Monday, February 22, 2010
IMF experts rethink long term ideas
Read this report. The experts think that inflation at 4% is better than 2% and that capital flow should be restricted. I agree with both ideas. Higher inflation will also mean that interest rate will be higher (i.e. good for retirees and savers) and that asset bubbles will be contained (i.e. stock and property prices will not run away). This will produce a more stable economic system.
Distribution cost
The benefit illustration for a life insurance policy has an item called "distribution cost". This is the amount taken away from your savings (i.e premiums) to pay the commission to the insurance agent and his agency manager. It is usually a large sum of money, representing more than 18 months of premium. If you save $500 a month, the amount that is taken away as distribution cost could be (say) $9,000. A large part of this sum is taken away during the first year and the rest over the next four years.
You should ask, "Is it too much to give away (say) $9,000 to buy a life insurance policy? You have more attractive alternatives. You can buy term insurance to cover a larger sum (say $300,000) by paying less than $500 a year. You can invest in a low cost fund, such as the Exchange Traded Fund in SGX, and pay only a small annual fee of 0.3% for the asset management service.
If more consumers are aware about the alternatives, there is no need for them to pay 18 months of their premium as "distribution cost". This will force insurance companies to reduce their distribution cost and find more efficient and low cost ways to market their products. Some countries plan to ban the payment of commission for the sale of insurance products, as the consumers had been given a bad deal for the past years.
After paying such a high distribution cost, you are not getting a superior product that gives superior return. Most life insurance policies give a yield of 2% to 3% over 30 years. This is too low. It should be higher, if the distribution cost and other charges are kept at a modest level.
However, if you find a life insurance policy that has a modest distribution cost, say $300 or less, it is all right to buy the product. Alternatively, you should be willing to pay a fee of $300 for advice, provided that the commission built into the life insurance policy is refunded to you.
Tan Kin Lian
You should ask, "Is it too much to give away (say) $9,000 to buy a life insurance policy? You have more attractive alternatives. You can buy term insurance to cover a larger sum (say $300,000) by paying less than $500 a year. You can invest in a low cost fund, such as the Exchange Traded Fund in SGX, and pay only a small annual fee of 0.3% for the asset management service.
If more consumers are aware about the alternatives, there is no need for them to pay 18 months of their premium as "distribution cost". This will force insurance companies to reduce their distribution cost and find more efficient and low cost ways to market their products. Some countries plan to ban the payment of commission for the sale of insurance products, as the consumers had been given a bad deal for the past years.
After paying such a high distribution cost, you are not getting a superior product that gives superior return. Most life insurance policies give a yield of 2% to 3% over 30 years. This is too low. It should be higher, if the distribution cost and other charges are kept at a modest level.
However, if you find a life insurance policy that has a modest distribution cost, say $300 or less, it is all right to buy the product. Alternatively, you should be willing to pay a fee of $300 for advice, provided that the commission built into the life insurance policy is refunded to you.
Tan Kin Lian
Survey: The Stingy Nanny
Effect of Deduction
An agent who recommends a life insurance policy to you is required to provide a benefit illustration, which can take 10 pages or more.
You should ask the agent to show you the "effect of deduction" and calculate it as a percentage of the "value of premiums paid". The "effect of deduction" should not exceed the following percentage of the "value of premiums paid" in the case of a regular premium policy:
20 year policy - 15%
25 year policy - 18%
30 year policy - 22%
35 year policy - 25%
The above benchmark is my estimate of the fair amount to be deducted from your "value of premium paid" to cover the insurance protection and investment services provided by the insurance company. If the actual percentage is higher, the amount taken away is excessive.
The "value of premium paid" is the accumulated amount assuming that your premium has been invested to earn the assumed rate of return. The "effect of deduction" is the amount that is taken away from your accumulated amount to cover the charges by the insurance company.
Most insurance policies have an "effect of deduction" that takes away an additional 15% from the accumulated premiums (compared to the reasonable levels shown above). These insurance plans do not provide good value to consumers.
For an investment-linked policy, the "value of premiums paid" is not shown. You have to add the "projected net amount" plus "effect of deduction" to get the "value of premiums paid".
Tan Kin Lian
You should ask the agent to show you the "effect of deduction" and calculate it as a percentage of the "value of premiums paid". The "effect of deduction" should not exceed the following percentage of the "value of premiums paid" in the case of a regular premium policy:
20 year policy - 15%
25 year policy - 18%
30 year policy - 22%
35 year policy - 25%
The above benchmark is my estimate of the fair amount to be deducted from your "value of premium paid" to cover the insurance protection and investment services provided by the insurance company. If the actual percentage is higher, the amount taken away is excessive.
The "value of premium paid" is the accumulated amount assuming that your premium has been invested to earn the assumed rate of return. The "effect of deduction" is the amount that is taken away from your accumulated amount to cover the charges by the insurance company.
Most insurance policies have an "effect of deduction" that takes away an additional 15% from the accumulated premiums (compared to the reasonable levels shown above). These insurance plans do not provide good value to consumers.
For an investment-linked policy, the "value of premiums paid" is not shown. You have to add the "projected net amount" plus "effect of deduction" to get the "value of premiums paid".
Tan Kin Lian
Shared bicycles
I posted a blog on the shared bicycles used in the University of Singapore. A few commentators like the idea while others felt that it will not work in Singapore. Here are some research about shared bicycles used in other countries:
http://en.wikipedia.org/wiki/Bicycle_sharing_system
http://www.veoliatransportation.com/transit/shared-bicycles
http://worksmancycles.com/shopsite_sc/store/html/page59.html
http://www.transalt.org/newsroom/media/1136
Tan Kin Lian
http://en.wikipedia.org/wiki/Bicycle_sharing_system
http://www.veoliatransportation.com/transit/shared-bicycles
http://worksmancycles.com/shopsite_sc/store/html/page59.html
http://www.transalt.org/newsroom/media/1136
Tan Kin Lian
Prepare for high inflation
Dear Mr. Tan,
The deficit at Federal and state levels in USA seems to be the next big thing i.e. bigger than Greek crisis. California is already facing the problem of not enough money to pay their civil servants. Some other states are facing the same problem. There are articles written about it and it seems very serious.
Are you able to share your opnion in your blog as well as letting us understand what is the impact to Singapore since we are very dependent on USA for our survival. Also what can we do to protect ourselves in the event the above happens e.g. buy gold and keep since US$ is going to crush.
REPLY
The USA is facing a large deficit as they are not collecting enough taxes to pay for their government expenditures (at Federal and State levels). Right now, they are issuing bonds to fund the deficit and pay a low rate of interest.
They have to raises taxes to balance the budget, but the politicians are reluctant to do so. They have to cut expenses, but that is also unpopular. At some point of time, they have to print money to fund the deficits. This will lead to higher rates of inflation. Many other countries face the same situation and may have to adopt the same solutions.
We have to prepare for high inflation in the future. In this environment, it will be bad to be invested in bonds that give a fixed rate of return. We have to invest in equities and properties that have a variable return that will increase with inflation. On the other hand, high inflation will burst the asset bubbles in equities and bonds. Maybe the safe asset classes will be gold and cash.
This situation may take many years before the correction occurs. In the meantime, many people continue to ignore the problem. Can I have your views on this matter also?
The deficit at Federal and state levels in USA seems to be the next big thing i.e. bigger than Greek crisis. California is already facing the problem of not enough money to pay their civil servants. Some other states are facing the same problem. There are articles written about it and it seems very serious.
Are you able to share your opnion in your blog as well as letting us understand what is the impact to Singapore since we are very dependent on USA for our survival. Also what can we do to protect ourselves in the event the above happens e.g. buy gold and keep since US$ is going to crush.
REPLY
The USA is facing a large deficit as they are not collecting enough taxes to pay for their government expenditures (at Federal and State levels). Right now, they are issuing bonds to fund the deficit and pay a low rate of interest.
They have to raises taxes to balance the budget, but the politicians are reluctant to do so. They have to cut expenses, but that is also unpopular. At some point of time, they have to print money to fund the deficits. This will lead to higher rates of inflation. Many other countries face the same situation and may have to adopt the same solutions.
We have to prepare for high inflation in the future. In this environment, it will be bad to be invested in bonds that give a fixed rate of return. We have to invest in equities and properties that have a variable return that will increase with inflation. On the other hand, high inflation will burst the asset bubbles in equities and bonds. Maybe the safe asset classes will be gold and cash.
This situation may take many years before the correction occurs. In the meantime, many people continue to ignore the problem. Can I have your views on this matter also?
Seminar on class action in USA - April 14, Fullerton Hotel
I have received the following information on the seminar:
Date Wednesday 14 April 2010
Place: Fullerton Hotel
Time: Morning, actual time to be confirmed
This date is delayed due to lack of available hotels and availability of speakers from the US firm. The lawyer was not able to arrange it for a weekend due to the above constraints.
More details will be provided when available. The above should be taken as Tentative.
PARTICIPANTS TO BRING DOCUMENTS
Date Wednesday 14 April 2010
Place: Fullerton Hotel
Time: Morning, actual time to be confirmed
This date is delayed due to lack of available hotels and availability of speakers from the US firm. The lawyer was not able to arrange it for a weekend due to the above constraints.
More details will be provided when available. The above should be taken as Tentative.
PARTICIPANTS TO BRING DOCUMENTS
Dear Mr. Tan,
There will also be a one-on-one meeting after the seminar with KM lawyers. These meetings will start about 2 p.m. Please request the investors to bring along photocopies of their investment documents, if this is possible. Then the meetings will bear immediate fruits.
KM - Kirby McInerney - US legal firm specialising in class action on securities.
Singapore contact person - Teo Guan Hock (email: tguanhoc@singnet.com.sg, mobile: 96695578)
website: http://www.kmslaw.com/
website: http://www.kmslaw.com/
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