Dear Mr. Tan,
I am 58 years old still and is still working. I have a retirement account in my CPF. Should I purchase an annuity using cash or should I use my retirement account?
REPLY
It is better to keep your minimum sum in the CPF as it earns a better return. You can buy the life annuity using cash. Read this FAQ:
http://www.tankinlian.com/faq/seniors.html
Tuesday, May 27, 2008
Dubious practices in respect of Terminal Bonus
Dear Mr. Tan,
The article "Salutary bonus lessons from the UK" (Straits Times, 28 May 2008) highlighted that "onerous benefit guarantees were a big factor behind the closure of Equitable Life...".
You have raised some good questions on the risks of terminal bonuses. The declaration of unsustainable annual bonuses was indeed a key factor for the collapse of Equitable Life. However, Equitable life also adopted "dubious practices" in respect of "terminal" or "final" bonuses, and failed to set aside adequate technical provisions for terminal bonuses.
These imprudent practices are highlighted in a BBC article entitled "Where Equitable Life went wrong", which provides a more comprehensive picture of the Equitable Life case. http://news.bbc.co.uk/2/hi/business/3547441.stm
SH
REPLY
The bonus rates declared by NTUC Income in the past were sustainable. In the early 1990s, they were calculated based on a long term yield of 6.5%. In the late 1990s and early 200s, there were reduced to reflect a long term yield of 5.25%. The actual yield earned during the past 10 years was 7.8%.
At any point of time, the bonus rates were adjusted (upwards or downwards) to reflect the projected long term yield of the fund. This projected yield is based on the mix of investments that is prudent for the fund.
It is possible for a life company to declare unsustainable bonus rates. For example, if the bonus rates were calculated based on a projected yield of 10% in today's environment in Singapore, it would be considered to be unsustainable.
NTUC Income did not declare unsustainable bonus rates in past years. In fact, it had been quite conservative in calculating the annual bonus. It kept 20% of the each year's bonus aside, to be declared as a special bonus payable on maturity and claim. This helped to provide a safety margin.
The article "Salutary bonus lessons from the UK" (Straits Times, 28 May 2008) highlighted that "onerous benefit guarantees were a big factor behind the closure of Equitable Life...".
You have raised some good questions on the risks of terminal bonuses. The declaration of unsustainable annual bonuses was indeed a key factor for the collapse of Equitable Life. However, Equitable life also adopted "dubious practices" in respect of "terminal" or "final" bonuses, and failed to set aside adequate technical provisions for terminal bonuses.
These imprudent practices are highlighted in a BBC article entitled "Where Equitable Life went wrong", which provides a more comprehensive picture of the Equitable Life case. http://news.bbc.co.uk/2/hi/business/3547441.stm
SH
REPLY
The bonus rates declared by NTUC Income in the past were sustainable. In the early 1990s, they were calculated based on a long term yield of 6.5%. In the late 1990s and early 200s, there were reduced to reflect a long term yield of 5.25%. The actual yield earned during the past 10 years was 7.8%.
At any point of time, the bonus rates were adjusted (upwards or downwards) to reflect the projected long term yield of the fund. This projected yield is based on the mix of investments that is prudent for the fund.
It is possible for a life company to declare unsustainable bonus rates. For example, if the bonus rates were calculated based on a projected yield of 10% in today's environment in Singapore, it would be considered to be unsustainable.
NTUC Income did not declare unsustainable bonus rates in past years. In fact, it had been quite conservative in calculating the annual bonus. It kept 20% of the each year's bonus aside, to be declared as a special bonus payable on maturity and claim. This helped to provide a safety margin.
Collective Protest - set aside for the time being
I discussed with NTUC Income's management to seek an amicable solution that will be in the best interest of policyholders and the reputation of NTUC Income. I communicated two concerns on behalf of the policyholders:
1. The restucture of the bonus system results in a lower annual bonus distributed yearly to policyholders, to be compensated by a higher rate of special bonus (which is not guaranteed). I ask that there should be satisfactory assurance on the payment of the special bonus on surrenders and claims, so that the policyholders will not lose out on the restructuring of the bonus.
2. In some past years, policyholders received a bonus cut (compared to what was illustrated at the point of sale) when the investment yield was low. As NTUC Income had earned a good yield of 7.8% earned during the past 10 years, I suggest that the shortfall in the bonus for the poor years be restored as early as possible, subject to financial solvency. I pointed out that the actual yield is higher than the projected yield at the point of sale.
To allow more time to find a settlement, I indicated that I will set aside the Collective Protest for the time being. I hope that an amicable solution can be found, so that the protest will not be necessary.
The Straits Times reported that Income had issued a statement that the old bonus structure is unsustainable. I disagree. For policies taken in the earlier years, they were based on a projected yield of 6.5%. For policies issued in the later years, they were based on a projected yield of 5.25%. These were realistic estimates of the future yield made at that time. The actual yield earned over the last 10 years turned out to be higher, at 7.8%.
Under the old bonus system adopted by NTUC Income, the sustainable rate of bonus is not a rate that is fixed. It is a rate that is adjusted from time to time, to reflect any change in the projected yield. If the yield goes up, the rate of bonus is adjusted upwards. If it comes down, it is adjusted downwards.
During the 1970s and 1980s, the bonus rates were adjusted upwards very few years. During the late 1990s, in the low interest rate environment, the bonus rates were adjusted downwards. In recent years, there is a case for the bonus to be adjusted upwards.
I believe that this system is fairer to policyholders and allows them to enjoy a higher vested bonus each year. This increases their cash value and reduces their loss, if they have to terminate the policies in the earlier years.
Tan Suee Chieh said that my change of tone was probably due to a better appreciation of issues behind the bonus structure. This is not the case - and I had told Tan Suee Chieh about it earlier. I had understood the issues earlier and had concerns about the change. My wish now is to find a solution that is in the best interests of the policyholders and the reputation of NTUC Income.
Some policyholders have asked me to insist that they be given the right to choose between the new and old bonus structure. I hope that this is possible and believe that it is the best option.
If NTUC Income's managment is convinced that the new bonus structure is likely to give a better return to the policyholders, they should be able to convince most policyholders to move to the new structure.
1. The restucture of the bonus system results in a lower annual bonus distributed yearly to policyholders, to be compensated by a higher rate of special bonus (which is not guaranteed). I ask that there should be satisfactory assurance on the payment of the special bonus on surrenders and claims, so that the policyholders will not lose out on the restructuring of the bonus.
2. In some past years, policyholders received a bonus cut (compared to what was illustrated at the point of sale) when the investment yield was low. As NTUC Income had earned a good yield of 7.8% earned during the past 10 years, I suggest that the shortfall in the bonus for the poor years be restored as early as possible, subject to financial solvency. I pointed out that the actual yield is higher than the projected yield at the point of sale.
To allow more time to find a settlement, I indicated that I will set aside the Collective Protest for the time being. I hope that an amicable solution can be found, so that the protest will not be necessary.
The Straits Times reported that Income had issued a statement that the old bonus structure is unsustainable. I disagree. For policies taken in the earlier years, they were based on a projected yield of 6.5%. For policies issued in the later years, they were based on a projected yield of 5.25%. These were realistic estimates of the future yield made at that time. The actual yield earned over the last 10 years turned out to be higher, at 7.8%.
Under the old bonus system adopted by NTUC Income, the sustainable rate of bonus is not a rate that is fixed. It is a rate that is adjusted from time to time, to reflect any change in the projected yield. If the yield goes up, the rate of bonus is adjusted upwards. If it comes down, it is adjusted downwards.
During the 1970s and 1980s, the bonus rates were adjusted upwards very few years. During the late 1990s, in the low interest rate environment, the bonus rates were adjusted downwards. In recent years, there is a case for the bonus to be adjusted upwards.
I believe that this system is fairer to policyholders and allows them to enjoy a higher vested bonus each year. This increases their cash value and reduces their loss, if they have to terminate the policies in the earlier years.
Tan Suee Chieh said that my change of tone was probably due to a better appreciation of issues behind the bonus structure. This is not the case - and I had told Tan Suee Chieh about it earlier. I had understood the issues earlier and had concerns about the change. My wish now is to find a solution that is in the best interests of the policyholders and the reputation of NTUC Income.
Some policyholders have asked me to insist that they be given the right to choose between the new and old bonus structure. I hope that this is possible and believe that it is the best option.
If NTUC Income's managment is convinced that the new bonus structure is likely to give a better return to the policyholders, they should be able to convince most policyholders to move to the new structure.
Risk of high terminal bonus
Many insurance companies introduce life insurance policies with low annual bonus and high terminal bonus.
If the policyholder surrender the policies before the terminal bonus is payable, usually during the first 20 years, they will get a low cash value. The insurance company makes a big profit.
The policyholder is likely to get a cash value (on surrender) that is lower than the total premiums that was paid. The policyholder usually gets a poor deal and has to bear a high cost for the insurance protection, compared to the alternative of buying a low cost term insurance.
Even if the policyholder is able to wait a long time (say, 20 years or longer) for the terminal bonus to become payable, the policyholder still faces the risk that the terminal bonus (which is not guaranteed) may be reduced in the future. Policyholders of insurance companies have suffered a big loss in payout due to a severe reduction in terminal bonus on a few occasions in past years.
NTUC Income used to declare a high rate of annual bonus from its annual surplus, consistent with the long term yield of the fund. This allows the policy to accumulate a high cash value and reach a breakeven point (i.e. the cash value equals the premiums paid) as early as possible.
As the long term yield changes, the rate of annual bonus is adjusted (usually upwards, but sometimes downwards).
NTUC Income has now decided to change the bonus structure to declare a lower rate of annual bonus and to increase the rate of special bonus. This affects 310,000 policies and is stated to be in line with "industry practice". The bad aspect of this industry practice is that the insurance company can to pay out a lower cash value and make a bigger profit on a surrendered policy - although NTUC Income has stated that this is not their intent.
NTUC Income has said that they will increase the terminal bonus for surrenders and claims, so that the payout to the policyholder will be not less than the old bonus structure.
It is important for each policyholder to know the answers to the following questions:
1. What is the rate of terminal bonus payable on each of their policy for each year from now until the maturity date or for the whole of life. Under this new system, a different rate of terminal bonus will apply for each type of policy, each year of entry, each year of termination and the type of termination (i.e. surrender or claim).
2. Will the rates of terminal bonus be published for all policies, so that each policyholder is able to see not only the rates that will apply to each of his policy but to all other policies as well?
3. How will the rates of terminal bonus be changed in the future, to reflect the change in the long term yield of the fund and to ensure that all the policyholders are treated fairly?
It is important for each policyholder to get sufficient assurance that their interest will be protected by the change in bonus structure. This requires full disclosure of the new rates of terminal bonus and the principles guiding the changes in these rates in the future.
It is best for each policyholder to be given an individual choice of staying with the old bonus structure or move to the new structure.
If the policyholder surrender the policies before the terminal bonus is payable, usually during the first 20 years, they will get a low cash value. The insurance company makes a big profit.
The policyholder is likely to get a cash value (on surrender) that is lower than the total premiums that was paid. The policyholder usually gets a poor deal and has to bear a high cost for the insurance protection, compared to the alternative of buying a low cost term insurance.
Even if the policyholder is able to wait a long time (say, 20 years or longer) for the terminal bonus to become payable, the policyholder still faces the risk that the terminal bonus (which is not guaranteed) may be reduced in the future. Policyholders of insurance companies have suffered a big loss in payout due to a severe reduction in terminal bonus on a few occasions in past years.
NTUC Income used to declare a high rate of annual bonus from its annual surplus, consistent with the long term yield of the fund. This allows the policy to accumulate a high cash value and reach a breakeven point (i.e. the cash value equals the premiums paid) as early as possible.
As the long term yield changes, the rate of annual bonus is adjusted (usually upwards, but sometimes downwards).
NTUC Income has now decided to change the bonus structure to declare a lower rate of annual bonus and to increase the rate of special bonus. This affects 310,000 policies and is stated to be in line with "industry practice". The bad aspect of this industry practice is that the insurance company can to pay out a lower cash value and make a bigger profit on a surrendered policy - although NTUC Income has stated that this is not their intent.
NTUC Income has said that they will increase the terminal bonus for surrenders and claims, so that the payout to the policyholder will be not less than the old bonus structure.
It is important for each policyholder to know the answers to the following questions:
1. What is the rate of terminal bonus payable on each of their policy for each year from now until the maturity date or for the whole of life. Under this new system, a different rate of terminal bonus will apply for each type of policy, each year of entry, each year of termination and the type of termination (i.e. surrender or claim).
2. Will the rates of terminal bonus be published for all policies, so that each policyholder is able to see not only the rates that will apply to each of his policy but to all other policies as well?
3. How will the rates of terminal bonus be changed in the future, to reflect the change in the long term yield of the fund and to ensure that all the policyholders are treated fairly?
It is important for each policyholder to get sufficient assurance that their interest will be protected by the change in bonus structure. This requires full disclosure of the new rates of terminal bonus and the principles guiding the changes in these rates in the future.
It is best for each policyholder to be given an individual choice of staying with the old bonus structure or move to the new structure.
Investing in unit trusts and shares
I helped my three children to open an account with an online portal to invest in unit trust and a stockbroker to invest in shares. I will transfer some of my shares, REITS and unit trusts to them.
I want them to learn how to manage their own investments. This will encourage them to invest their own savings from their monthly salaries in shares and low cost unit trusts. These products, have low cost and are transparent.
During the visit to the online portal and stockbroker, they are given a hands-on guidance on how to manage their investments through the website. This is their first personal experience on investments.
They will learn how to take care of their investments, instead of relying on advisers who charges high fees that are not properly disclosed to the investor. I want them to avoid investing in high cost investment-linked plans that takes away two years of their savings.
I wish to encourage young people to visit an online portal (i.e. Fundsupermart, DollarDex, POEMS, DBS Vickers) to open an account and learn how to manage your investments through the portal.
I hope that parents with adequate savings, can can transfer some cash or shares to your children to start their personal investment accounts.
I want them to learn how to manage their own investments. This will encourage them to invest their own savings from their monthly salaries in shares and low cost unit trusts. These products, have low cost and are transparent.
During the visit to the online portal and stockbroker, they are given a hands-on guidance on how to manage their investments through the website. This is their first personal experience on investments.
They will learn how to take care of their investments, instead of relying on advisers who charges high fees that are not properly disclosed to the investor. I want them to avoid investing in high cost investment-linked plans that takes away two years of their savings.
I wish to encourage young people to visit an online portal (i.e. Fundsupermart, DollarDex, POEMS, DBS Vickers) to open an account and learn how to manage your investments through the portal.
I hope that parents with adequate savings, can can transfer some cash or shares to your children to start their personal investment accounts.
Compassionate Fines
Someone once said that Singapore is a “fine” city. We have a fine for littering, a fine for jay-walking, a fine for late payment of taxes, a fine for traffic offences and a fine for paying a fine late.
It is all right to have fines to impose discipline on the people. This is how Singapore gets the reputation of being a clean, orderly and safe city. It has its advantages.
However, in their zeal, the authorities may forget that their manner of imposing the fine can cause additional unintended hardship.
Read more about my article in the Online Citizen.
http://www.theonlinecitizen.com/
It is all right to have fines to impose discipline on the people. This is how Singapore gets the reputation of being a clean, orderly and safe city. It has its advantages.
However, in their zeal, the authorities may forget that their manner of imposing the fine can cause additional unintended hardship.
Read more about my article in the Online Citizen.
http://www.theonlinecitizen.com/
Collective Protect - Action
If you wish to send more signature, you can continue to do so. You can mail to me, or send it to kinlian@gmail.com.
You can get the Collective Protest from from: http://www.tankinlian.com/faq/collectiveprotest.html
You can get the Collective Protest from from: http://www.tankinlian.com/faq/collectiveprotest.html
Duplicative coverage
COMMENT POSTED IN MY BLOG
I have a friend who gave up Medishield because she has company medical benefit.At age 50, she contracted breast cancer, the company medical paid for her treatment. She left her job at 55, and because of her breast cancer, though in remission, she is not able to get a Shield Plan. Now she contracted liver cancer and is not covered by any medical insurance. So whether to insure the Shield Plan when employed with medical benefit or not, is really something to think much harder.
.said
REPLY
The coverage for medical expenses is already provided by the company. The insurance adviser is advising these employees to buy an Enhanced plan (costing $200 or more a year) just to cover the small risk of not getting continuing insurance after leaving a job. This cost is too high for the risk.
Soon, there will be a cheaper way to get this type of protection. For example, the company medical plan can be taken with an insurance company that offers the continuity of cover.
The employees do not have to buy their personal Shield coverage. They can cancel their existing coverage. This will save $200 or more yearly for the employee. The saving can be invested to get additional money for retirement (instead of being wasted on a cover that is mostly unnecessary).
I have a friend who gave up Medishield because she has company medical benefit.At age 50, she contracted breast cancer, the company medical paid for her treatment. She left her job at 55, and because of her breast cancer, though in remission, she is not able to get a Shield Plan. Now she contracted liver cancer and is not covered by any medical insurance. So whether to insure the Shield Plan when employed with medical benefit or not, is really something to think much harder.
.said
REPLY
The coverage for medical expenses is already provided by the company. The insurance adviser is advising these employees to buy an Enhanced plan (costing $200 or more a year) just to cover the small risk of not getting continuing insurance after leaving a job. This cost is too high for the risk.
Soon, there will be a cheaper way to get this type of protection. For example, the company medical plan can be taken with an insurance company that offers the continuity of cover.
The employees do not have to buy their personal Shield coverage. They can cancel their existing coverage. This will save $200 or more yearly for the employee. The saving can be invested to get additional money for retirement (instead of being wasted on a cover that is mostly unnecessary).
Logic9 (Sudoku)
Sudoku is a popular game. It appears daily in Today paper and in MyPaper. It appears in the Sunday Times.
You can learn the tips of how to solve the Sudoku puzzle at all levels, including the difficult ones, from:
http://www.tankinlian.com/logic9/
Look for Tips to Play Logic9. You can also practice these tips by Play.
This link is also available from the right panel under the heading Logic9 (Sudoku).
You can learn the tips of how to solve the Sudoku puzzle at all levels, including the difficult ones, from:
http://www.tankinlian.com/logic9/
Look for Tips to Play Logic9. You can also practice these tips by Play.
This link is also available from the right panel under the heading Logic9 (Sudoku).
Bad experience with insurance advisers
Dear Mr Tan,
I had a bad experience with my previous financial adviser who asked me to buy a expensive policy. I have lapse my policy as I find it too expensive and not practical.
I am a 28 years old, single. I do not want to spend too much in paying for higher premium. I know that Term Insurance is the most ideal. Which is better - Level or Decreasing Term?
My financial adviser recommended me a Term Insurance cover up to age of 65. I will be covered after 65 without paying premium. The premium is about $108.00 per month. The sum assured is $60,000. Is it good?
I have a NTUC M Incomeshield (previous known as MediShield) policy. My current financial adviser has advised me to top up $120 per year to enhance the coverage. I am also covered under my company insurance.
REPLY
It is best for you to ask a few insurance companies to quote to you the premium for term insurance. Read this FAQ:
http://www.tankinlian.com/faq/termd.html
Here are some benchmark rates for your reference:
http://www.tankinlian.com/faq/benchmark.html
The adviser is dishonest. He or she is selling a high cost whole life policy with premium payable up to age 65, and telling you that it is a low cost term insurance. If you buy a decreasing term insurance, you need to pay a much smaller premium.
As you are covered under your company scheme, there is no need for you to buy the enhanced plan.
You can lodge a complaint against these two advisers for giving you bad advice.
I had a bad experience with my previous financial adviser who asked me to buy a expensive policy. I have lapse my policy as I find it too expensive and not practical.
I am a 28 years old, single. I do not want to spend too much in paying for higher premium. I know that Term Insurance is the most ideal. Which is better - Level or Decreasing Term?
My financial adviser recommended me a Term Insurance cover up to age of 65. I will be covered after 65 without paying premium. The premium is about $108.00 per month. The sum assured is $60,000. Is it good?
I have a NTUC M Incomeshield (previous known as MediShield) policy. My current financial adviser has advised me to top up $120 per year to enhance the coverage. I am also covered under my company insurance.
REPLY
It is best for you to ask a few insurance companies to quote to you the premium for term insurance. Read this FAQ:
http://www.tankinlian.com/faq/termd.html
Here are some benchmark rates for your reference:
http://www.tankinlian.com/faq/benchmark.html
The adviser is dishonest. He or she is selling a high cost whole life policy with premium payable up to age 65, and telling you that it is a low cost term insurance. If you buy a decreasing term insurance, you need to pay a much smaller premium.
As you are covered under your company scheme, there is no need for you to buy the enhanced plan.
You can lodge a complaint against these two advisers for giving you bad advice.
Questions on Life Annuity
Dear Sir,
After reading through your website, I have some doubts about the benefits of annuities.
1. Are the monthly payouts inflation proofed? If not S$1 is not worth so much in 20+ years.
2. Are there any tax benefits?
3. Are there any early cancellation costs?
4. How does the return compare with say STI ETF's over 20years?
5. Funds are locked in?
6. What are the exact costs as compared to say holding Equities for the same period?
It seems not to be so easy for the average person to gauge the exact returns over the life of the annuity. In such case only the sweet parts are mentioned to attract allay peoples fears. I would appreciate your view on my comments.
REPLY
My views are expressed in this FAQ:
http://www.tankinlian.com/faq/life.html
After reading through your website, I have some doubts about the benefits of annuities.
1. Are the monthly payouts inflation proofed? If not S$1 is not worth so much in 20+ years.
2. Are there any tax benefits?
3. Are there any early cancellation costs?
4. How does the return compare with say STI ETF's over 20years?
5. Funds are locked in?
6. What are the exact costs as compared to say holding Equities for the same period?
It seems not to be so easy for the average person to gauge the exact returns over the life of the annuity. In such case only the sweet parts are mentioned to attract allay peoples fears. I would appreciate your view on my comments.
REPLY
My views are expressed in this FAQ:
http://www.tankinlian.com/faq/life.html
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