Benefit illustration - Life or Investment Linked Policy

Many agents will tell you about the new products that have been recently introduced. Most of these products have the same features - marketing gimmicks, complicated to understand, high charges, poor return to the investors.  Do not believe what the agent tells you, as they will usually exaggerate the good features (such as potential high return) but hide the bad features (i.e .not guaranteed, returns are exaggerated). They usually do not tell you that more than half of your savings is taken away from you to pay their commission during the initial few years.

If you have received a benefit illustration on a life insurance policy, and you are not sure what you have bought, you can send it to me at kinlian@gmail.com. I will help you to see if you have been given the correct information by the agent.

Tan Kin Lian

Students and young people should avoid saving in life insurance policies

I told this story a few months ago, and wish to repeat it.

A polytechnic students told me that he received a monthly allowance of $600 from this father, who is a bus driver. His friend sold him two life insurance policies that takes away $300 a month in premium. He knows realize that it was a bad decision, as he needed the money for his schooling and other expenses, and finds it difficult to pay the monthly premium. If he gives up the policies, he would suffer a large loss in the premiums that he had paid. He is now in a dilemma.

I like to advice young people to avoid taking life insurance policies, as a large part of the premium during the first few year goes to pay the commission to the agent. If you stop the policy, you will lose more than half of the premiums that you have saved. You will need the savings for other unexpected events.

My same advice goes to young people starting work for the first time. The insurance agent will sell you a life policy or investment-linked policy. They are all the same. You will get a poor return and a large part of your premium goes to pay commission to the agent.

Many people save in a life insurance policy (and be tied up for 20 years for a miserable 2% return), and roll over their credit cards paying 24% per year. This is bad financial management.

It is important for you to save, but you should save in a bank account. If you need to withdraw your savings, you do not have to suffer a penalty. If you wish to invest, do it at a later date, and invest in an exchange traded fund (such as the STI ETF) which has low transaction charges and gives you a good long term return.

But, before you invest, you can read my book "Practical Guide to Financial Planning", which will be available  in March 2010, or join the Financial Services Consumer Association, FISCA (www.fisca.sg)

Tan Kin Lian

Dhanabalan: Bubble in bets on events

Dear Mr Tan
In today's straits times, Dhanabalan said "the financial crisis is not the result of bankers making ill-judged loans to the real economy; it is the result of a bubble in bets on events in the real economy"


I do not know why he used the unusual word "ill-judged loans" but i believe he is talking about the subprime loans existing prior to the crisis of 2009. According to many internet articles I have read, and also a YouTube video explaining the Financial Crisis, the crisis was caused by sub-prime loans which are chopped and repackaged to CDOs etc. to spread the risks to the unwary investors. As a layman, I can understand this.


But Dhanabalan said it was nothing to do with these. He said the Financial Crisis was due to "a bubble in bets on events in the real economy". The Straits Times writer also added that it was a bubble "formed from bets on how events in the economy would pan out". I have absolutely no idea what Dhanabaln or the writer is saying about "bubble in bets on events".


REX


REPLY
This is how I interpret Mr. Dhanabalan's views. By real economy, he meant lending to companies to manufacture products, distribute goods, employ people. By taking bets, he meant that they were speculating on the asset prices through sub-prime, collateralized debt obligations (CDOs), credit default sways (CDS), and other derivatives.

If the housing prices continue to go up, they all win their bets. When the housing prices fall, the financial system collapse.