FIRST POSTED ON 10 MAY 2008
NTUC Income earned an investment yield of 10.7% on the participating fund in 2007. The average long term yield (computed over the past 10 years) is 7.8% per annum.
I have two policies that are affected by the restructuring of the bonues. I calculated the yields on these policies as follows.
1. GROWTH (LG SERIES)
This policy commenced in December 2003 with a single premium of $75,000. The estimated cash value at December 2008 (5 year duration) is $85,127, giving a policy yield of 2.5%. There is a gap of 5.3% compared to the fund yield of 7.8%.
If I keep the policy to the maturity date in December 2013, the projected maturity benefit is $112,795 giving a yield of 4.2%. This is still somewhat low, giving a gap of 3.6% compared to the fund yield.
This single premium policy has low expenses and low cost of insurance. I estimate that a fair reduction in yield should be 1%. The actual gap is somewhat high.
2. LIVING (LW SERIES)
This policy commenced in October 1996 with an annual premium of $2,567. The estimated cash value in October 2008 (12 year duration) is $28,383, giving a negative yield of -1.5%. There is a gap of 9.3% compared to the fund yield.
Although a Living policy has higher expenses and a bigger cost of insurance protection, the gap appears to be excessive.
Over the next 3 years, the cash value grows by only 1.8% per annum. This is low compared to the fund yield.
I have three other policies not affected by the restructuring of the bonus. The cash value for two policies increase by more than 4% per annum over the next 3 years and by 2.8% for the Living policy.
CONCLUSION
I believe that the policies affected by the bonus restructuring have not been given a fair rate of annual and special bonuses. This has resulted in a poor policy yield, compared to the long term average yield.
Friday, July 11, 2008
False advertising
I passed by a shop in Toa Payoh. They were playing a recorded advertisement, announcing that the shop is closing down and they have to sell the products at a low price. I looked at the price labels and found that they were actually charging more than other shops. This is false advertising and amounts to cheating.
There is a similar situation with financial products sold by agents. The agents are able to make mis-representation on the products that are not backed by the printed materials. The printed materials are quite confusing, so the buyer needs an agent to explain the product. The agent has the opportunity to make a mis-representation and get away with it.
Many types of high cost, poor value financial products are sold in this way. You should avoid these products.
There is a similar situation with financial products sold by agents. The agents are able to make mis-representation on the products that are not backed by the printed materials. The printed materials are quite confusing, so the buyer needs an agent to explain the product. The agent has the opportunity to make a mis-representation and get away with it.
Many types of high cost, poor value financial products are sold in this way. You should avoid these products.
Thursday, July 10, 2008
Regulation of insurance
Insurance is highly regulated in the United States. The intent is to protect consumers against the unfair practices of insurance companies.
Some of the areas that are regulated include:
* Licening of insurers and agents
* Approval of rates
* Content of policy forms
* Contract interpretation and enforcement
* Sales practices and information disclosure
Some of these requirements are already practiced in Singapore. In other areas, there is a need (in my view) for the regulatiron to be tightened.
For example, our regulators should ensure that the wordings of the policy forms are clear, to avoid future disputes between the insurer and the policyholder. The terms should also be fair to the policyholder.
Some of the areas that are regulated include:
* Licening of insurers and agents
* Approval of rates
* Content of policy forms
* Contract interpretation and enforcement
* Sales practices and information disclosure
Some of these requirements are already practiced in Singapore. In other areas, there is a need (in my view) for the regulatiron to be tightened.
For example, our regulators should ensure that the wordings of the policy forms are clear, to avoid future disputes between the insurer and the policyholder. The terms should also be fair to the policyholder.
Reduction of 4% in yield
I met an independent financial adviser. I told him about an investment-linked plan which projects a gross yield of 9% and a net yield of 5%. The reduction in yield was 4%. If the gross yield was 5%, the net yield was around 1%.
He was shocked. How can an investment product take away so much of the yield? He sells unit trusts, and is not able to recommend any investment fund that have an annual charge of 2% or more.
He asked, "How can insurance advisers sell products that take away 4%? Do they take care of the interest of their clients?"
Note: These high charges apply to most regular premium investment-linked products sold in the market. There are some exceptions, with lower charges. You should ask about the reduction in yield.
He was shocked. How can an investment product take away so much of the yield? He sells unit trusts, and is not able to recommend any investment fund that have an annual charge of 2% or more.
He asked, "How can insurance advisers sell products that take away 4%? Do they take care of the interest of their clients?"
Note: These high charges apply to most regular premium investment-linked products sold in the market. There are some exceptions, with lower charges. You should ask about the reduction in yield.
Avoid being cheated
If a salesman sells you a product and charges you a higher price compared to a similar product of the similar quality, you will feel that you have been cheated. You will probably avoid doing any more business with this salesman or his shop.
Does the same situation apply for financial and insurance products? Do you feel cheated, if you are offered a bad product and charged an excessive price? Can you avoid doing business with the salesman or his company?
The problem with a life insurance product is that you will be stuck with a bad product for 20 years or longer.
How to identify a bad product? Ask this question. Is this an investment product? If so, how much do I have to pay for the first 1 and 3 years. What do I get back if I stop the investment plan? If you do not get back your savings, it is a bad product.
Lesson: Avoid financial products that has high charges, lock you up for a long term, and imposes a high penalty on early termination.
Does the same situation apply for financial and insurance products? Do you feel cheated, if you are offered a bad product and charged an excessive price? Can you avoid doing business with the salesman or his company?
The problem with a life insurance product is that you will be stuck with a bad product for 20 years or longer.
How to identify a bad product? Ask this question. Is this an investment product? If so, how much do I have to pay for the first 1 and 3 years. What do I get back if I stop the investment plan? If you do not get back your savings, it is a bad product.
Lesson: Avoid financial products that has high charges, lock you up for a long term, and imposes a high penalty on early termination.
Win $3 million on the Big Sweep
An old lady was nearly ninety years of age when she won $3,000,.000 in the Big Sweep. Her family were extremely worried about her heart and feared that the news of her large win would come as too much of a shock to her.
They decided to call the doctor and explained the situation to him. The doctor said, "Now, you don't have to worry about anything. I am fully trained in such delicate matters. I can break the news to her gently. Everything will be quite safe, if left to me."
The doctor went to see the old lady and gently brought up the subject of the Big Sweep. He said, "Tell me, what would you do if you have a large win on the Big Sweep, say 3 million dollars."
"Why, " replied the old lady. " I would give half of it to you, of course!"
The doctor fell down, dead from shock!
They decided to call the doctor and explained the situation to him. The doctor said, "Now, you don't have to worry about anything. I am fully trained in such delicate matters. I can break the news to her gently. Everything will be quite safe, if left to me."
The doctor went to see the old lady and gently brought up the subject of the Big Sweep. He said, "Tell me, what would you do if you have a large win on the Big Sweep, say 3 million dollars."
"Why, " replied the old lady. " I would give half of it to you, of course!"
The doctor fell down, dead from shock!
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