If you are 30 years old, and you wish to insure against critical illness for $100,000, you have the following choice:
1. Buy a "whole life" critical illness policy and pay $200 a month
2. Buy a 30 year critical illness cover and pay $40 a month
If you choose option 2, you can invest $160 a month in a low cost fund to earn an average of 5% per annum, you will get give you $128,000 in cash at the end of 30 years. (This is not a guaranteed return, but it is the likely return).
If you pay $20 a month on a decreasing critical illness cover, you will get $144,000 (estimated)
If you put $200 a month in the critical illness cover, you are likely to get a cash value at the end of 30 years of around $100,000 (plus or minus $10,000).
Saturday, July 12, 2008
Regulation of financial products
Read the debate in this blog:
http://kwayteowman.blogspot.com/2008/05/to-regulate-or-not-to-regulate.html
http://kwayteowman.blogspot.com/2008/05/to-regulate-or-not-to-regulate.html
Blog on public transport in Singaore
The Straits Times Review section published my article about the "world class transport system". the article can be located here:
http://news.asiaone.com/News/the%2BStraits%2BTimes/Story/A1Story20080712-76200.html
The article mentioned that my blog on public transport can be found in this website. The actual website is:
www.singaporepublictransport.blogspot.com
http://news.asiaone.com/News/the%2BStraits%2BTimes/Story/A1Story20080712-76200.html
The article mentioned that my blog on public transport can be found in this website. The actual website is:
www.singaporepublictransport.blogspot.com
Friday, July 11, 2008
Low yield for policies with restructured bonuses
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.
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.
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.
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