wording in favour of the policyholder, as the insurance company is expected to be more familiar with the contract and is expected to write the terms more clearly.
Reasonable expectation: the contract will be interpreted according to the expctation of a reasonable person who is not trained in law.
Investment Tips for a Retiree
Hi Mr. Tan
There are many articles written about retirement planning and the investment strategy to achieve the retirement goals. However, they do not discuss the appropriate investment and draw-down strategy for retirees like myself – persons who is now faced with what to do with the money accumulated from years of saving.
I have spoke to many independent financial advisers and most of them asked me to allocate the savings into equity, balanced or bond funds according to your risk profile. Some would suggest putting part of the money into annuity.
However, given that all existing annuity plans only achieve between a return of between 3.5% to 4% returns p.a. and payment out from 62 year old, one would wonder if it is advisable to do that?
Also, in reality, bond fund is different from bonds and does not provide fixed coupons for retirees with money to live on. Moreover, judging from current market price bond funds is just as volatile as the equity funds.
You would be doing us a great service if you would write a series of articles giving practical advice on investment strategies and instruments that would benefits a retirees with various amount of saving, say $500k, $1m, $2m, investable income with a goals of 6% to 8% return?
Some of these questions retirees need answers are:
· How should I allocate my retirement funds into cash [no of mth expenses?] and the various investment instruments?
· What are the various financial instruments [UT, ETF, Annuity, property etc] for investing and where can I find them?
· Would investing in index EFT better than UT?
· What financial instrument gives better return than FD, saving account and having similar liquidity need to meet monthly expenses?
· Where else can you find articles discussing this aspect of investment planning for retirees.
REPLY
Can you read the FAQs posted in my website,
www.tankinlian.com/faq
In particular, the following FAQs:
http://www.tankinlian.com/faq/seniors.html
http://www.tankinlian.com/faq/returns.html
http://www.tankinlian.com/faq/savings.html
http://www.tankinlian.com/faq/retirement.html
http://www.tankinlian.com/faq/cpf.html
Let me know if you find them to be easy to understand and helpful to answer your questions.
There are many articles written about retirement planning and the investment strategy to achieve the retirement goals. However, they do not discuss the appropriate investment and draw-down strategy for retirees like myself – persons who is now faced with what to do with the money accumulated from years of saving.
I have spoke to many independent financial advisers and most of them asked me to allocate the savings into equity, balanced or bond funds according to your risk profile. Some would suggest putting part of the money into annuity.
However, given that all existing annuity plans only achieve between a return of between 3.5% to 4% returns p.a. and payment out from 62 year old, one would wonder if it is advisable to do that?
Also, in reality, bond fund is different from bonds and does not provide fixed coupons for retirees with money to live on. Moreover, judging from current market price bond funds is just as volatile as the equity funds.
You would be doing us a great service if you would write a series of articles giving practical advice on investment strategies and instruments that would benefits a retirees with various amount of saving, say $500k, $1m, $2m, investable income with a goals of 6% to 8% return?
Some of these questions retirees need answers are:
· How should I allocate my retirement funds into cash [no of mth expenses?] and the various investment instruments?
· What are the various financial instruments [UT, ETF, Annuity, property etc] for investing and where can I find them?
· Would investing in index EFT better than UT?
· What financial instrument gives better return than FD, saving account and having similar liquidity need to meet monthly expenses?
· Where else can you find articles discussing this aspect of investment planning for retirees.
REPLY
Can you read the FAQs posted in my website,
www.tankinlian.com/faq
In particular, the following FAQs:
http://www.tankinlian.com/faq/seniors.html
http://www.tankinlian.com/faq/returns.html
http://www.tankinlian.com/faq/savings.html
http://www.tankinlian.com/faq/retirement.html
http://www.tankinlian.com/faq/cpf.html
Let me know if you find them to be easy to understand and helpful to answer your questions.
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