Tuesday, October 27, 2009
Insurance for poly and university students
Dear Mr. Tan,
I read your view that it is not necessary for a poly student to buy insurance for saving. My friend, who is an agent, told me that I should save early and pay a lower premium. He said that if I do not save, I will spend away the money. Who should I listen to?
REPLY
As you are not working to earn a regular income, you should avoid making any commitment to make fixed saving in an insurance policy. You should save your money in a flexible saving account which can be withdrawn at any time, without any penalty, to meet emergency needs.
A life insurance policy is the worst type of saving plan for a student or any person with irregular income. Up to two years of your savings is taken away from you as "distribution cost". This is your earned earned savings, which you earn from part time work or from the allowance given by your parent. Why should you give it away to the insurance agent or company as distribution cost?
Many students find it a burden to continue the fixed commitment and give up their insurance policy, leading to the forfeiture of their savings.
It is wrong for the insurance agent to sell a fixed saving plan to a student who does not have a regular income. The agent is only thinking of earning the commission from the sale - without thinking about the financial burden that is being given to the student.
I read your view that it is not necessary for a poly student to buy insurance for saving. My friend, who is an agent, told me that I should save early and pay a lower premium. He said that if I do not save, I will spend away the money. Who should I listen to?
REPLY
As you are not working to earn a regular income, you should avoid making any commitment to make fixed saving in an insurance policy. You should save your money in a flexible saving account which can be withdrawn at any time, without any penalty, to meet emergency needs.
A life insurance policy is the worst type of saving plan for a student or any person with irregular income. Up to two years of your savings is taken away from you as "distribution cost". This is your earned earned savings, which you earn from part time work or from the allowance given by your parent. Why should you give it away to the insurance agent or company as distribution cost?
Many students find it a burden to continue the fixed commitment and give up their insurance policy, leading to the forfeiture of their savings.
It is wrong for the insurance agent to sell a fixed saving plan to a student who does not have a regular income. The agent is only thinking of earning the commission from the sale - without thinking about the financial burden that is being given to the student.
My comment applies to university undergraduates as well.
Tan Kin Lian
Tan Kin Lian
Cash back insurance policy
I wish to explain why a cash back insurance policy gives a poor yield to the consumer.
A cash back policy combined a basic policy with an annual refund feature. Let us take a hypothetical case. The basic policy is a whole life policy with an annual premium of $5,000 and a yield at the end of 25 years of 2% per annum. The cash back feature adds an additional premium of $1,000 and pays $950 a year from the 2nd year (i.e. no payment for the first year). The cash back feature reduces the yield to 1.8% per annum.
The agent tells the customer that he is getting a cash back every year (after the first year) and makes it look like a more attractive policy. But the agent does not explain that the yield has reduced or the effect of deduction has increased with the cash back feature.
The agent earns commission on the increased premium of $6,000 (including the premium paid for the cash back feature). If the distribution cost is 200%, the customer will be paying $12,000 in distribution cost, including the cost attributable to the cash back feature.
It does not make sense for the customer to pay a higher premium for the cash back feature and get back less than the increased premium. But the consumer does not know about this structure of the policy. The agent tells the consumer that this is an "innovative policy".
Tan Kin Lian
A cash back policy combined a basic policy with an annual refund feature. Let us take a hypothetical case. The basic policy is a whole life policy with an annual premium of $5,000 and a yield at the end of 25 years of 2% per annum. The cash back feature adds an additional premium of $1,000 and pays $950 a year from the 2nd year (i.e. no payment for the first year). The cash back feature reduces the yield to 1.8% per annum.
The agent tells the customer that he is getting a cash back every year (after the first year) and makes it look like a more attractive policy. But the agent does not explain that the yield has reduced or the effect of deduction has increased with the cash back feature.
The agent earns commission on the increased premium of $6,000 (including the premium paid for the cash back feature). If the distribution cost is 200%, the customer will be paying $12,000 in distribution cost, including the cost attributable to the cash back feature.
It does not make sense for the customer to pay a higher premium for the cash back feature and get back less than the increased premium. But the consumer does not know about this structure of the policy. The agent tells the consumer that this is an "innovative policy".
Tan Kin Lian
When cancer disappears
Some cancers do not need to be treated. They can stop growing and disappear, according to this article.
Monday, October 26, 2009
Break-even point for old NTUC policies
Dear Mr. Tan,
When you were in charge of NTUC, did your products have a breakeven point of 5 years?
REPLY
If my memory was correct, most of the products have a break-even point of 5 to 8 years. They also provide a good yield to the customer, after 20 years, i.e. 5% or higher. So, most customers who bought the NTUC policies in the early days obtained a good deal. The high yield was possible due to low distribution cost, and a high rate of bonus distribution.
Advice on stock selection and timing
Dear Mr Tan,
In the investement section of yday's Sunday Times, CIMB research recommended Parkway Life Reits as heath care assets is seen as one of the most stable asset classes and this reits stands out as one of the few heath-care reits that can amalgamate such assets.
I am thinking of liquidating my Comfortdelgro shares (with some profit) and invest into Parkway Life Reits as it seems to pay higher dividends. What is your opinion on this ?
REPLY
I am not able to advise on stock selection and timing. Wish you all the best in your decision.
In the investement section of yday's Sunday Times, CIMB research recommended Parkway Life Reits as heath care assets is seen as one of the most stable asset classes and this reits stands out as one of the few heath-care reits that can amalgamate such assets.
I am thinking of liquidating my Comfortdelgro shares (with some profit) and invest into Parkway Life Reits as it seems to pay higher dividends. What is your opinion on this ?
REPLY
I am not able to advise on stock selection and timing. Wish you all the best in your decision.
Breakeven point
Dear Mr. Tan,
What is an acceptable break-even point for a life insurance policy? I have a policy that breaks even after 20 years, i.e. the cash value is more than the premiums paid. Is this acceptable?
REPLY
If you are saving your money, the break-even point should be 0 years. This is what you get when you put your money in a bank account. You can withdraw it at any time without penalty.
If you invest in a unit trust with a front end load of 2% (or less), you can break even within 1 year (provided that the stock-market gives a positive return.
A life insurance policy takes many years to break even due to the high commission paid to the insurance agent. If the distribution cost is 50% of the annual premium, it should take 5 years to break even. If it is 100%, it should take 7 years to break even.
I consider a distribution cost of 50% to be rather high, but may be acceptable. Your life insurance policy should take 5 years to break even. If it takes longer than 5 years, it is not good for consumers. There are better ways to invest your money.
Tan Kin Lian
NOTE
What is an acceptable break-even point for a life insurance policy? I have a policy that breaks even after 20 years, i.e. the cash value is more than the premiums paid. Is this acceptable?
REPLY
If you are saving your money, the break-even point should be 0 years. This is what you get when you put your money in a bank account. You can withdraw it at any time without penalty.
If you invest in a unit trust with a front end load of 2% (or less), you can break even within 1 year (provided that the stock-market gives a positive return.
A life insurance policy takes many years to break even due to the high commission paid to the insurance agent. If the distribution cost is 50% of the annual premium, it should take 5 years to break even. If it is 100%, it should take 7 years to break even.
I consider a distribution cost of 50% to be rather high, but may be acceptable. Your life insurance policy should take 5 years to break even. If it takes longer than 5 years, it is not good for consumers. There are better ways to invest your money.
However, if the life insurance policy is able to give an attractive yield, compared to other types of investments, you may accept a higher break-even point of 7 years.
Tan Kin Lian
NOTE
The break-even point is the number of years required for the surrender value of the policy to reach the total amount of premiums paid.
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