Don't write off S'pore Savings Bonds

PUBLISHED

OCT 25, 2015, 5:00 AM SGT

SOURCE: THE STRAITS TIMES http://str.sg/ZLD6

The first issue of the Singapore Savings Bonds (SSBs) met with a lukewarm response from the public last month but investors should still look closely at this investment option.

Applications worth $413.16 million were lodged by 19,505 people. That amount was only a third of the maximum $1.2 billion available, an outcome that surprised many in the financial industry.

If you were one of those applicants, you would have received your amount in full up to the $50,000 limit. The bonds would have been deposited into your Central Depository (CDP) securities account by now.

Applications for the second issue close at 9pm on Tuesday.

This batch, which will be issued on Nov 2, comes with an average interest rate of 2.78 per cent per annum for 10 years - higher than the 2.63 per cent promised for the first issue.

Financial experts told The Sunday Times that the second issue's average interest rate will likely be higher than that for the first and third issues, as we explain below.

There is no need to rush for these bonds as there will be tranches issued every month for at least the next five years, including between $2 billion and $4 billion worth this year.

While you could incur opportunity cost if you wait too long, it is more important to decide first and foremost if the bonds are suitable for your financial needs and risk profile, given the many investment alternatives on the market.

The Sunday Times highlights some issues regarding SSBs.

INTEREST RATES MARKET-DRIVEN

Some bondholders who bought into the first bond issue are unhappy that the second tranche offers higher interest rates.

It helps to understand that these rates are market-driven and not set by the Government. The SSB rate is determined by the average Singapore Government Securities (SGS) yields in the month before a new issue opens for application, so levels will vary.

The interest rate for the second SSB issue, which opened for applications this month, is based on the SGS yields last month.

These yields moved up relative to August, which resulted in higher interest rates for the second bond issue compared with the first.

Mr Vasu Menon, senior investment strategist at OCBC Bank, says investors can estimate the likely rate for the third issue - which opens for applications on Nov 2 - by looking at the average 10-year SGS yields this month.

"Looking at the SGS yields in October, it seems very likely that the interest rate for the third issue will be lower than the second issue," he notes. This is because the average SGS yields in the first three weeks of this month were lower than the average rate of the first and second issues of the savings bond.

So, if you wish to invest in SSBs, you have until 9pm on Tuesday to subscribe as the average interest rate of 2.78 per cent is likely to be higher than that for the first and third issues.

You can check the daily SGS yields used to compute the bond rates at 

https://secure.sgs.gov.sg/fdanet/SgsBenchmarkIssuePrices.aspx.

Mr Menon says there are many factors that could impact SGS yields beyond the third issue, including possible interest rate rises in the United States.

SSB rate 'reasonable' for risk-free investment

Given that US interest rates are likely to head higher next year, there is a real possibility that rates here could also rise in the medium term. That could mean higher SSB returns as well, he adds.

Generally, finance experts say that the SGS yields over the past 10 years indicate that the average interest rate for SSBs is likely to be between 2 per cent and 3 per cent a year.

It is impossible to predict the rates accurately on a month-to-month basis so you will find it difficult to time your purchase to get the highest interest rate.

You could consider that the prevailing SSB average interest rate of about 2.78 per cent is reasonable for a risk-free investment and compare it with alternatives such as fixed deposits, equities, structured notes or funds that offer higher potential returns but come with higher risk.

Mr Marc Lansonneur, DBS' Singapore head of investment products, says you can avoid the highs and lows of SSB yields by subscribing to the bonds using fixed amounts on a regular basis instead of placing all of your funds in a single investment.

REDEEMING THE BONDS

Some investors who bought into the first issue are wondering if they should redeem their bonds and invest in the second issue, which will have a higher average interest rate.

Mr Menon suggests that it may be worthwhile to redeem only if the average interest rate for another issue is "significantly higher".

One of the attractions of SSBs is that there is no penalty for redeeming early, but there may be an opportunity cost.

"Unlike SGS, that pay the same coupon each year, SSBs pay coupons that step up or increase over time. As a result, the average interest rate is higher the longer the bonds are held," says Mr Menon.

"If the bonds are redeemed early to re-invest in later issues, it is possible that the interest rate in the first year for the new issue may not be as high as the interest rate that the bond investor would be enjoying at the point of redemption (if the bond is held for more than a year)."

Furthermore, bondholders must bear in mind that they will incur a $2 redemption fee and another $2 application fee for the next issue. These fees are charged by banks to cover the cost of processing redemption and application requests through ATMs and Internet banking channels.

An investor who holds at least $5,000 of the first savings bond would have earned enough accrued interest from holding it for one month to defray the $4 fees.

You should also note that you are not able to immediately re-invest the redemption proceeds from, say, the first issue into the second issue as applications for this close on Tuesday, while the redemption amounts from the first tranche will be paid out on Nov 2.

So, if you are keen to invest in the second issue, make sure you have enough cash in your account when you apply.

BONDS VERSUS FIXED DEPOSITS

Some of you may have seen that fixed deposits can pay higher interests than SSBs in the short term. But the SSB rate steps up over time so that over a 10-year period, the average interest is higher than that for fixed deposits.

SSBs are a long-term savings option that allows you to save for up to 10 years, while fixed deposits are generally for shorter-term savings like three to 24 months.

So an investor who holds a one-year fixed deposit, for example, and rolls it over every year for 10 years is likely to receive less interest than if he had invested in a long-term instrument like SSBs for 10 years.

However, there may come a time when interest rates for fixed deposits or other "safe" investment products become significantly more attractive than SSB rates.

You could then redeem your SSB investments.

A DIVERSIFIED PORTFOLIO

The SSB programme is part of a set of initiatives by the authorities to improve the availability of simple, low-cost investment products to retail investors. It is meant to complement the Central Provident Fund system and other savings, investment and retirement options such as deposits, unit trusts and insurance plans.

In fact, with their risk-free and monthly withdrawal features, the bonds are an attractive option for people who would otherwise have not invested at all.

Mr Lansonneur says that SSBs are suitable for investors looking for a low-risk investment on a minimum two- to three-year horizon. However, they should not be the sole investment as yields are on the low side.

"It should be considered as an investment option included in a more diversified portfolio, which could consist of a combination of SSBs, fixed deposits, shares, exchange-traded funds and unit trusts," he adds.

UOB's head of wealth management, Singapore and the region, Ms Chung Shaw Bee, says SSBs are a flexible risk-free investment option suitable for investors who have a low risk appetite and are looking for cash and returns.

She says: "For young investors with a high risk tolerance and $50,000 to invest, they can consider an allocation of up to 20 per cent to bonds. This can include SSBs and bond unit trusts which invest in corporate bonds. The allocation to SSBs should increase for investors with lower risk appetites and shorter time horizons.

"For older investors with a 10-year horizon, a low risk appetite and the same investment amount, the SSB allocation can go up to 80 per cent as the focus should be on wealth preservation and income generation."

Many people in Singapore unsure if retirement nest egg is big enough

PUBLISHED

NOV 1, 2015, 5:00 AM SGT

Source: The Straits times http://str.sg/ZbuX

SINGAPORE - Most people know that they need to plan for retirement but are unsure if their nest egg is sufficient. Given a second chance, they would have started planning and saving when younger.

This stark reality was uncovered by two polls conducted by The Sunday Times Invest with DBS Bank on the last two Sundays and Mondays.

Slightly more than half or 52 per cent of the 762 respondents in the first poll said they have started planning for their golden years but that it may not be enough.

Of those, 8 per cent said they had left it too late and will start now, while 4.2 per cent said they cannot make ends meet.

On the bright side, however, 35 per cent or about 270 are confident of retiring well.

Most of the respondents opt for a myriad of asset classes for their investments, including unit trusts, stocks, insurance and property. About 26 per cent invest in unit trusts and stocks while about 20 per cent have purchased insurance.

Only one in 10 uses the Supplementary Retirement Scheme (SRS) to enjoy tax savings and grow their retirement funds, which shows that there is room for greater penetration.

The SRS is a national voluntary scheme set up in 2001 to incentivise individuals to save consistently for retirement while also enjoying tax benefits.

In the survey, 38 per cent of respondents say that an average return of 1 per cent to 4 per cent a year is typically achieved, while about 30 per cent are able to garner a higher average return of 4 per cent to 8 per cent a year. About 3 per cent managed to get more than 12 per cent a year.

The top concern facing retail investors is not having enough sources of passive income, followed by outliving one's savings, and inflation. About 6 per cent worry about having to rely on family and friends when they retire.

In the second poll of 416 respondents, about 30 per cent said they are happy with their planning while four in 10 wished they had started planning and saving when they were younger.

About 20 per cent wished someone had shown them the way, and about one in 10 said they should have spent less and saved more.

This finding presents opportunities for financial advisers to reach out to these people and provide the necessary advice. Individuals are also encouraged to step up their cash management skills and financial literacy so as to make informed investment decisions.

Underlining the need to plan for retirement instead of leaving it to chance, an overwhelming 83 per cent of retired respondents said they consciously planned and saved for their golden years.

For this group of people, just under half said they should have enough savings to last their retirement, while about 21 per cent say they need to continue working past 62. About 12.5 per cent say they do not have enough savings and 17.3 per cent say they are unsure.

About 46 per cent rely on a combination of investment dividends and annuity plans, retirement savings, Central Provident Fund savings and family, to fund their golden years.

How Invest Editor Lorna Tan builds her nest egg

PUBLISHED NOV 1, 2015, 5:00 AM SGT

Source: THE STRAITS TIMES http://str.sg/Zbuh 

For the past six years, I have been channelling spare cash into a savings scheme called Supplementary Retirement Scheme (SRS), enabling me to save on tax while I build my nest egg.

I have also tried to make my SRS savings work hard for me by investing in shares. I have nine counters in my SRS account, including StarHub and StarHill Global Reit. Both stocks have been a positive experience through their dividend income and share price appreciation.

I bought 5,000 StarHub shares in January 2010 at $2.13 apiece. The closing price was $3.60 on Friday. My 20,000 Starhill shares were bought two years later at 59 cents apiece, and on Friday, they closed at 81 cents .

Cash makes up 15 per cent of my SRS portfolio and I'm on the lookout for bargains amid the volatile market. Leaving my SRS funds uninvested will mean inflation eating away at my savings when I withdraw the cash at 62.

Though I wouldn't be working at that age, I expect to pay some income tax because I am likely to be enjoying rental income from my investment property while withdrawing from the SRS over 10 years.

Assuming I have $200,000 in my SRS account, and by spacing out the withdrawals over 10 years, this would work out to $20,000 annually. Half of the withdrawn amount, or $10,000, will be taxable.

Add this to my yearly rental of $40,000 and assuming zero personal relief, I'm looking at a chargeable income of $50,000, which will attract $1,250 in personal income tax.

The personal income tax rate is 0 for the first $20,000, 2 per cent for the next $10,000, 3.5 per cent for the next $10,000, and 7 per cent for the next $40,000.

If I had no income source other than my SRS, I wouldn't need to pay income tax as I can withdraw up to $40,000 of SRS funds yearly tax-free.

So assuming I have $200,000 in my SRS when I reach 62, I would withdraw $40,000 annually until it's depleted, which would take five years.

Next year, the SRS contribution cap for Singaporeans will increase to $15,300. It will be good if the Government also allows a longer period for individuals to spread out their withdrawals, which will lead to greater flexibility and tax savings.

Lorna Tan

Make (full) sense of insurance policies

8 November 2015

Source: The Straits Times http://str.sg/ZE7k

A lot of effort has gone into making insurance policies more easily understood but plenty of us still get caught out. Just ask office worker Marie Koh.

Madam Koh (not her real name) lodged a complaint against her insurer for allegedly not honouring the terms in her savings-type plan when it matured in October last year.

She wanted to know why there was a big difference between the maturity payout she received and the projected maturity values. The illustrated terminal bonus was also not paid at maturity.

Madam Low, who is in her late 50s, also refused to accept the insurer's explanation that the premiums paid for her policy's riders, such as critical illness, would not contribute to the accumulation of the bonus as they have no cash value.

Unhappy with her lower-than-expected maturity payouts, she proposed to be paid a 1.1 per cent compounded return on the premiums paid for her savings policy.

The insurer refused, reiterating that the projected maturity values were not guaranteed, something that was stated in her contract.

There are many policyholders like Madam Low who find it difficult to understand their policies. Nor do they know what figures in a sales or benefit illustration document to focus on before deciding to buy.

---

IT PAYS TO BE CLEAR ABOUT BENEFITS

Many end up relying on financial consultants to highlight the benefits when we should make it our responsibility to understand them.

If we do so, we will reduce misunderstandings and the incidence of customers being taken for a ride by unscrupulous financial advisers or being led into buying unsuitable products due to misrepresentation.

BENEFIT ILLUSTRATION

When we prepare to buy life insurance, we get documents to help us make an informed choice. They include a benefit illustration, a life insurance guide and a product summary.

It is tempting to gloss over a benefit illustration because it looks like a jumble of numbers. But it is worth your while to make the effort to understand it because it shows the financial benefits you may receive if you buy the insurance policy, surrender or make a claim, and if you hold it to maturity.

Besides indicating benefits - both guaranteed and non-guaranteed - the benefit illustration shows the costs and charges relating to the product you are buying.

Rather than getting a nasty shock later, it is prudent to analyse the benefit illustration first and know precisely what you are getting yourself into. Insurance is a long-term commitment and the consequences are dire if you need to surrender the policy early. In some cases, you stand to lose all the premiums you have paid.

Let's take a look at a benefit illustration from a life insurance firm's endowment plan that has been generated for a 35-year-old male non-smoker. The annual premiums are about $40,000 for five years, amounting to $200,378, and the tenure is 10 years.

Like most traditional whole-life and endowment plans, this is a participating policy where premiums are pooled with those of other participating policies in a designated "participating or life fund".

The insurer invests the fund in a range of assets such as equities, government and corporate bonds, property and cash to earn returns that can used to pay benefits to you and other policyholders of the fund as well as to finance expenses.

In line with the insurer's investment strategy, the proportion invested in each asset class may vary over time. You can find the asset allocation of the fund in the product summary. Besides guaranteed benefits, the non-guaranteed benefits are typically in the form of bonuses that are added to the sum assured. They cannot be later reduced or removed once declared.

To help illustrate the benefits and costs relating to the policy, the insurer assumes two investment rates of return. These are purely for illustrative purposes, which means the benefits the policyholder actually receives may differ from what is projected in the benefit illustration.

Since May 1994, the insurance industry has followed standards on what should and should not be included in a benefit illustration.

They typically illustrate two rates of return - one up to a maximum of 4.75 per cent per year and a lower rate that is at least 1.5 percentage points below the maximum, or 3.25 per cent. These two rates have remained unchanged since July 2013. In fact, it was a much higher 7 per cent in 1994 before it was revised to 6 per cent in 1997 and cut to 5.25 per cent in 2002.

The Life Insurance Association (LIA) says the two projected returns do not represent the upper and lower limits of the investment performance of the insurers' funds.

The assumed higher rate of 4.75 per cent - or the maximum best estimate long-term investment rate of return - is deemed by LIA as achievable by insurers' life funds over a horizon of at least 10 years.

"It provides consumers a sense of the variability of their payouts based on long-term returns achieved by the participating fund. It is important to note the long-term nature of returns, which is over a period of at least 10 years, rather than a few years," said LIA.

To ensure the assumed investment returns continue to be appropriate, LIA conducts a yearly review, considering factors like investment returns for each asset class and long-term investment outlook.

The illustrated investment returns for investment-linked insurance products are 4 and 8 per cent.

TERMS IN A BENEFIT ILLUSTRATION

Guaranteed death benefit: The guaranteed amount the insurer pays if the insured person dies.

Non-guaranteed death benefit: The projected non-guaranteed additional amount to be paid if the insured person dies. It is calculated assuming the life fund earns yearly investment returns of 3.25 and 4.75 per cent.

Guaranteed surrender value: The guaranteed amount the insurer pays if the policy is cancelled prematurely. As there are high costs involved in early surrender, policyholders suffer a loss if this happens in the first few years.

Non-guaranteed surrender value: The projected non-guaranteed additional amount to be paid by the insurer if the policy is cancelled prematurely. It is calculated assuming the insurance fund achieves annual investment returns of 4.75 and 3.25 per cent. The projected amounts are dependent on the bonuses declared.

Based on the example of the 35-year-old's endowment plan, the total maturity amount - comprising guaranteed and non-guaranteed values - is projected as $244,097 at the end of 10 years, assuming a 4.75 per cent return. However, if the assumed return is 3.25 per cent, the projected total maturity amount would be $223,943.

Total distribution cost: The total cumulative cost that the insurer pays to the distribution channel for the policy sale. It includes cash payments such as commissions, cost of benefits and services.

Effect of deduction: The deductions are taken out from the policy. They include the cost of insurance, distribution, expenses and surrender charges.

BEFORE YOU COMMIT

Finance experts say that since the projected returns do not represent the real returns received by the client, one way to assess the product is to look at the guaranteed values because that is the amount that the insurer is obligated to pay.

Mr Patrick Lim, associate director at financial advisory PromiseLand Independent, says when it comes to endowment plans, he would not recommend those offering a guaranteed maturity cash benefit lower than the total premiums paid.

Said Mr Lim: "The guaranteed cash value must be higher than total premiums paid on maturity of the plan. For example, if total premiums equal $10,000, the guaranteed cash value must be higher than $10,000, and the higher the better because insurers have to honour the guaranteed cash value on maturity."

In the example above, the guaranteed maturity sum is $189,000, less than the $200,000 in total premiums.

You can also ask financial consultants to work out the effective or net returns of the benefits based on the projected investment returns. This is because the policyholders' net return is usually substantially lower after taking into account management expenses, distribution and other costs such as mortality.

In the example above, the net return at the projected maturity value of $223,943 - if the insurer makes an investment return of 3.25 per cent a year - is only 1.4 per cent a year. At the projected $244,097 at maturity - based on an assumed return of 4.75 per cent a year - the net return is 2.49 per cent a year.

LIA has confirmed that in the near future, the benefit illustration for par policies will be further enhanced by including two illustrated effective yields to maturity based on the two projected investment returns.

It is worth your while to do a comparison of similar insurance products and analyse if they can offer higher guaranteed amounts and/or net yields, among other criteria, such as their suitability in meeting your financial objectives. Websites like CompareFirst.sg can help with insurance comparison.

After all, insurers differ in their investment and asset-allocation strategy. It is possible that there are similar plans that offer higher guaranteed values and net effective yields.

You can also compare the insurance plan with other investment products, bearing in mind that every product carries different risks. An example is the principal-guaranteed Singapore Savings Bonds which offer decent yields, flexible withdrawals and are risk-free.

And if you are uncomfortable with the product's guaranteed amounts and/or the net yields, you are better off walking away.

But what if the insurers are just being cautious when they offer lower guaranteed values? Well, check out the insurer's bonus track record.

It is prudent to understand how bonuses in life funds work. There are usually two types. One is a reversionary bonus, which is declared annually and becomes part of the guaranteed value. The terminal or maturity bonus is typically a one-off declared on maturity of the plan and is expressed as a percentage of the accumulated annual bonuses to date.

Bonus rates have steadily declined over the years. They are affected mainly by the fund's investment strategy and experience as well as other factors such as claims and incurred expenses.

Insurers may cut bonus rates and this usually happens for the cohort of policies whose previously quoted rates of return at inception have become unsustainable due to increasingly depressed yields. However, insurers do try to avoid cutting rates as this causes dissatisfaction among policyholders. Instead, newer policies are quoted with lower rates of return.

With the exception of Tokio Marine, almost all insurers have cut bonuses in the past. The worst on record is AIA, which cut terminal or maturity bonuses to zero in 2001, affecting regular-premium endowment policies maturing that year, recalls Mr Lim.

The bonus cuts are mitigated by the insurers' practice of "smoothening" returns in par policies. This means that in a good year, the insurer may choose to pay out its normal bonus rate and retain more surpluses. In a poor year, it may distribute more of the retained surplus as bonuses to maintain the bonus rate. The effect is a fairly smooth rate of return, which masks any volatility that the life fund may experience.

Every year, you will receive an annual bonus update that will show you the bonus that your policy has accrued. You will also receive a par fund update which gives a snapshot of the insurer's life fund performance over the past three years.

Do note that for some participating plans, some insurers have done away with the traditional bonus structure and are offering a non-guaranteed dividend-paying plan instead. Cash dividends are non-guaranteed, but when given do not add to the sum assured.

And depending on the product design, they may be given annually only after the insured reaches a certain age or upon a claim or surrender.

Furthermore, look at the long-term track record of insurers' investment returns on life funds. According to LIA's compilation of life funds' returns requested by The Sunday Times, insurers Manulife, Prudential, AIA and Tokio Marine have achieved average returns of above 4 per cent per annum over a seven-year period ending 2014.

Last but not least, it is important to ensure that you can afford the premiums and are able to pay them throughout the plan tenure. Policyholders who surrender their plans prematurely are likely to incur losses and, in some cases, get nothing back. Recognising this, insurers have been offering "limited pay" plans that require customers to pay, say, a shorter five-year period, but the plan tenure could be a longer 10-year period.

What Financially Independent People Do

Admin executive paid yearly insurance premiums higher than annual pay

PUBLISHED

OCT 5, 2015, 5:00 AM SGT
http://str.sg/Z6MZ

Administrative executive's policy requires her to fork out $40,000 a year

Lorna Tan  Senior Correspondent

An endowment insurance plan bought two years ago by Madam Corinne Han has proved a costly mistake.

The Prudential policy, which Madam Han, 57, bought at United Overseas Bank (UOB), requires her to pay yearly premiums higher than her annual pay.

She told The Straits Times that her intention in visiting UOB in 2013 was to open an account and inquire about fixed deposits. Instead, she ended up purchasing the policy that came with freebies like an air-fryer and a steamer.

Madam Han, an administrative executive with O-level education, earns about $30,000 a year, but the policy requires her to fork out an annual premium of $40,000 for five years, translating to total premiums of $200,000. So far, she has paid $80,000.

Back in 2013, when she visited UOB, she had $350,000 on hand due to a divorce settlement.

But after accounting for legal fees and loan payments, she would be left with about $100,000, insufficient to pay for the total premiums of $200,000.

As she was staying with her mother at the time, she rented out three rooms in her HDB flat. This gave her a combined monthly rental income of $2,000 in 2013. It has since dropped to about $1,000.

This is how the PruSave Max Limited Pay plan works.

At the end of the 10-year maturity period, Madam Han is projected to receive a maturity benefit of $236,000 - that is, a potential gain of $36,000 - if Prudential can earn 4.75 per cent on its investments.

By then, the value of the accumulated premiums, based on the illustrated rate of 4.75 per cent, would have grown to $291,172.

However, the "Effect of Deduction" (EOD) would amount to about $55,000, which leaves a non-guaranteed maturity sum of $236,000 to Madam Han. The EOD - which is due to Prudential - includes the cost of insurance, distribution cost, expenses and surrender charge.

If Prudential's investment return is 3.25 per cent, the maturity benefit is projected to be $217,768.

However, both the projected maturity figures of $236,000 and $217,768 are non-guaranteed.

The figures are used by the insurer for illustrative purposes, something that may be the source of confusion as the maturity benefits may be misconstrued to be between these two rates of returns.

The figure that is guaranteed, as indicated in the policy's benefit illustration, is actually $181,000 - a sum that is lower than the total premiums Madam Han would have coughed up for the plan.

The plan she has comes with a death benefit of 105 per cent, which means the policy provides negligible protection.

Endowment plans typically are savings plans that come with insurance protection which, in this case, is nominal. Customers pay premiums over a fixed period and, typically, a small portion of the premiums is deducted to pay for insurance cover. The rest is invested. So most customers would expect to get their money back, plus interest, when the endowment policy expires.

"I didn't know that I may get back less than $236,000, which I believed was guaranteed," says Madam Han.

The policy documents state that it is not a savings account and that the actual benefits are not guaranteed.

There is still the question of how Madam Han ended up buying this plan.

After paying for two years, she now faces financial difficulty in paying future premiums. UOB has informed her that the annual premiums could be reduced, but she would have to forgo the excess premiums that were paid in the first two years.

This means that if she pays a reduced annual premium of, say, $20,000 for the remaining three years, she will forgo the excess $40,000 that was paid in the first two years.

Madam Han has complained to UOB and wants to surrender the policy and recover her premiums.

A UOB spokesman told The Straits Times: "We will be arranging a meeting with Madam Han to clarify and address the matter with her."

Madam Han has four children, aged 20 to 27. Two of them have not completed their formal education.

____________________________________________

Comments from Investment Moats

Source: http://www.investmentmoats.com/budgeting/admin-exec-overextended-40000yr-premium-payment-evaluation-system-flawed/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+InvestmentMoats+%28Investment+Moats%29

The Admin Exec overextended her $40,000/yr premium payment. Evaluation system was flawed Posted: 06 Oct 2015 06:30 AM PDT There was a post by Ms Lorna Tan on Monday on a 57 year old Admin Executive plight when she thought what she put into the bank with UOB is guaranteed and that she has problems pulling it out. The article sought to create awareness of this specific case so that readers can learn from it. I have my own take away, hence this post. You can read the article here. Here are some of the facts from the article: The product is an insurance savings endowment PRUsave Max Limited Pay Pay for 5 years $40,000/yr, total premiums $200,000 Policy will mature in 10 years with a Maturity Benefit The Maturity Benefit is part guaranteed and non guaranteed The guaranteed portion will eventually be less than the total premiums paid The distribution cost in total, or the amount paid to the agents and the insurance company comes up to $55,000 If Prudential Investment Return is 3.25%, the maturity benefit is projected to be $217,768. If 4.75%, the maturity benefit is projected to be $236,000 She earns $30,000/yr and have 4 children aged 20 to 27 years old Her original intention was to put in as a time deposit During that time, she got $350,000 in divorce proceeds but after legal fees and loan payment, she was left with $100,000 which cannot pay for all the premiums She has paid $80,000 out of the $200,000 premium The policy was purchased with freebies of a steamer and an airfryer She purchased this thinking it is with the bank and it is guaranteed Insurance Savings Endowment rarely lose Money The experience folks may hold a different view, but based on my research, and how these plans are structured, they rarely end up poorer. This is even when some of my friends says so, but when I look at their statements, it proves otherwise. In my aggregation of some of my readers and friends matured or soon to matured policies they end up being positive or at least 2.5% in the past. (Post here) While the coupon rates on bonds these days are much lower, they shouldn’t lose money. That should not construe to be equal to guaranteed. If the maturity benefit is projected to be $217,768, the internal rate of return is 1.22%. Its not the best, and if you put it next to the Singapore Savings Bonds of 2.78%, this looks bad. If the maturity benefit is projected to be $236,000 the internal rate of return is 2.38%. These are projected which means it might be less. If the sales person feels this PRUSave is a better product, then it should at least yield more than time deposit. With the XIRR of the former, I wondered if it is indeed better. In any case, this is still a way to build wealth, for the risk adverse. This product in most scenarios should at least reach the buyer’s expectation of not losing money. Jumping into a lion’s den The problem for her is that she jumped into a situation where the sales person have an economic bias to up sell her products that earn the sales person a better commission. With a commission structure, people have a propensity to be pushy. There will be imaginary false promises being put out, such as that when is the last time 6 blue chip companies every collapse (when one of them happen to be a bank called Lehman Brothers) There are also incentives to tempt the person to act more irrationally, pushing them closer to buying. In this case, the steamer and air fryer. We all need a good evaluation system or process The biggest problem here is that, she could always say no if the product is risky and not good enough. Or that she does not know enough of it. She seem to have a problem seeing that $40,000 per year is a lot of money. Not just that, but did not think thoroughly whether she is able to pay for the full premium. This problem is not constraint to her alone. I have seen many peers and family members making the same mistake. It can be better overcome by a better evaluation system: When being marketed a product, don’t give the answer immediately if you are not familiar with it, or it have much moving parts Sit on it for a period, to see if you still want it Always have folks trusted, and with competency to act as a sounding board Have a habit or system to read widely, even if its not a lot Have a system of doing research Have a trigger that any big sum of commitment, needs a more thorough evaluation Sales Persons are genuinely motivated to sell and cannot be trusted These are rather general pointers and for some of you would know about them, but honestly if I don’t put them out, most would not do. I find these rule of thumb rather useful even for myself. Due to my condition, I have been marketed much MLM health products, and each of them seem to think they are the end result to solving my auto immune skin conditions. So I have also expanded much energy, and money in this area. In all health solutions, I derive on certain triggers in my system to save me from calamity: try your best to make sure the products do not have adverse health effects, check the sources do your own research on it have a budgeted amount monthly and annually for medical supplementation. If it exceeds this amount too much, just forget about it Summary My dad have a time deposit with UOB, thus I am rather disappointed that UOB was in this equation. I can see my dad in her shoes and this becomes my problem. I somehow think that there is more to this story than meets the eye. Its important to have a system or process of evaluation. We cannot be an expert in every areas, but we can try to be as adequate as possible, or network well to know folks who supplement us where we are deficient. This is applicable for legal advice, financial advice, medical, wellness and career.

How to Become a Millionaire by Age 30

http://www.entrepreneur.com/article/234454

JUNE 04, 2014 

Getting rich and becoming a millionaire is a taboo topic. Saying it can be done by the age of 30 seems like a fantasy.

It shouldn’t be taboo and it is possible. At the age of 21, I got out of college, broke and in debt, and by the time I was 30, I was a millionaire.

Here are the 10 steps that will guarantee you will become a millionaire by 30.

1. Follow the money. In today’s economic environment you cannot save your way to millionaire status. The first step is to focus on increasing your income in increments and repeating that. My income was $3,000 a month and nine years later it was $20,000 a month. Start following the money and it will force you to control revenue and see opportunities.

2. Don’t show off -- show up! I didn’t buy my first luxury watch or car until my businesses and investments were producing multiple secure flows of income. I was still driving a Toyota Camry when I had become a millionaire. Be known for your work ethic, not the trinkets that you buy.

3. Save to invest, don’t save to save. The only reason to save money is to invest it.  Put your saved money into secured, sacred (untouchable) accounts. Never use these accounts for anything, not even an emergency. This will force you to continue to follow step one (increase income). To this day, at least twice a year, I am broke because I always invest my surpluses into ventures I cannot access.

4. Avoid debt that doesn’t pay you. Make it a rule that you never use debt that won’t make you money. I borrowed money for a car only because I knew it could increase my income. Rich people use debt to leverage investments and grow cash flows. Poor people use debt to buy things that make rich people richer.

5. Treat money like a jealous lover. Millions wish for financial freedom, but only those that make it a priority have millions. To get rich and stay rich you will have to make it a priority. Money is like a jealous lover. Ignore it and it will ignore you, or worse, it will leave you for someone who makes it a priority.

6. Money doesn’t sleep. Money doesn’t know about clocks, schedules or holidays, and you shouldn’t either. Money loves people that have a great work ethic. When I was 26 years old, I was in retail and the store I worked at closed at 7 p.m. Most times you could find me there at 11 p.m. making an extra sale. Never try to be the smartest or luckiest person -- just make sure you outwork everyone.

7. Poor makes no sense. I have been poor, and it sucks. I have had just enough and that sucks almost as bad. Eliminate any and all ideas that being poor is somehow OK. Bill Gates has said, "If you’re born poor, it’s not your mistake. But if you die poor, it is your mistake."

8. Get a millionaire mentor. Most of us were brought up middle class or poor and then hold ourselves to the limits and ideas of that group. I have been studying millionaires to duplicate what they did. Get your own personal millionaire mentor and study them. Most rich people are extremely generous with their knowledge and their resources.

9. Get your money to do the heavy lifting. Investing is the Holy Grail in becoming a millionaire and you should make more money off your investments than your work. If you don’t have surplus money you won’t make investments. The second company I started required a $50,000 investment. That company has paid me back that $50,000 every month for the last 10 years. My third investment was in real estate, where I started with $350,000, a large part of my net worth at the time. I still own that property today and it continues to provide me with income. Investing is the only reason to do the other steps, and your money must work for you and do your heavy lifting.

10. Shoot for $10 million, not $1 million. The single biggest financial mistake I’ve made was not thinking big enough. I encourage you to go for more than a million. There is no shortage of money on this planet, only a shortage of people thinking big enough.

Apply these 10 steps and they will make you rich. Steer clear of people that suggest your financial dreams are born of greed. Avoid get-rich-quick schemes, be ethical, never give up, and once you make it, be willing to help others get there too.

GRANT CARDONE

CONTRIBUTOR

International Sales Expert