A newspaper report explained the difficulty faced in Malaysia about handling price control for fuel and essential products. It appears that price control distorts the distribution of the products and cause artificial shortages.
Is there any other way to provide relief to ordinary people from high prices, apart from price controls?
During war time, the distribution of essential products were done through coupons. This is the rationing system. People can buy the products only through coupons. This system also has its problems. A black market is created for the sale of these coupons.
In today's world, there is a better system to handle this problem. It involves the use of low-cost technology.
Anyone like to suggest what is a workable system?
Monday, March 24, 2008
Life insurance products
There are three main types of life insurance products:
a) Term insurance - pays the sum assured on death during the period of insurance. The policy ceases at the end of the period. There is no savings in this policy.
b) Whole life insurance - pays the sum assured on death. The policy can be continued for a lifetime. The policyholder has the option to terminate the policy and receive a cash value.
c) Endowment insurance - pays the sum assured on premature death or on the maturty date (i.e. at the end of the period of insurance). This policy combines the term insurance together with a savings element that accumulates the benefit payable on maturity.
The premium paid under whole life or endowment insurance is higher than term insurance. The excess premium, less charges, is accumulated to produce the cash value or maturity benefit. Due to the high charges, the yield on this savings portion is generally poor.
If you buy a participating or with-profits policy (i.e. whole life or endowment policy), your policy will earn an annual bonus that depends on the profits of the insurance company. This bonus is added to the policy. The yield on a participating policy is marginally higher, but is still low compared with other financial products.
It is better to pay a separate premium for the term insurance, and invest the remaining savings in a low cost investment fund, which can produce a higher yield on the investments.
The annuity is a different product. I shall explain its features separately.
a) Term insurance - pays the sum assured on death during the period of insurance. The policy ceases at the end of the period. There is no savings in this policy.
b) Whole life insurance - pays the sum assured on death. The policy can be continued for a lifetime. The policyholder has the option to terminate the policy and receive a cash value.
c) Endowment insurance - pays the sum assured on premature death or on the maturty date (i.e. at the end of the period of insurance). This policy combines the term insurance together with a savings element that accumulates the benefit payable on maturity.
The premium paid under whole life or endowment insurance is higher than term insurance. The excess premium, less charges, is accumulated to produce the cash value or maturity benefit. Due to the high charges, the yield on this savings portion is generally poor.
If you buy a participating or with-profits policy (i.e. whole life or endowment policy), your policy will earn an annual bonus that depends on the profits of the insurance company. This bonus is added to the policy. The yield on a participating policy is marginally higher, but is still low compared with other financial products.
It is better to pay a separate premium for the term insurance, and invest the remaining savings in a low cost investment fund, which can produce a higher yield on the investments.
The annuity is a different product. I shall explain its features separately.
Know What's Ethical
Minister for Health Khaw Boon Wan said,
"Doctors should be aware that they should not prescribe procedures of dubious benefits to their patients, exposing them to unnecessary risk or financial cost. If they do so, they will be considered unethical."
I hope that MAS Chairman Goh Chok Tong will say the following:
"Financial advisers should be aware that they should not prescribe financial and insurance products of dubious benefits to their clients, exposing them to unnecessary risk or financial cost. If they do so, they will be considered unethical."
This message, coming from the highest level in MAS, will address the marketing abuses in the financial services market.
"Doctors should be aware that they should not prescribe procedures of dubious benefits to their patients, exposing them to unnecessary risk or financial cost. If they do so, they will be considered unethical."
I hope that MAS Chairman Goh Chok Tong will say the following:
"Financial advisers should be aware that they should not prescribe financial and insurance products of dubious benefits to their clients, exposing them to unnecessary risk or financial cost. If they do so, they will be considered unethical."
This message, coming from the highest level in MAS, will address the marketing abuses in the financial services market.
Take the risk and get a higher return
A whole life or endowment policy will lock you into a low yield, for the following reasons:
a) the insurance company has to invest 70% of the money in low yielding bonds (to provide the guarantee), and only 30% in equity or property (which gives a higher yield)
b) up to two years of the premium is used to pay commission and marketing expenses.
Here are the yields that you can get on your savings (excluding the portion used to pay for the insurance cover):
3% - from an insurance product, after deducting marketing expenses
4% - from a no-load investment fund, invested with the same mix
6% - from a no-load investment fund, invested 100% in equity.
Here is the amount that you can get by investing $6,000 a year
An investment fund has risk, but it can be reduced by diversification and investing for the long term.
Question: Do you want a "safe" investment, that gives you $294,000 when a "no-guarantee" investment can give you much more, say $503,000?
Lesson: Take the risk and enjoy a higher return. Avoid paying high front end charges.
a) the insurance company has to invest 70% of the money in low yielding bonds (to provide the guarantee), and only 30% in equity or property (which gives a higher yield)
b) up to two years of the premium is used to pay commission and marketing expenses.
Here are the yields that you can get on your savings (excluding the portion used to pay for the insurance cover):
3% - from an insurance product, after deducting marketing expenses
4% - from a no-load investment fund, invested with the same mix
6% - from a no-load investment fund, invested 100% in equity.
Here is the amount that you can get by investing $6,000 a year
Duration 3% pa 4% pa 6% pa
10 years $70,800 $74,900 $83,800
20 years $166,000 $186,000 $234,000
30 years $294,000 $359,000 $503,000
An investment fund has risk, but it can be reduced by diversification and investing for the long term.
Question: Do you want a "safe" investment, that gives you $294,000 when a "no-guarantee" investment can give you much more, say $503,000?
Lesson: Take the risk and enjoy a higher return. Avoid paying high front end charges.
Creaming off the customer
Dear Mr. Tan,
Is an insurance product that offers a return of less than 2% over 20 years considered as "creaming off" the policyholder?
REPLY
Over a 20 year period, the expected return should be 5% per annum, considering the current rate of inflation and other factors.
If the product offers less than 2%, then the difference of 3% is taken away for the following:
a) cost of insurance protection
b) commission to the sales agents
c) advertising expenses
d) high salaries and other expenses.
The cost of insurance protection should taken away only 0.5%. The remaining 2.5% is large wasted on the marketing and other expenses.
The product is usually marketed with "gimmicks" that hide the real cost. This can be considered as "creaming of" the customer.
Is an insurance product that offers a return of less than 2% over 20 years considered as "creaming off" the policyholder?
REPLY
Over a 20 year period, the expected return should be 5% per annum, considering the current rate of inflation and other factors.
If the product offers less than 2%, then the difference of 3% is taken away for the following:
a) cost of insurance protection
b) commission to the sales agents
c) advertising expenses
d) high salaries and other expenses.
The cost of insurance protection should taken away only 0.5%. The remaining 2.5% is large wasted on the marketing and other expenses.
The product is usually marketed with "gimmicks" that hide the real cost. This can be considered as "creaming of" the customer.
Planning for financial security of family
Dear Mr Tan,
Your blog have been most invaluable in helping me with my current review of all the policies bought by my family.
1) You mentioned so frequently about the monthly income benefit but I realised this product is not common among the insurers. From what I gather, only Aviva, GE and TM Asia (together a term or whole life policy) have it. The cheapest I found was fom GE: $3000 monthly income benefit till age 60yrs old, with waiting period of 90 days for $630 p.a. Is this a reasonable price to pay? Why isn't there more of this product in the market since it is quite essential to a person with family?
Reply:
The GE product appears to be a disability income product. It pays the monthly income during disabilty for a certain period and ceases on death.
You need a family income product, which pays a monthly income to the family on the death of the policyholder. The income is payable for the remainder of the period of insurance.
2) Also in your past entries where you mentioned we should aim for coverage of about 5x our annual income. Should we also include the coverage given by our employers in this case?
Reply:
You can include the coverage provided by your employer to make the target of 5 years. It is all right to insure for a higher sum, say up to 8 years of your income.
3) Is there any difference when insurers say Terminal Illness and Critical Illness?
Reply
The definitions of critical illness and terminal illness are different. Many people can claim for critical illness earlier, before they can claim for terminal illness.
Your blog have been most invaluable in helping me with my current review of all the policies bought by my family.
1) You mentioned so frequently about the monthly income benefit but I realised this product is not common among the insurers. From what I gather, only Aviva, GE and TM Asia (together a term or whole life policy) have it. The cheapest I found was fom GE: $3000 monthly income benefit till age 60yrs old, with waiting period of 90 days for $630 p.a. Is this a reasonable price to pay? Why isn't there more of this product in the market since it is quite essential to a person with family?
Reply:
The GE product appears to be a disability income product. It pays the monthly income during disabilty for a certain period and ceases on death.
You need a family income product, which pays a monthly income to the family on the death of the policyholder. The income is payable for the remainder of the period of insurance.
2) Also in your past entries where you mentioned we should aim for coverage of about 5x our annual income. Should we also include the coverage given by our employers in this case?
Reply:
You can include the coverage provided by your employer to make the target of 5 years. It is all right to insure for a higher sum, say up to 8 years of your income.
3) Is there any difference when insurers say Terminal Illness and Critical Illness?
Reply
The definitions of critical illness and terminal illness are different. Many people can claim for critical illness earlier, before they can claim for terminal illness.
Subscribe to:
Posts (Atom)