Get the Benefit Illustration

A few people have asked me quite difficult questions on the life insurance policies that have been marketed to them. They ask, "is it all right to invest in the policy?"

Quite often, the policies are specific to the company that has offered it. I am not aware about the features of the policies, or the charges that are being taken away from the premiums that have to be paid. I know that, in most cases, the charges are excessive and the insurance policy represents a bad investment for the consumer, but I am not able to give a conclusive view, without the underlying facts.

My reply to the consumer is, "get the Benefit Illustration and send it to me". With the Benefit Illustration, I can point out the key points in the policy and how consumers are being overcharged, or "ripped off".

A few consumers who sent their Benefit Illustrations to me in the past were shocked that a large part of the potential investment gain was taken away from them, and this was not explained by the financial adviser who sold the policy to them. When they learn about it, it was already too late.

If you want my views, send the Benefit Illustration to me.

Tan Kin Lian

Managing investment risks

Many people are risk averse. They are afraid of taking investment risks and making a loss. The investments that gives the best long term return are equities, but they are also the most volatile, i.e. the price can go up and down by a large percentage in a few days or weeks.

A long term investor should not worry about the short term changes in the price of the shares. As long as they keep the shares, they do not have to take a loss. The value of the shares will eventually recover and give an attractive return. This has been the trend over the past years.

There is the risk of selecting the wrong shares, which may perform worse than the market or may even go bankrupt. This risk can be minimized through diversification, i.e. investing in a fund comprising of 10 or more shares. Some shares in the fund may perform badly, but they will be offset by the other shares that perform better than the market.

There is still the market risk. In a bad stock market, most shares will perform badly. The bad market may last for a few months or even a few years. A long term investor is able to ride out the bad years and will be compensated by the good years, to get an above average return. I describe this strategy as "averaging out the good and bad years".

By investing in a fund, the long term investor does not have to worry about picking the right stocks, or managing the individual investments, such as collecting the dividends and subscribing to the rights issues and other corporate actions. These fund manager will take care of these activities.

It is important for the long term investor to choose a fund that have low initial and annual charges. They can choose an exchange traded fund (ETF) that meets these two criteria. The STI ETF has a transaction charge of 0.3% and an annual management fee of 0.3%. Some other ETFs have higher annual charges, but they are usually less than 0.7%.

The investor can choose a unit trust that has an upfront charge of about 2% and an annual fee of about 1%. The unit trust is actively managed and is aimed at producing a better return than an ETF through the active selection of the fund manager. Research has shown, however, that over the longer term, the actively managed unit trusts perform worse than ETF, after deducting fees.

If you select the right unit trust, you may get a better return than average, but the challenge is selecting the right fund. It has been found that past performance is not an indication of future performance. Choose the funds that performed well in recent years may not be a good strategy.

For a long term investor, the tip is, invest in an exchange traded fund that have low annual charges, of less than 0.5%. Invest for the long term and do not worry about the fluctuations in the market. This type of investment is better than investing in life insurance policies, due to the extremely high charges taken by life insurance companies (usually 3% per annum).

Tan Kin Lian

Survey: Educating the young

Here are the results of the survey based on 47 replies.

About 90% refer an education system that has the following features:

> educate the young to be literate, numerate, have social skills, and moral values, instead of achieving academic excellence.

> a less competitive system, so that parents do not have to put pressure on students to study hard through homework and private tuition

> gives higher priority to non-academic subjects, such as moral values, character, social skills and interaction?

> encourage some people to pursue other forms of personal development, instead of university degrees

However, about 20% (i.e. more than 10%) are satisfied with the current system which emphasis academic excellence, and picks future leaders from the scholars.

The survey is still open for participation. Click here.

Migrant and foreign workers

The following terms have been used to describe the foreigners who are now working in Singapore:

foreign talent
foreign workers
foreigners
migrant workers
immigrants

Previously, the word "foreign talent" was commonly used by our political leaders, mainstream media and even by the common people. I have spoken a few times against the use of this term, as it is inappropriate and demeaning to Singaporeans.

I found that the mainstream media has started to use the term "foreigners". While this is more appropriate, I still find that it is an unnecessary distinction. If we have to use a term, perhaps "immigrant" would be more appropriate. It implies a willingness of these workers and their families to make a future in Singapore.

Tan Kin Lian

FOREIGN TALENTS “FT” vs FOREIGN TALENTS POLICY “FTP”

Mr TAN Kin Lian

I like to suggest that you create a LABEL on “Foreign Talents” and “Foreign Talents Policy” in your website. I discover that there are a lot of mis-communications on “Foreign Talents” and “Foreign Talents Policy”.

FOREIGN TALENTS “FT” vs FOREIGN TALENTS POLICY “FTP”

With the discussion and reaction of some Singaporeans, it may seem that Singaporeans are not welcoming foreigners. I think this is a wrong description of Singaporeans.

Many of us, including myself, used to work overseas one time or another. We were foreign talents, once upon a time. We also have a lot of foreigners’ friends. I think Singaporeans are warm people. As a Singaporean, I am looking forward to Singapore Government to make a clear statement of what is their FTP. For example, what category of talents we are attracting and why. For example, what are the level of influx Singapore can absorb. The possibility lack of clear deliberation of FTP could result in Singaporeans calling for explanation. This is understandable because they are many foreigners living among our midst and doing the same job we used to do.

Some may have over-reacted, but many could be just striving understand what is FT and FTP. Unfortunately, calling for explanation and rationale could be seen as unwelcoming FT. This is sadly not the case for Singaporeans.

Maybe, MR TAN could help to elaborate what is Government’s FTP; alternatively, you can help Singaporeans to raise intelligent questions for the Government to answer them. I really hope that local breed and bred Singaporeans to live in harmony with FT in our midst. Even if Singaporeans do not agree with Government’s FTP, we cannot conclude that Singaporeans do not live alongside FT. Singaporeans want to welcome foreigners, but at the same time they need a FTP that fit the need of social and economics objectives of Singapore.

Demographics is an important fabrics of the society, and I think FTP should be deliberated clearly and convincingly to Singaporeans at large. This is the best way to cultivate sense of belonging to this little land we are living in, and the best way to welcome and integrate FT among our midst. I like to conclude that it is good to have FT coming to our country. Singaporeans at large just want to know who are these FT and in what level of influx Singapore can absorb – socially and economically.

Once again, I think you could be the person who has sufficient depth of knowledge and grace for this subject matter. Thank you.

CASHEW NUT

Buy insurance up to age 60

Many agent advice consumers that they need to buy life insurance for the whole of life. This is bad advice.

The consumer only need to buy life insurance up to the time that their youngest child reaches age 25. By that time, all the children would have been financially independent. This is likely to be age 60 or 65 (for those who have their children at an older age).

There is no need for life insurance after age 65. If the consumer had been prudent in having regular saving during their working life, they are likely to have sufficient savings to take care of their retirement needs. This could amount $250,000 for an ordinary wage earner or more for a high income earner. With this savings, there is no need for life insurance cover.

The agent likes to advice consumers to buy the most expensive insurance policy, as their commission is directly linked to the amount of premium. They can earn between 12 to 24 months of the savings. If you save $300 a month, you may lose $7,200 of your savings to pay commission to the agent or the expenses and profit of the insurance company. This is a lot of money to give away, especially as the saving plan does not give you an attractive return (compared to saving in an low cost unit trust) and imposes a heavy penalty if the policy is terminated prematurely.

You should have your savings separately and buy Term Insurance or Family Income Benefit for 25 years or up to age 60 years (if this is shorter). This is adequate for most people. But you can consider your own financial situation to make a suitable decision. Do not be misled by an insurance agent or financial planner who is only interested in earning a higher commission.

Tan Kin lian

Tax the big banks

Here are the reasons to tax the big banks. Read this article.