An immediate annuity pays the annuity payment immediately. A deferred annuity pays the annuity payment at a specified date in the future. During the deferred period, the invested sum is invested to earn interest.
If you do not need the annuity payment immediately, you have the following options:
a) buy a deferred annuity
b) invest your money separately and buy an immediate annuity at the future date
Your choice depends on the terms that you are offered. For example, if the insurance company pays 2.5% per annum for the deferred period, it will be attractive compared to leaving the money in the bank to earn 1%.
If you buy the deferred annuity, you are locked into the contract now. If you wish to withdraw from it later, you may be subject to penalty. You should choose the deferred annuity only if you are sure that it is what you really want.
My preference is to invest separately and buy an immediate annuity at the time that you need the annuity payment. For example, it is better to keep your minimum sum in the Central Provident Fund until 62 or 65 years, and earn interest at 4% plus bonus of 1%. You can decide at 62, if you wish to switch to an immediate annuity at that time.
Lesson: Keep the flexibility. Do not be locked into a contract that you cannot change. If you buy an annuity contact, stick to it for the entire period.
Saturday, April 5, 2008
Lyxor Exchange Traded Funds (ETFs)
Hi Mr. Tan,
I read your blog. You said that it might be better to buy into ETF such as STI ETF to reduce expenses and upfront loading. Recently, there has been a number of Lyxor ETFs listed on SGX and they are denominated in USD. What is your opinion of such ETFs, in particular that the exchange rate risk of such ETFs seemed particularly high in current market?
REPLY
The Lyxor ETFs are denominated in USD for the purpose of trading only. The underlying risk depends on the asset class that the fund is invested in, and is not affected by the traded currency. For example, if the USD weakens and the underlying fund is performing well, the unit price denominated in USD will increase to compensate for it.
I am not familiar with the Lyxor ETFs, but if they are widely diversified, invested in good quality stocks (i.e. non speculative) and have low expense ratios, then these ETFs are suitable for long term investors.
I read your blog. You said that it might be better to buy into ETF such as STI ETF to reduce expenses and upfront loading. Recently, there has been a number of Lyxor ETFs listed on SGX and they are denominated in USD. What is your opinion of such ETFs, in particular that the exchange rate risk of such ETFs seemed particularly high in current market?
REPLY
The Lyxor ETFs are denominated in USD for the purpose of trading only. The underlying risk depends on the asset class that the fund is invested in, and is not affected by the traded currency. For example, if the USD weakens and the underlying fund is performing well, the unit price denominated in USD will increase to compensate for it.
I am not familiar with the Lyxor ETFs, but if they are widely diversified, invested in good quality stocks (i.e. non speculative) and have low expense ratios, then these ETFs are suitable for long term investors.
Future role of the intermediary
Hi Mr. Tan
If more insurance companies offer their products through the internet, is there a need for insurance agents?
REPLY:
Insurance agents will continue to play a useful role. They have to advice the customer on making the final decision, after the customer has obtained most of the information from the internet. As the insurance agent takes less time to make the sale, the commission rate can be reduced.
This is similar to the situation with buying shares from a stockbroker. The brokerage is now 0.3% (as compared to 1% previously). The stockbroker continue to do well through a larger volume of business.
I use a stockbroker to obtain relevant information and handle the transactions. This is more convenient than searching for the information by myself. I do not mind paying a slightly higher brokerage (compared to transacting through the internet), as the service is valuable.
There is a role for insurance agents in the new environment. The new system will be more efficient and will reduce cost for the benefit of everybody. The agent can earn a fair rate of remuneration, but should not be placed in a conflict of interest.
The challenge is making the change to move forward.
If more insurance companies offer their products through the internet, is there a need for insurance agents?
REPLY:
Insurance agents will continue to play a useful role. They have to advice the customer on making the final decision, after the customer has obtained most of the information from the internet. As the insurance agent takes less time to make the sale, the commission rate can be reduced.
This is similar to the situation with buying shares from a stockbroker. The brokerage is now 0.3% (as compared to 1% previously). The stockbroker continue to do well through a larger volume of business.
I use a stockbroker to obtain relevant information and handle the transactions. This is more convenient than searching for the information by myself. I do not mind paying a slightly higher brokerage (compared to transacting through the internet), as the service is valuable.
There is a role for insurance agents in the new environment. The new system will be more efficient and will reduce cost for the benefit of everybody. The agent can earn a fair rate of remuneration, but should not be placed in a conflict of interest.
The challenge is making the change to move forward.
Excellent Customer Service
Excellent customer service is built from the following components:
a) A genuine belief in doing the best for customers
b) Simple and efficent processes
c) People who enjoy serving customers
d) Teamwork among the service providers
e) Competent leadership, who knows the business
It is not possible to have excellent customer service under the following environment:
a) When an organisation wants to increase profit at the expense of customers
b) When there is high turnover of managers and staff
c) When people look after their individual performance, rather than work as a team
d) When the top people are not accessible to customers
There are so many organisations that fall into this trap. The leaders think that excellent customer service can be achieved by engaging consultants to improve the processes. It hardly works.
It takes man years to build an organisation that has excellent customer service. It can take a short time to destroy it.
a) A genuine belief in doing the best for customers
b) Simple and efficent processes
c) People who enjoy serving customers
d) Teamwork among the service providers
e) Competent leadership, who knows the business
It is not possible to have excellent customer service under the following environment:
a) When an organisation wants to increase profit at the expense of customers
b) When there is high turnover of managers and staff
c) When people look after their individual performance, rather than work as a team
d) When the top people are not accessible to customers
There are so many organisations that fall into this trap. The leaders think that excellent customer service can be achieved by engaging consultants to improve the processes. It hardly works.
It takes man years to build an organisation that has excellent customer service. It can take a short time to destroy it.
5 year Single Premium Endowment
Hi Mr. Tan,
I wish to seek your advice on the best return single premium endownment for 5 years. This sum of money is mean for housing which i intend to use it after 5 years.
My objective is to treat the single premium endowment as a form long term fixed deposit for high return as compare to the current fixed deposit rate. Thank you for your advice.
REPLY
You have to do some work. Call the telphone numbers of the life insurance company directly. Tell them that you have $x and wish to have a 5 year single premium endowment. Let me quote the best terms to you.
You can show me the figures (of guaranteed and non-guaranteed benefit). I will help you to make a decision. The telephone numbers of the insurance companies are found in this FAQ:
http://www.tankinlian.com/faq/termd.html
Alternatively, you can ask a bank or stockbroker to find a government bond that will mature in 5 years time. You will probably get a yield of about 3%. Over 5 years, the gain should be about 16%.
I wish to seek your advice on the best return single premium endownment for 5 years. This sum of money is mean for housing which i intend to use it after 5 years.
My objective is to treat the single premium endowment as a form long term fixed deposit for high return as compare to the current fixed deposit rate. Thank you for your advice.
REPLY
You have to do some work. Call the telphone numbers of the life insurance company directly. Tell them that you have $x and wish to have a 5 year single premium endowment. Let me quote the best terms to you.
You can show me the figures (of guaranteed and non-guaranteed benefit). I will help you to make a decision. The telephone numbers of the insurance companies are found in this FAQ:
http://www.tankinlian.com/faq/termd.html
Alternatively, you can ask a bank or stockbroker to find a government bond that will mature in 5 years time. You will probably get a yield of about 3%. Over 5 years, the gain should be about 16%.
Should MAS ban high cost products?
Someone posted a comment about an ILP product that gives poor cash value after two years. He asked, "Why doesn't MAS (i.e. Monetary Authority of Singapore) ban this type of product, or set some limit on the commission that can be paid to the agent?"
It seems that many consumers are not aware about the high charges of an ILP product, and now learn to their regret that so much of their savings is taken away from them.
If you are in this category, and you felt that the insurance agent has not been fair in disclosing this important point to you, should write to MAS. If enough people write to MAS, maybe, they will take actions to protect the interest of consumers.
Alternatively, you should write a letter of complaint to the newspapers and wait for MAS to reply to your letter.
It seems that many consumers are not aware about the high charges of an ILP product, and now learn to their regret that so much of their savings is taken away from them.
If you are in this category, and you felt that the insurance agent has not been fair in disclosing this important point to you, should write to MAS. If enough people write to MAS, maybe, they will take actions to protect the interest of consumers.
Alternatively, you should write a letter of complaint to the newspapers and wait for MAS to reply to your letter.
High charges of ILP policy
There are many stories about consumers who bought the ILP policy from several insurance conmpanies and agents, only to find the cash value to be so low after paying permiums for two years. Read this website to learn about the high cost:
http://www.askdrmoney.com/Ins_ILP_RP.htm
According to this survey by Dr. Money, the insurance proeuct can take away 19 months of your savings. If you save $300 a month, you will lose more than $5,000. It is a lot of hard work for you to earn this money. It is taken away to pay the insurance agent and the marketing cost of the insurance company.
You should avoid these high cost insurance products. Please help to tell your friends and relatives. They should avoid ILP policies sold by insurance agents.
It is better for you to invest in a low cost fund, such as the STI exchange traded fund (i.e. managed by StateStreets).
You can also wait for a few months, and invest in the Wealth Accumulator which will be introduced later this year. Read this FAQ:
http://www.tankinlian.com/faq/low.html
http://www.askdrmoney.com/Ins_ILP_RP.htm
According to this survey by Dr. Money, the insurance proeuct can take away 19 months of your savings. If you save $300 a month, you will lose more than $5,000. It is a lot of hard work for you to earn this money. It is taken away to pay the insurance agent and the marketing cost of the insurance company.
You should avoid these high cost insurance products. Please help to tell your friends and relatives. They should avoid ILP policies sold by insurance agents.
It is better for you to invest in a low cost fund, such as the STI exchange traded fund (i.e. managed by StateStreets).
You can also wait for a few months, and invest in the Wealth Accumulator which will be introduced later this year. Read this FAQ:
http://www.tankinlian.com/faq/low.html
Keen interest in Wealth Accumulator
Hi Mr. Tan,
I follow your blog, and there's more and more story about ILP charges. Sadly, I also have ILP policy with this "P" insurance company. When I signed the policy, I thought that's the only insurance model I can have with some value return. As for term insurance, initially, I thought it's not good since the policy doesn't return any value at the end.
But, as I read your blog, I understand that "Buy Term and Invest the Rest" might be a better model. However. it's too late for me, as the ILP has been signed about 1.5 years ago, and as you already know, the cash value is so little at this time. As I will still be charged by premium cost for another 1-2 years (which might be around 50%), do you think I should surrender this policy now?
Since current ILP model mostly doesn't give proper benefit to customer, and only gives heavy benefit to insurance agent, why don't the government ban this insurance model? Or at least make some regulation for the size of the initial premium charge? Government has done similar to the Sales Charge of Unit Trust, which only allows 3% sales charge to the Unit Trust (if it's invested using CPF), which as expected, followed by the reduction of sales charge by almost all institution or bank.
I look forward to your "Wealth Accumulator" product. Hope it will be an "innovation" that will be followed by other insurance company to provide better benefit for customer. May I know how you will realize/market this product?
REPLY
If you are willing to cut loss, you can terminate the ILP policy now and save on the high charges for the next few years. I hope to get a new insurance company to offer the Wealth Accumulator product later in 2008.
Read this FAQ to learn about the Wealth Accumulator:
http://www.tankinlian.com/faq/low.html
I follow your blog, and there's more and more story about ILP charges. Sadly, I also have ILP policy with this "P" insurance company. When I signed the policy, I thought that's the only insurance model I can have with some value return. As for term insurance, initially, I thought it's not good since the policy doesn't return any value at the end.
But, as I read your blog, I understand that "Buy Term and Invest the Rest" might be a better model. However. it's too late for me, as the ILP has been signed about 1.5 years ago, and as you already know, the cash value is so little at this time. As I will still be charged by premium cost for another 1-2 years (which might be around 50%), do you think I should surrender this policy now?
Since current ILP model mostly doesn't give proper benefit to customer, and only gives heavy benefit to insurance agent, why don't the government ban this insurance model? Or at least make some regulation for the size of the initial premium charge? Government has done similar to the Sales Charge of Unit Trust, which only allows 3% sales charge to the Unit Trust (if it's invested using CPF), which as expected, followed by the reduction of sales charge by almost all institution or bank.
I look forward to your "Wealth Accumulator" product. Hope it will be an "innovation" that will be followed by other insurance company to provide better benefit for customer. May I know how you will realize/market this product?
REPLY
If you are willing to cut loss, you can terminate the ILP policy now and save on the high charges for the next few years. I hope to get a new insurance company to offer the Wealth Accumulator product later in 2008.
Read this FAQ to learn about the Wealth Accumulator:
http://www.tankinlian.com/faq/low.html
Disappointing service at Business Center
Dear Mr. Tan,
Firstly, I will like thank you for your blog, which Ibelieve is beneficial to consumers.
I have visited a business centre of an insurance company on two occasions. Both times, the business consultants wanted to sell the idea of Life insurance to me. They looked disappointed when I insisted on a low cost term policy instead.
The moral of the story is;
1) Even though the consultants are earning mostly afixed salary (a small component in commission), it is difficult to be objective when commissions no matter how small or targets are involved.
2) Consumers have to take some responsibility in educating themselves and study the product before purchasing any products. It is difficult to obtain objective advice.
REPLY
Thank you for your feedback. I hope to get a new life insurance company to offer low cost insurance and low cost investment funds. They can be bought over the telephone or its office. This will happen later in 2008.
Firstly, I will like thank you for your blog, which Ibelieve is beneficial to consumers.
I have visited a business centre of an insurance company on two occasions. Both times, the business consultants wanted to sell the idea of Life insurance to me. They looked disappointed when I insisted on a low cost term policy instead.
The moral of the story is;
1) Even though the consultants are earning mostly afixed salary (a small component in commission), it is difficult to be objective when commissions no matter how small or targets are involved.
2) Consumers have to take some responsibility in educating themselves and study the product before purchasing any products. It is difficult to obtain objective advice.
REPLY
Thank you for your feedback. I hope to get a new life insurance company to offer low cost insurance and low cost investment funds. They can be bought over the telephone or its office. This will happen later in 2008.
Dollar Averaging
Hi Mr Tan,
I have an investment link policy. My advisor has advised me to invest on a yearly basis to enjoy better allocation rates (i.e. at the moment, I am doing regularly investment on a yearly basis).
My question is for dollar cost averaging to work best (i.e. for long term investment), it is advisable to invest on yearly or monthly basis? You advice is appreciated.
REPLY
Both methods should produce neutral results. The effect of dollar averaging depends on the level of the market at the time of each investment
It is more important for you to buy an ILP that invest 100% of your annual or monthly premium. Do not buy an ILP that takes away two years of your savings.
Read this FAQ:
http://www.tankinlian.com/faq/ilp.html
I have posted two cases in my blog of policyholders who were shocked to discover that after investing over $2000 for 2 years, they cash value is less than $400 today. You should not fall into the same trap.
I have an investment link policy. My advisor has advised me to invest on a yearly basis to enjoy better allocation rates (i.e. at the moment, I am doing regularly investment on a yearly basis).
My question is for dollar cost averaging to work best (i.e. for long term investment), it is advisable to invest on yearly or monthly basis? You advice is appreciated.
REPLY
Both methods should produce neutral results. The effect of dollar averaging depends on the level of the market at the time of each investment
It is more important for you to buy an ILP that invest 100% of your annual or monthly premium. Do not buy an ILP that takes away two years of your savings.
Read this FAQ:
http://www.tankinlian.com/faq/ilp.html
I have posted two cases in my blog of policyholders who were shocked to discover that after investing over $2000 for 2 years, they cash value is less than $400 today. You should not fall into the same trap.
ILP policy takes away most of the premiums
Dear Mr. Tan,
I've bought an ILP policy. My premiums are $1200 per year and have paid it for two years. I has cash value of about $310 now. The sum insured is 100k. It is a yearly premium and the third one is going to be due soon.
After reading about the charges and feasibility of ILPs, I'm sceptical that I should keep this policy. Would you advise me to give it up or continue with it?
REPLY
I suggest that you ask the insurance company about the charges for the next three years, i.e. what percentage of your premium will be invested. If the charges are small, it is probably better for you to continue the policy, as you have already incurred most of the front end charges.
It is quite sad that an insurance company can take away so much of a person's savings. You should tell your family and friends to avoid this type of policy in the future.
I intend to get a new life insurance company to introduce an ILP that has no front end charge. 100% of the premium will be invested. Tentativelyly, this is called the Wealth Accumulator.
Read this FAQ:
http://www.tankinlian.com/faq/low.html
I've bought an ILP policy. My premiums are $1200 per year and have paid it for two years. I has cash value of about $310 now. The sum insured is 100k. It is a yearly premium and the third one is going to be due soon.
After reading about the charges and feasibility of ILPs, I'm sceptical that I should keep this policy. Would you advise me to give it up or continue with it?
REPLY
I suggest that you ask the insurance company about the charges for the next three years, i.e. what percentage of your premium will be invested. If the charges are small, it is probably better for you to continue the policy, as you have already incurred most of the front end charges.
It is quite sad that an insurance company can take away so much of a person's savings. You should tell your family and friends to avoid this type of policy in the future.
I intend to get a new life insurance company to introduce an ILP that has no front end charge. 100% of the premium will be invested. Tentativelyly, this is called the Wealth Accumulator.
Read this FAQ:
http://www.tankinlian.com/faq/low.html
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