1. Does a life insurance policy provide good value for a person to plan for the future?
Insurance agents like to sell endowment and whole life policies, including variations of these policies, to consumers as a way to plan for their future. These policies offer poor value to the consumer.
The typical cost of an endowment or whole life policy is a reduction of 4% to 4.5% in the yield.
If the long term investment yield is 7%, a reduction of 4.5% gives you a net yield of 2.5%. This net yield is unsatisfactory, as it is not likely to cover the rate of inflation. You need to aim for a higher yield.
If you select a low cost insurance fund, the reduction in yield should be only 1%. This allows you to get a net yield of 6%.
If you are investing for 20 years, a difference of 3.5% in the yield (i.e. 2.5% from a life insurance policy compared to 6% from a low cost product) accumulates to 44% at the end of 20 years.
If you invest for 30 years, the difference is 80%,
For example, instead of getting cash value of $100,000 at the end of 20 years from a whole life policy, you could get $144,000 (i.e. 44% more) by buying Term insurance and investing the remaining savings in a low cost investment fund.
2. Why does the life insurance policy cost so much, i.e. a reduction of 4.5% in yield?
The reduction in yield comprise of:
a) Upfront marketing cost 1%
b) Expense ratio and mortality 1.5%
c) Guarantee penalty 2%
Total 4.5%
The upfront marketing cost is incurred in the advertising, marketing and commission to the agent. This could amount to 2 years of your savings. It is an upfront charge and is taken away from your savings during the initial few years.
The expense ratio is the charge for investing your savings and administering your account. The mortality charge is for providing the death, accident or critical illness cover.
The guarantee penalty is the cost to the consumer of getting the guarantee in the life insurance policy. The insurance company has to invest a large proportion (about 70%) of the investments in low yielding bonds to provide the guarantee. This has a significant impact on the yield (compared to the yield that can be earned from a diversified equity fund).
3. How can I get a higher return for my long term savings?
You can get a higher return as follows:
a) Buy a Decreasing Term to provide the insurance cover
b) Invest the remainder of your savings in a low cost investment fund
c) Invest in the fund directly, to avoid the upfront marketing expense
The reduction in yield to provide the insurance cover and expense ratio is likely to be about 1%.
If the investment fund can earn 7%, you can get a net yield is about 6%.
4. Is it risky to invest in an equity fund?
If you are investing in a diversified investment fund over the long term, say 10 years or longer, the risk will be reduced considerably.
By investing in a diversified fund comprising of 30 or more good quality investments (e.g. the largest companies in the stock market), you are diversifying your risk. A few investments may turn bad over the years, but they will be more than compensated by the good investments in the fund.
If you are investing over the long term, you will be able to get an average return from the good and bad years. In a good year, you may be able to earn more than 20%. In a bad year, you can suffer a loss. Over the long term, you will be able to get an average market rate of return.
The average return from the stock market over the past 30 years is more than 10%. For the future, the return is likely to be lower (due to global economic factors and other reasons), but the average is still likely to be quite attractive. Many experts predict an average return of 6% to 8%.
5. I have already invested most of my savings in a several high cost life insurance policies. Is it advisable for me to terminate the policies and invest in a low cost investment fund now?
First, you have to find an insurance company that is able to provide you with low cost Decreasing Term insurance and in a low cost investment fund with no upfront charge.
If you switch your investment now, you can benefit from the following:
a) Lower expense ratio
b) Higher return from the investment fund (i.e. no guarantee penalty)
The difference in yield could be 2.5%. Over the next 20 years, you could earn 27% more.
You have already suffered the upfront cost (which could amount to two years of your savings), but it is better to cut loss now and recover your loss from the higher return in the future.
The potential higher yield from the investment fund is not guaranteed and comes with a higher risk (i.e. avoid the guarantee penalty).
In my view, this risk is reduced considerably through diversification and a long term time horizon. But, you have to understand the risk clearly, before you switch your investment from the life insurance policy.
6. Can you recommend an insurance company that can provide low cost insurance cover and a low cost investment fund?
I am now working as a consultant to a relatively new life insurance company. I hope that this new company will be able to offer these good value products towards later in 2008.
Tan Kin Lian
Sunday, April 13, 2008
Saturday, April 12, 2008
Practical lesson in customer service
I waited a long time to be served at the check-in counter at Changi Airport.
I told the customer service officer, "Are you X? I waited an unusually long time for you to check-in the passenger in front of me. After that, you were chatting with your colleague at the next counter before you attended to me. I am angry at this slow service. I will be lodging a complaint."
X said, "The delay was caused by the system hang. I apologise". X then attended to me speedily, efficiently and courteously. His face light up when I said, "Thank you. I have decided not to lodge the complaint". I am sure that X had a practical lesson in customer service that he will remember for a long time.
Lesson: Never chat with a colleauge while at work. Pay attention to your customer.
I told the customer service officer, "Are you X? I waited an unusually long time for you to check-in the passenger in front of me. After that, you were chatting with your colleague at the next counter before you attended to me. I am angry at this slow service. I will be lodging a complaint."
X said, "The delay was caused by the system hang. I apologise". X then attended to me speedily, efficiently and courteously. His face light up when I said, "Thank you. I have decided not to lodge the complaint". I am sure that X had a practical lesson in customer service that he will remember for a long time.
Lesson: Never chat with a colleauge while at work. Pay attention to your customer.
Inflated injury claims
Dear Mr Tan
I assume you must have read the article in the Sunday Times on inflated car insurance claims. When you were at NTUC you implemented a rule whereby all car insurance policies at NTUC requires the insured to agree to use only workshops designated by NTUC. I believe that also covered all claims by 3rd parties. It was a good measure but not popular with many insurance companies who decided not to follow your footsteps. I wondered why.
It seemed that insurance companies when they met with 3rd party claims, they are very eager to settle the claim even when they are inflated. The excuse they give is that they do not wish to undergo a long legal process so it is easier to settle even if the claim is many times higher than what is really required to repair the car. Is this the case?
I have had experience of this nature before but the insurance company is very evasive when I question them. They are also very unwilling to disclose the amount the claim they have settled. Why is this so?
The end result is that I end up giving up my no claim bonus. Is there something we can do to nip this problem. I have a healthy suspicion that the insurance companies actually encourage this practise. Your views would be appreciated
REPLY
Here are my views. This is a difficult problem. It is difficult to solve.
The party that can solve it is the Government.They have to pass a law to make sure that people who cheat by inflating claims are severely dealt with. If the Government does not want to pass a law, then the insurance companies will continue to face difficulty in dealing with this matter. And the consumers will have to pay higher premiums.
I assume you must have read the article in the Sunday Times on inflated car insurance claims. When you were at NTUC you implemented a rule whereby all car insurance policies at NTUC requires the insured to agree to use only workshops designated by NTUC. I believe that also covered all claims by 3rd parties. It was a good measure but not popular with many insurance companies who decided not to follow your footsteps. I wondered why.
It seemed that insurance companies when they met with 3rd party claims, they are very eager to settle the claim even when they are inflated. The excuse they give is that they do not wish to undergo a long legal process so it is easier to settle even if the claim is many times higher than what is really required to repair the car. Is this the case?
I have had experience of this nature before but the insurance company is very evasive when I question them. They are also very unwilling to disclose the amount the claim they have settled. Why is this so?
The end result is that I end up giving up my no claim bonus. Is there something we can do to nip this problem. I have a healthy suspicion that the insurance companies actually encourage this practise. Your views would be appreciated
REPLY
Here are my views. This is a difficult problem. It is difficult to solve.
The party that can solve it is the Government.They have to pass a law to make sure that people who cheat by inflating claims are severely dealt with. If the Government does not want to pass a law, then the insurance companies will continue to face difficulty in dealing with this matter. And the consumers will have to pay higher premiums.
Travelling to Jakarta, April 2008
I will be in Jakarta for the next four days. I will return on Wed midnight. My posting to the blog will be less regular.
Goalkeeper to the blog
I have to act as goal-keeper to this blog.
There were regular comments from a few people attacking the following:
a) insurance agents in general
b) new products introduced by NTUC Income
c) the current management
I have to block many comments that fall into the following:
a) personal attacks
b) defamatory, e.g. accusing people of cheating, incompetence
c) vulgar, rude
I allow some comments to go through, if they appear to be fair, objective or substantiated.
To make my work easier, I suggest that you should send your e-mail to me giving the facts. I will post them, without disclosing your identity.
There were regular comments from a few people attacking the following:
a) insurance agents in general
b) new products introduced by NTUC Income
c) the current management
I have to block many comments that fall into the following:
a) personal attacks
b) defamatory, e.g. accusing people of cheating, incompetence
c) vulgar, rude
I allow some comments to go through, if they appear to be fair, objective or substantiated.
To make my work easier, I suggest that you should send your e-mail to me giving the facts. I will post them, without disclosing your identity.
Opportunities for growth and promotion
I am now a consultant to a relatively new life insurance company. This company sell life and health insurance directly to customers and corporte clients, using the internet, call center and worksite marketing. It will sell low cost investment funds later this year.
The company is interested to look for managers and executives for its sales and marketing team. We will use an innovative new marketing approach - create awareness, educate the customers and advice them on the suitable, good value products.
We are particularly interested in people who:
a) enjoy dealing with customers
b) like to try a innovative way of marketing
c) have a certificate or diploma in life and health insurance
d) enjoy success and achievement
The positions offer attractive salary and incentives, and good opportunity for growth and promotion.
If you are interested to learn more about this opportunity, send a brief resume by e-mail to kinlian@gmail.com
Please pass the word around to your friends, who may be interested to make a change of career.
The company is interested to look for managers and executives for its sales and marketing team. We will use an innovative new marketing approach - create awareness, educate the customers and advice them on the suitable, good value products.
We are particularly interested in people who:
a) enjoy dealing with customers
b) like to try a innovative way of marketing
c) have a certificate or diploma in life and health insurance
d) enjoy success and achievement
The positions offer attractive salary and incentives, and good opportunity for growth and promotion.
If you are interested to learn more about this opportunity, send a brief resume by e-mail to kinlian@gmail.com
Please pass the word around to your friends, who may be interested to make a change of career.
Avoid buying a private car
Dear Mr. Tan,
May I ask you whether it is a good time to buy a car now? As I had just came back from overseas lately. I found out that the COE had increased a lot. For the category below 1600cc, the COE price is $16930. Some people say it may hit $20000 for COE.
Do you think will the COE come down $12000 to $14000 in few months times As every things is increasing who will want to buy the car if COE keep increase. Please help me to answer my query.
REPLY
In my personal view, it is a bad time to buy a car any time. Although I I have a car, I prefer to keep it at home, and travel by MRT and bus.. Sometimes I take the taxi.
If you have to buy a car, you better get someone else to advise you on timing. I am not familiar with this matter.
May I ask you whether it is a good time to buy a car now? As I had just came back from overseas lately. I found out that the COE had increased a lot. For the category below 1600cc, the COE price is $16930. Some people say it may hit $20000 for COE.
Do you think will the COE come down $12000 to $14000 in few months times As every things is increasing who will want to buy the car if COE keep increase. Please help me to answer my query.
REPLY
In my personal view, it is a bad time to buy a car any time. Although I I have a car, I prefer to keep it at home, and travel by MRT and bus.. Sometimes I take the taxi.
If you have to buy a car, you better get someone else to advise you on timing. I am not familiar with this matter.
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