A customer was advised to invest a large single premium in an investment linked product in 2007. He was not clear about the investment. The cash value is now only 55% of the invested sum. I was surprised that the value is so low, as the stock market must have dropped only 20% during this period. I learned later that he was advised to invest in a some special funds.
The public should be careful about these types of special funds, which have high charges and low transparency, and generally perform worse than the broad market. It is better to take the market risk and invest in the STI exchange traded fund.
Monday, December 7, 2009
Lock up for 2 years at low return
Someone asked for my views about a 2 year insurance product that offers a return of 1.5% per annum. I felt that this return was rather low for the investment to be locked up. My preference is to keep the money in cash (earn 0.5% per annum) and wait for better investment opportunities.
Use of Medisave for health screening
Minister for Health Khaw Boon Wan said that the Government is considering to allow Medisave to be used for health screening, but needs some safeguards to be in place to prevent abuses.
A good safeguard is to set a cap on the amount that can be withdrawn for health screening, to be used once every three years. Within this cap, the medical facilities will compete to provide the best packages that is available. Independent experts can comment on the usefulness of these packages. Consumers who wish to spend more can still use their own money, and not draw down on Medisave.
A good safeguard is to set a cap on the amount that can be withdrawn for health screening, to be used once every three years. Within this cap, the medical facilities will compete to provide the best packages that is available. Independent experts can comment on the usefulness of these packages. Consumers who wish to spend more can still use their own money, and not draw down on Medisave.
Temasek 20 and 30 year bonds
Temasek Holdings has issued 20 and 30 year bonds paying a coupon rate of 4% and 4.2% respectively. Based on the issue price (which is slightly below par), the bonds offer a slightly higher yield of 4.149% and 4.37% respectively.
Temasek Holdings has a AAA rating from S&P and Aaa rating from Moody's. These are the highest rating available for bonds. The credit risk is as low as government bonds.
However, there is the risk of a change in interest rate. If a 20 year bond yields 4% and the interest rate for this duration increases to 5%, the prices of the bonds will drop by 8.4% If the interest rate increases to 7% (due to high inflation), the price of the bonds will drop by 28%. When you invest in a long term bond, your return is locked up for this period. You only suffer a capital risk if you decide to sell off the bonds prematurely on the market.
The bonds will refund the principal in full at the maturity date, i.e. the end of the period.
For retirees who wish to have an regular income of a higher yield over 20 and 30 years, this is a good choice. Many insurance companies invest in these type of bonds, but they take away 2% from their policyholders, giving a net yield that is much lower. It is better for the retiree to invest directly in these bonds.
I have asked my bank and stockbroker to tell me how these bonds can be purchased. I will post the findings later.
Tan Kin Lian
Temasek Holdings has a AAA rating from S&P and Aaa rating from Moody's. These are the highest rating available for bonds. The credit risk is as low as government bonds.
However, there is the risk of a change in interest rate. If a 20 year bond yields 4% and the interest rate for this duration increases to 5%, the prices of the bonds will drop by 8.4% If the interest rate increases to 7% (due to high inflation), the price of the bonds will drop by 28%. When you invest in a long term bond, your return is locked up for this period. You only suffer a capital risk if you decide to sell off the bonds prematurely on the market.
The bonds will refund the principal in full at the maturity date, i.e. the end of the period.
For retirees who wish to have an regular income of a higher yield over 20 and 30 years, this is a good choice. Many insurance companies invest in these type of bonds, but they take away 2% from their policyholders, giving a net yield that is much lower. It is better for the retiree to invest directly in these bonds.
I have asked my bank and stockbroker to tell me how these bonds can be purchased. I will post the findings later.
Tan Kin Lian
Poor yield on life insurance policy
A policyholder paid premium for 21 years under a whole life policy and obtained a surrender value that represented a yield of less than 2%. The insurance had advertised an actual yield of more than 5% for other products of similar durations.
The policyholder was unhappy with the poor yield on his policy and asked for an explanation. He was told that it was due to the specific type of product, which provided high coverage. In my view, this should not account for the large difference in the yield.
It is likely that this policy was given a lower yield due to the restructuring of the bonus. As the bonus varies for each policy, it was difficult for the policyholder to know if he had been given a fair rate of return.
The policyholder was unhappy with the poor yield on his policy and asked for an explanation. He was told that it was due to the specific type of product, which provided high coverage. In my view, this should not account for the large difference in the yield.
It is likely that this policy was given a lower yield due to the restructuring of the bonus. As the bonus varies for each policy, it was difficult for the policyholder to know if he had been given a fair rate of return.
Profit of health insurers
A senator in the US wants to cap the profit of health insurers. Read this article.
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