How can you get a return of 6% to 24% a year?
The solution: lend to yourself. How is this possible?
During the first few years of your working life, you accumulate savings. You will earn a modest rate of 2% a year on your savings. In later years, when you need money to make a major purchase or an unexpected emergency, you borrow from your past savings.
If you do not have the past savings, you have to take a loan and pay interest at 6% (on secured borrowing) to 24% (on credit card). By borrowing from your past saving, you save this hefty interest rate.
It does not matter that your saving earn you only 2% a year in the meantime. When you need it, you can save 6% to 24% on your loan interest.
If you borrow $10,000 at 6%, the interest is $50 a month. If the rate is 24% a month, the interest is $200 a month. If you can save $50 to $200 a month on interest payment, it can add to your savings.
If you do not need to lend to yourself, you can invest your savings in a low cost, diversified fund to earn about 5% to 7% per annum. That is still better than 2%.
Remember: When you have the chance, accumulate savings. You will need it for the future. Keep your saving in a flexible investment that can be withdrawn without penalty, such as a savings account or an investment fund.
Do not invest in high cost financial products that locks you up for many years and imposes a heavy penalty on early withdrawal.
Saturday, March 1, 2008
Benchmark premium rates for Term Insurance
Hi Mr. Tan,
I read with great interest your example about the family income policy. You quoted the premium rate for a male at age 30. I am now 35 years old. What is the premium that I have to pay?
REPLY
You can get the benchmark premium rates for various ages, and period of insurance, and for the three types of term insurance plans, from this FAQ:
http://www.tankinlian.com/faq/benchmark.html
These benchmarks are the premium rates that I consider to be good value for consumers, based on the expected claims and reasonable expenses and profit margin. They are lower than the term insurance rates now charged in the market.
I believe that, in the near future, some life insurance companies will offer premium rates that are lower than the benchmarks to capture this big market.
I read with great interest your example about the family income policy. You quoted the premium rate for a male at age 30. I am now 35 years old. What is the premium that I have to pay?
REPLY
You can get the benchmark premium rates for various ages, and period of insurance, and for the three types of term insurance plans, from this FAQ:
http://www.tankinlian.com/faq/benchmark.html
These benchmarks are the premium rates that I consider to be good value for consumers, based on the expected claims and reasonable expenses and profit margin. They are lower than the term insurance rates now charged in the market.
I believe that, in the near future, some life insurance companies will offer premium rates that are lower than the benchmarks to capture this big market.
Save for your future needs
If you earn a modest salary, do you prefer to:
(a) Set aside some savings for the future?
(b) Spend away all of your savings
(c) Spend your future earnings now, by taking a loan or credit?
If you decide to save, do you prefer to:
(a) Put the savings in a savings account to earn 0.5% interest
(b) Invest in a low cost, diversified investment fund to earn 5% (average), but has risk
(c) Invest the savings in a life insurance policy to earn 2.5%, but is locked in for 10 to 30 years.
If you like to earn a better return, but wish to learn how to manage your risk, you can read this FAQ:
http://www.tankinlian.com/faq/savings.html
(a) Set aside some savings for the future?
(b) Spend away all of your savings
(c) Spend your future earnings now, by taking a loan or credit?
If you decide to save, do you prefer to:
(a) Put the savings in a savings account to earn 0.5% interest
(b) Invest in a low cost, diversified investment fund to earn 5% (average), but has risk
(c) Invest the savings in a life insurance policy to earn 2.5%, but is locked in for 10 to 30 years.
If you like to earn a better return, but wish to learn how to manage your risk, you can read this FAQ:
http://www.tankinlian.com/faq/savings.html
Value of Life Insurance
If you have a family with young children, are you willing to spend $30 to $50 a month to pay for a life insurance plan that can provide a benefit payment in the event of premature death of the parent?
Which do you prefer?
(a) Buy a whole life plan that covers about $10,000 to $15,000 and accumulate cash value?
(b) Buy a term insurance plan that covers $150,000 to $250,000 (i.e. no cash value)?
(c) No need to buy life insurance, as premature death is quite unlikely.
Do you prefer the payment of the benefit to be in the following:
(a) A lump sum,
(b) A monthly income for 10 to 20 years,
(c) A combination of both payments?
Are you willing to spend $30 to $50 a month as an expense (i.e. without any return), to provide adequate financial security to your family?
I recommend a term insurance plan that pays a lump sum benefit of (say) $50,000 plus a monthly income of $2,000 until the end of the term (say, until your age of 55). This will cost about $50 a month for a person now age 30 years old.
Which do you prefer?
(a) Buy a whole life plan that covers about $10,000 to $15,000 and accumulate cash value?
(b) Buy a term insurance plan that covers $150,000 to $250,000 (i.e. no cash value)?
(c) No need to buy life insurance, as premature death is quite unlikely.
Do you prefer the payment of the benefit to be in the following:
(a) A lump sum,
(b) A monthly income for 10 to 20 years,
(c) A combination of both payments?
Are you willing to spend $30 to $50 a month as an expense (i.e. without any return), to provide adequate financial security to your family?
I recommend a term insurance plan that pays a lump sum benefit of (say) $50,000 plus a monthly income of $2,000 until the end of the term (say, until your age of 55). This will cost about $50 a month for a person now age 30 years old.
Spread in Flexi-link
Dear Mr. Tan,
I checked on the Flexi-link and was told that there is an upfront spread of 3.5%. What is this spread? I was told that my investment will drop by 3.5% immediately after I bought the units of the fund. Is this too costly? Are there any funds that do not charge this spread?
REPLY
The spread is the difference between the offer price and the bid price of the units. You buy the units at the offer price and sell them at the bid price. If you invest today and sell immediately, you will suffer a loss of 3.5%, due to the spread.
This spread is used to pay the agent for selling the investment to you, and to the insurance company for its expenses. If you invest $100,000, you will lose $3,500 immediately, due to this spread.
If you keep your investment for 5 years, the spread of 3.5% average out to a cost of 0.7% per year. You have to incur the annual expense ratio, which is about 0.5% to 1.3% per annum (depending on the type of fund). The total cost is 1.2% to 2% (which is rather high). If you keep the invetment for a longer period, then the cost comes down.
If you wish to invest in a low cost fund, I suggest that you consider the STI exchange traded fund. It has an initial cost of 0.3% (i.e. the brokerage to the stockbroker) and an annual fee of 0.3% per annum. This is a low cost fund.
I checked on the Flexi-link and was told that there is an upfront spread of 3.5%. What is this spread? I was told that my investment will drop by 3.5% immediately after I bought the units of the fund. Is this too costly? Are there any funds that do not charge this spread?
REPLY
The spread is the difference between the offer price and the bid price of the units. You buy the units at the offer price and sell them at the bid price. If you invest today and sell immediately, you will suffer a loss of 3.5%, due to the spread.
This spread is used to pay the agent for selling the investment to you, and to the insurance company for its expenses. If you invest $100,000, you will lose $3,500 immediately, due to this spread.
If you keep your investment for 5 years, the spread of 3.5% average out to a cost of 0.7% per year. You have to incur the annual expense ratio, which is about 0.5% to 1.3% per annum (depending on the type of fund). The total cost is 1.2% to 2% (which is rather high). If you keep the invetment for a longer period, then the cost comes down.
If you wish to invest in a low cost fund, I suggest that you consider the STI exchange traded fund. It has an initial cost of 0.3% (i.e. the brokerage to the stockbroker) and an annual fee of 0.3% per annum. This is a low cost fund.
Earn a higher return from an investment fund
Dear Mr. Tan,
I am in my early 40s. Currently, I have a Living policy with an insured amount of $100,000. The insurance agent has recommended another policy for $100,000. It is a savings plan that also covers critical illness. Should I take up 20 or 25 year plan?
REPLY
I usually advice people to buy Term insurance and invest in a low cost, diversified investment fund.
Read these FAQs:
http://www.tankinlian.com/faq/choice.html
http://www.tankinlian.com/faq/savings.html
I am in my early 40s. Currently, I have a Living policy with an insured amount of $100,000. The insurance agent has recommended another policy for $100,000. It is a savings plan that also covers critical illness. Should I take up 20 or 25 year plan?
REPLY
I usually advice people to buy Term insurance and invest in a low cost, diversified investment fund.
Read these FAQs:
http://www.tankinlian.com/faq/choice.html
http://www.tankinlian.com/faq/savings.html
Choices in investments
Hi Mr. Tan,
Greetings. I am thankful for your blog entries. Thank you for taking the effort to share with us your expertise.
I am looking at investing for retirement. I have been looking at funds targeted at emerging markets such as Russia, India. I have also been told that the dollar-cost averaging helps to level out risks in the long term. Is then a monthly 'savings' into an emerging markets fund a sound investment for retirement? If yes, what are some funds that you would highly recommend? If not, what are the alternatives you would recommend I look into?
I am also looking into investment in more conservative avenues. I heard over television an expert recommending the money market funds as an ideal investment tool for the immediate future, as the markets are quite vulnerable. Are there any particular money market funds that are recommended for the more conservative investor?
A bank has introduced a new structured deposit (Crude Oil Structured Deposit). My first impression of the fund is that it looks pretty promising. Are there any fine print that I may have overlooked? Thank you very much for sharing your expertise and your time.
REPLY
My suggestion is set out in this FAQ:
http://www.tankinlian.com/faq/savings.html
I suggest investing in a low cost, diversified investment fund for the long term, in Singapore or a established market. I do not recommend investing in an emerging market fund, because it is more speculative.
You should also avoid structured products. Read this FAQ:
http://www.tankinlian.com/faq/sinvest.html
Greetings. I am thankful for your blog entries. Thank you for taking the effort to share with us your expertise.
I am looking at investing for retirement. I have been looking at funds targeted at emerging markets such as Russia, India. I have also been told that the dollar-cost averaging helps to level out risks in the long term. Is then a monthly 'savings' into an emerging markets fund a sound investment for retirement? If yes, what are some funds that you would highly recommend? If not, what are the alternatives you would recommend I look into?
I am also looking into investment in more conservative avenues. I heard over television an expert recommending the money market funds as an ideal investment tool for the immediate future, as the markets are quite vulnerable. Are there any particular money market funds that are recommended for the more conservative investor?
A bank has introduced a new structured deposit (Crude Oil Structured Deposit). My first impression of the fund is that it looks pretty promising. Are there any fine print that I may have overlooked? Thank you very much for sharing your expertise and your time.
REPLY
My suggestion is set out in this FAQ:
http://www.tankinlian.com/faq/savings.html
I suggest investing in a low cost, diversified investment fund for the long term, in Singapore or a established market. I do not recommend investing in an emerging market fund, because it is more speculative.
You should also avoid structured products. Read this FAQ:
http://www.tankinlian.com/faq/sinvest.html
Low cost investment funds in Sweden
My friend in Sweden told me that there are low cost investment funds available in Sweden. The expense ratio is between 0.5 and 0.75% per annum. It offers a better return than other funds that have a expense ratio of 2% to 3%.
He was surprised that the low cost funds are not yet available in Singapore. He believed that this will come soon.
He was surprised that the low cost funds are not yet available in Singapore. He believed that this will come soon.
25 year family income and term insurance
When I was 30 years old, I bought a 25 year term insurance policy to cover a sum assured of $100,000 and to provide a monthly income of $2,000 to my family in the event of premature death during the term. I paid a premium of about $1,000 a year.
25 years have passed, and the policy has now expired. During this time, I was assured that, if anything had happened to me, my family would have a lump sum and monthly income to meet their financial needs. I have other life insruance policies, which provided additional coverage.
Term insurance was rather expensive in those early days. Today, the premuim rate for the same cover is much lower. It does not matter to me that I did not get any return for this term insurance policy, as I was able to accumulate and invest my savings in other ways.
25 years have passed, and the policy has now expired. During this time, I was assured that, if anything had happened to me, my family would have a lump sum and monthly income to meet their financial needs. I have other life insruance policies, which provided additional coverage.
Term insurance was rather expensive in those early days. Today, the premuim rate for the same cover is much lower. It does not matter to me that I did not get any return for this term insurance policy, as I was able to accumulate and invest my savings in other ways.
Alternative to fixed deposit
Dear Mr. Tan,
My wife and I are in our early 30s. We know very little about insurance and investment. We wish to thank you for giving us advice and information in your blog.
We bought life insurance about 10 years ago and pay a premium of about $150 each for 25 years. Presently both our saving in bank is about $X.
Can you kindly advise us on how to invest our saving as interest rate on fixed deposit is low. We do not wish to take risk and have never invested in stock.
A few days ago, I visited NTUC income @ AMK hub but can't really decide on Flexi-Link policy, Growth Plan, Revosave or Ideal plan. In fact, we are getting more confused.
REPLY
I hope that this FAQ will help you to make a decision:
http://www.tankinlian.com/faq/savings.html
As you are investing for the next 30 years, it is better to invest in a low cost, diversified investment fund. You will be averaging out the good and bad years, and also diversifying your risk over a large number of shares. The risk is small, and you can get a good return.
I suggest investing in the STI exchange traded fund. You can buy through your stockbroker.
My wife and I are in our early 30s. We know very little about insurance and investment. We wish to thank you for giving us advice and information in your blog.
We bought life insurance about 10 years ago and pay a premium of about $150 each for 25 years. Presently both our saving in bank is about $X.
Can you kindly advise us on how to invest our saving as interest rate on fixed deposit is low. We do not wish to take risk and have never invested in stock.
A few days ago, I visited NTUC income @ AMK hub but can't really decide on Flexi-Link policy, Growth Plan, Revosave or Ideal plan. In fact, we are getting more confused.
REPLY
I hope that this FAQ will help you to make a decision:
http://www.tankinlian.com/faq/savings.html
As you are investing for the next 30 years, it is better to invest in a low cost, diversified investment fund. You will be averaging out the good and bad years, and also diversifying your risk over a large number of shares. The risk is small, and you can get a good return.
I suggest investing in the STI exchange traded fund. You can buy through your stockbroker.
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