Dear Mr Tan,
I really enjoyed your blog. You are very knowlegeable not only in terms of insurance but also investments. Contrary to what other people say, I think you are one of those expert investors.
I would like to ask your opinion about the i-term insurance. I attempted to buy one but was distracted/dissuaded by the NTUC advisers.
The reason given was there was a difference in the definition of terminal illness as described in the I-term insurance and critical illness in other insurance products.
The insurance payout is for terminal/"sure death" illness in I-term insurance. But the definition for "critical illness" is less "serious illness".
Is this true?
REPLY:
The critical illness policy provides a wider definition. If you contract a critical illness, the sum assured is payable immediately. The premium for critical illness is more than 10 times of i-term (and 20 times of decreasing term).
My personal preference is:
* buy decreasing term insurance to provide the death and permanent disability insurance (restricted cover).
* invest the difference in a low cost, well diversified investment fund.
* buy a medical insurnace plan (like Medishield) to cover the cost of treatment of critical illness. If this is insufficient, it can be supplemented by my savings (which will be quite large after 10 or 20 years)
* (optional) - buy critical illness cover for $50,000.
I hope that this tip is helpful to you. Read this FAQ to get a comparison of premium rates.
Saturday, August 11, 2007
Friday, August 10, 2007
Subprime mortgages cause global stockmarkets to fall
Dear Mr Tan
Why are the subprime mortgages in America causing problems to the global stockmarkets? Surely, the economy in Asia is growing strongly. Why should it be affected by the mortgages in America?
REPLY:
The subprime mortgages were issued in America. A batch of mortgages are put into a portfolio, called an "asset backed security". This portfolio is divided into different tranches. The most secure tranches were rated AAA. The BBB tranche is high risk. The least secure are the equity tranche.
The investment bankers take the BBB tranches of many portfolios and put them into a new portfolio, called a CDO (collateralised debt obligation). The CDO is again issued into several tranches, from AAA to equity tranche.
The AAA tranche of the CDO actually comprise of many BBB tranches of the ABS (which are high risk). These CDOs are sold to funds in Europe and Asia.
When the American property market falls in value, many of the subprime morgages defaulted. This affects the BBB traches of the ABS and nearly all of the tranches of the CDOs. The AAA and AA tranches of the CDOs have falled in value, by a lot.
Many banks invested in these CDOs. When they fall in value, the banks have to book the losses. This caused their stock prices to fall. This is affecting the stockmarkets around the world.
Some of the money raised by the structured products sold in Singapore were also invested in the CDOs. They have also fallen in value.
There is nothing much that the investor can do about these structured products. If they withdraw now, they will suffer large losses. They can only wait for the maturity date, and hope that the market would have recovered.
If you read some of the structured products, they said that the investor may lose part or all of the principal. It can happen. Let's hope that it does not.
Why are the subprime mortgages in America causing problems to the global stockmarkets? Surely, the economy in Asia is growing strongly. Why should it be affected by the mortgages in America?
REPLY:
The subprime mortgages were issued in America. A batch of mortgages are put into a portfolio, called an "asset backed security". This portfolio is divided into different tranches. The most secure tranches were rated AAA. The BBB tranche is high risk. The least secure are the equity tranche.
The investment bankers take the BBB tranches of many portfolios and put them into a new portfolio, called a CDO (collateralised debt obligation). The CDO is again issued into several tranches, from AAA to equity tranche.
The AAA tranche of the CDO actually comprise of many BBB tranches of the ABS (which are high risk). These CDOs are sold to funds in Europe and Asia.
When the American property market falls in value, many of the subprime morgages defaulted. This affects the BBB traches of the ABS and nearly all of the tranches of the CDOs. The AAA and AA tranches of the CDOs have falled in value, by a lot.
Many banks invested in these CDOs. When they fall in value, the banks have to book the losses. This caused their stock prices to fall. This is affecting the stockmarkets around the world.
Some of the money raised by the structured products sold in Singapore were also invested in the CDOs. They have also fallen in value.
There is nothing much that the investor can do about these structured products. If they withdraw now, they will suffer large losses. They can only wait for the maturity date, and hope that the market would have recovered.
If you read some of the structured products, they said that the investor may lose part or all of the principal. It can happen. Let's hope that it does not.
Thursday, August 9, 2007
Regular premium unit trust
A financial adviser told me that he sells regular premium unit trust with a front end load of 3%. There is no no additional charge that takes away 6 to 18 months of the savings (unlike a regular premuim investment-linked plan from a life insurance company).
If the monthly saving is $100, the charge is only $3. The adviser earns a commission of only $3.
Due to the low commission, he is not able to spend time to visit the client. He speaks to them over the telephone and sends the form by mail. He receives the completed form by mail.
He advises his client to invest their Central Provident Fund savings, from the ordinary and special account, into unit trust.
It is advisable to invest in a unit trust, if the annual expense ratio is less than 1.5%. It is better, if the fund has an expense ratio of 1% or less.
Dr Money has some low cost funds listed in his href="http://www.askdrmoney.com/Unit_Trusts_and_Funds.htm">website. I shall ask him to cover some of the low cost unit trust.
When you buy a ILP, ask about the additional charge. Alternatively, you can ask if 100% of the regular premium is "allocated" for investment. If the allocation is less than 100%, the difference is the additional charge (which may be deducted over many years).
If the monthly saving is $100, the charge is only $3. The adviser earns a commission of only $3.
Due to the low commission, he is not able to spend time to visit the client. He speaks to them over the telephone and sends the form by mail. He receives the completed form by mail.
He advises his client to invest their Central Provident Fund savings, from the ordinary and special account, into unit trust.
It is advisable to invest in a unit trust, if the annual expense ratio is less than 1.5%. It is better, if the fund has an expense ratio of 1% or less.
Dr Money has some low cost funds listed in his href="http://www.askdrmoney.com/Unit_Trusts_and_Funds.htm">website. I shall ask him to cover some of the low cost unit trust.
When you buy a ILP, ask about the additional charge. Alternatively, you can ask if 100% of the regular premium is "allocated" for investment. If the allocation is less than 100%, the difference is the additional charge (which may be deducted over many years).
Wednesday, August 8, 2007
Pooling of Risk under a Life Annuity
A life annuity allows all the participants to pool their risk and guarantee the an attractive payment for the lifetime of the annuitant.
Someone argued in my blog against buying a life annuity. He advocates keeping the money in the CPF and drawing it out over 40 years. He does not expect any annuitant to live beyond age 100.
A minimum sum of $99,600 at age 55 will accumulate to slightly more than $130,000 at age 62, assuming interest at 4% per annum.
If you draw down this sum of $130,000 over 20 years (and you continue to earn 4% per annum), you can receive $813 a month. If you participate in a life annuity, you will be able to get this sum payable for a lifetime, as the average lifespan is 20 years. Those who die younger leave behind the balance of their capital in the pool to continue the payment to those who live behind 20 years.
If you wish to keep the money in your personal account, and you want to draw down the sum of $130,000 over 40 years, you can receive only $558 a month. This is a reduction of 32% (compared to $813). There is no pooling of risk. On death, there is a balance in the account that can go into the estate.
Which is better? $813 a month (with pooling of risk) or $559 a month (with no pooling of risk)?
Note: At present, no life insurance company is able to guarantee a payout of 4% per annum, as the return on government bonds is less than 3%. If the Central Provident Fund provides the life annuity and pays the guaranteed 4% per annum, they will be able to pay out $813 over a lifetime.
Someone argued in my blog against buying a life annuity. He advocates keeping the money in the CPF and drawing it out over 40 years. He does not expect any annuitant to live beyond age 100.
A minimum sum of $99,600 at age 55 will accumulate to slightly more than $130,000 at age 62, assuming interest at 4% per annum.
If you draw down this sum of $130,000 over 20 years (and you continue to earn 4% per annum), you can receive $813 a month. If you participate in a life annuity, you will be able to get this sum payable for a lifetime, as the average lifespan is 20 years. Those who die younger leave behind the balance of their capital in the pool to continue the payment to those who live behind 20 years.
If you wish to keep the money in your personal account, and you want to draw down the sum of $130,000 over 40 years, you can receive only $558 a month. This is a reduction of 32% (compared to $813). There is no pooling of risk. On death, there is a balance in the account that can go into the estate.
Which is better? $813 a month (with pooling of risk) or $559 a month (with no pooling of risk)?
Note: At present, no life insurance company is able to guarantee a payout of 4% per annum, as the return on government bonds is less than 3%. If the Central Provident Fund provides the life annuity and pays the guaranteed 4% per annum, they will be able to pay out $813 over a lifetime.
SMS Marketing
Are you involved in marketing? There is a new way of marketing that can get a quality lead for a low cost. It involves sending a SMS to targetted customers, based on their profile.
It will also give an attractive benefit to the targeted customers - which can be supported by lower marketing cost.
More details are shown in this FAQ.
It will also give an attractive benefit to the targeted customers - which can be supported by lower marketing cost.
More details are shown in this FAQ.
Buy a life annuity earlier
Dear Mr Tan,
I see from you "Financial Planning for Seniors" that I can get a higher payout, if I buy a life annuity at an older age.
Do you advise me to draw down on my other savings first, and buy the life annuity later, after my other savings have been depleted?
REPLY
You can read section 9 of this FAQ to get some indicative figure about the amount of your life annuity, based on different entry ages. The annuity payout will increase each year, based on the bonus that is declared by the insurance company (in the case of a participating annuity).
The yield on the participating annuity is about 4% to 4.5% per annum, inclusive of bonus (which is not guaranteed). If you find this yield to be attractive, you can buy your life annuity earlier.
If you are able to earn a better return from other investments, you can wait and buy the annuity when you are older.
If you are not investment savvy or cannot take risk (e.g. if your saving is just adequate for your future needs), it is better to buy a life annuity earlier.
I see from you "Financial Planning for Seniors" that I can get a higher payout, if I buy a life annuity at an older age.
Do you advise me to draw down on my other savings first, and buy the life annuity later, after my other savings have been depleted?
REPLY
You can read section 9 of this FAQ to get some indicative figure about the amount of your life annuity, based on different entry ages. The annuity payout will increase each year, based on the bonus that is declared by the insurance company (in the case of a participating annuity).
The yield on the participating annuity is about 4% to 4.5% per annum, inclusive of bonus (which is not guaranteed). If you find this yield to be attractive, you can buy your life annuity earlier.
If you are able to earn a better return from other investments, you can wait and buy the annuity when you are older.
If you are not investment savvy or cannot take risk (e.g. if your saving is just adequate for your future needs), it is better to buy a life annuity earlier.
Customer friendly Call Center
Do you find it frustrating to get through the call center of large organisaionts, e.g. banks, credit card, telephone companies, airlines, government agencies?
Most of them have a telephone system that require the customer to press many buttons and listen to many options, before the customer can talk to a person. Quite often, the customer pressed the wrong button and got lost.
I have experience in setting up a call center that operates differntly. It won the world best award for "innovation technology". Here are ten tips on how a customer friend call center should be organised.
It gives a better customer experience, and still keep down the cost of handling the customer enquiries.
Do you like a call center that is operated on the 10 tips?
Most of them have a telephone system that require the customer to press many buttons and listen to many options, before the customer can talk to a person. Quite often, the customer pressed the wrong button and got lost.
I have experience in setting up a call center that operates differntly. It won the world best award for "innovation technology". Here are ten tips on how a customer friend call center should be organised.
It gives a better customer experience, and still keep down the cost of handling the customer enquiries.
Do you like a call center that is operated on the 10 tips?
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