Friday, November 06, 2015

It is crazy for a customer to invest in this type of policy

Here is an example of a life insurance policy sold by a bank to its customers, who trusted the bank to offer them a reliable investment product. The product is designed by a life insurance company. The bank earns a commission from selling the product.

1. The customer pays an annual premium of $12,000 for 5 years. At the end of 5 years, the surrender value of the policy is $38,000. The customer loses $22,000 if he (or she) withdraws the money.

2. If the customer dies within this period, the customer gets a death benefit that is about 5% higher than the total premiums paid. This means that the life insurance policy effectively provides no insurance protection as the 5% is the interest that is earned from the premium.

3. Why does the customer wants to give away $60,000 to get back only $38,000? Who knows? Only an unsuspecting customer will buy such an investment product. But, many policies of this kind are being sold by our bank branches every day!

4. The customer has to wait for another 10 years to get back a modest return. At the end of 15 years, the projected maturity benefit is $80,000 of which the guaranteed sum is $44,000 and the non-guaranteed sum is $36,000. This means that after paying $60,000 and waiting for 15 years, the customer may not even get back the total amount of saving. The customer can only hope that the life insurance company will pay the non-guaranteed amount. If the company states that the investment earnings has been low, the poor customer does not have any right to demand payment of the projected amount.

5. The benefit illustration shows the surrender value based on a projected investment return of 4.75%. The sales representative points out this figure to suggest that the return on the life insurance policy is 4.75%. That is not true. The actual return for the 15 years is 2.2%.

6. There is a figure called "effect of deduction". This is the difference between the "accumulated premium" and the maturity benefit at the end of 15 years. Here is an explanation. If the insurance company was able to earn an annual yield of 4.75% over the 15 years, the accumulated premium with interest would be $110,000. This is $50,000 more than the premium of $60,000. The insurance company takes away $30,000 and gives only $20,000 to the customer.

7. Why should a customer leave the money to be invested by the insurance company and take all of the investment risk and allow the insurance company to take away $30,000 and leave only $20,000 for the customer? Who knows?

8. Why does the bank sell such an investment product to its customers and allow the insurance company to make the bulk of the profit? Well, the bank was interested to earn the commission by selling the policy. The distribution cost, which is the amount paid to the bank, is $5,000. The rest of the profit goes to the insurance company. It looks like the smartest party in the transaction is the insurance company. No wonder they make so much profit each year!

Misleading information given to entice a sale

I have received another request for assistance from an elderly lady. She went to United Overseas Bank to deposit a cheque for the sale of her HDB flat.

The sales representative and her supervisor, who holds the title of vice president, were persistent in getting her to buy a Prusave policy. (This is a nice way of saying that they "put a lot of pressure on her").

They told her that the saving is for 5 years and that the return is 4.75%. They should her a brochure to this effect. She bought the policy without understanding what the contract really was.

She decided to take the advice of the vice president and trusted that she would give the right advice.

After a year, she learned that the policy locked up her savings for 15 years (although the annual premium was payable for five years only), and that she would suffer a large loss of her savings if the policy is terminated before the end of 15 years.

She was not told about the poor surrender value at the time of buying the policy. When she asked about these figures, the sales representative told her to ignore them, as they were given as "standard figures" for formality only. She should focus on the return of 4.75%.

The return of 4.75% was also misleading. This was the "illustrated yield". The actual yield, after removing the "effect of deduction" was probably 2% per annum. A large part of the actual yield is not guaranteed anyway.

She wanted to stop the policy after paying one year's premium, but she would have suffered a large loss on the first year's premium.

Preparing for the economic downturn

Dear Mr. Tan
An economic downturn looks quite likely, especially in Singapore. We are affected by a weak global economy and weakness in China, but we also have our domestic factors to make the problem worse, especially in the property and new car sales.

What should ordinary people do to cope with the likely recession and increase in unemployment?

From an individual perspective, it is time to reduce spending and to increase savings. If you lose your job, you have some savings to tide over the difficult time.

From a social perspective, this "increase saving" will cause further problems to a weak economy. If too many people cut down on their spending, the economy will weaken further. The businesses that depend on consumer spending will be badly affected. Many will have to close down. This will cause a spiral effect.

In most countries, the government can help to cushion off the impact by reducing interest rate to help the businesses to survive. The low interest rate may encourage the ordinary people to increase their spending, but this is not likely to happen due to the uncertainty in the economy.

However, the current interest rate is very low in Singapore now. A further reduction in interest rate will not help to reduce the business cost.

I guess that it will be more difficult to manage the economic downturn in Singapore. It might help if the government decides to give a monthly cash allowance to workers who are retrenched during the downturn. It is an unemployment benefit, but it should be considered for the short term.

Thursday, November 05, 2015

The super rich pays little tax

Mr. Tan,
Singapore wants to attract the super rich to live in Singapore. We reduced our income tax rate to very low level and removed all estate duty. But, we do not tax the foreign income of the super rich. How does Singapore benefit from having this strategy to attract the super rich?

You are correct that the super rich do not pay any income tax on their income that is earned from overseas and brought into Singapore. If they do not have any income from Singapore, they do not have to pay any tax. They also enjoy estate duty exemption when they pass away.

Perhaps they will benefit the Singapore economy indirectly. If they set up their headquarters here, they will employ people in Singapore. If they put their money here, they may use the wealth management services provided by our banks.

But, I suspect that many of the rich foreigners do not employ many people here, so their benefit to Singapore is questionable.

The real beneficiaries of the Singapore tax regime are the people who earn high income from Singapore, i.e the top earners in the legal and medical professional, the top ministers and civil servants and the top CEOs. They enjoy million dollar salaries and profits from their activities in Singapore and pay a low rate of tax here.

To compensate for the low tax from the top earners, the government introduced GST that is levied on everyone. But the low income people pay a higher proportion of their earnings in GST. They are badly off.

I dislike the GST and low income tax rates in Singapore.

High inequality of income is bad

Mr. Tan
You advocate greater equality of income and wealth. If someone wants to work hard and become rich, what is wrong with it? Don't you want to encourage people to work hard? Do you prefer them to be lazy?

If someone wants to work hard and earn a higher income, it is all right. How much harder can they work,compared to others? Two or three times? It is all right for someone to earn 2 or 3 times of the ordinary wage.

However, if the income is 10, or 100 or 1,000 times of the ordinary income, it is too large a gap. In some cases, the high income could be earned through immoral means, e.g. to over charge a client in providing professional services. This happens when the high fees are not disclosed in advance, and are charged to the client who is not given a free choice. Examples are the high fees charged by doctors and lawyers.

There are other immoral ways to earn a high income, e.g. to sell misleading products to buyers, especially if the laws are inadequate in addressing the abuse. Examples are questionable financial products that are being sold to ignorant investors. Some of these products are outright scams.

When some people become super rich, and have assets worth billions, they will usually buy real estates and inflate their values. They sell these real estate to ordinary buyers at high prices and lock them in a heavy mortgage that will take a lifetime to pay. Or they rent the real estate to tenants at high rentals that take up a large part of their income, e.g. 50% or more. This is like a form of exploitation.

Extreme inequality of income of this nature is bad for society.

Wednesday, November 04, 2015

Monday, November 02, 2015

Private Shield is integrated with Medishield Life

Dear Mr Tan,
I have a Incomeshield Enhanced Basic plan which commenced every August. Now with the onset of Medishield Life, what should we do? Do we cancel the Incomeshield plan as Medishield Life is compulsory so that we don't pay premium on both sides?

Incomeshield in integrated with Medishield Life. It means that you do not need to pay premium for Medishield Life when you have Incomeshield.

Example, if the Medishield Life premium is $500 and you pay $900 for Incomeshield, Income will pay $500 to Medishield Life and keep $400 to cover the additional benefits. So, you are covered both under Medishield Life and for additional benefits under Incomeshield.

Sunday, November 01, 2015

How to prevent abuse by IPC charity

Mr. Tan
Is City Harvest Church a charity that enjoys tax privileges? Should the government regulate it more closely?

I found this posting. It states the CHC is an "ordinary charity" and is not an "IPC-charity". Being a non-IPC, it does not enjoy any tax privileges and is not regulated by the Commissioner of Charities, who is a government official.
We must remember that the government does not prevent the abuse of funds. In recent years, two IPC-registered charities were found to have breached the regulations, i.e. the National Kidney Foundation and the Ren Ci Hospital.

What is the problem and how can it be solved?

If the government grant IPC to a charity, it is contributing towards the funds collected by the charity through tax deductions. The government has a large financial interest in ensuring that the charity is managed properly.

The government should appoint a few directors to the board of the charity and make it clear that these directors are independent of the leaders of the charity and are responsible to look after the interest of the taxpayers.

This may be insufficient.

The government, through the Commissioner of Charities, may have to appoint the chief financial officer of the charity or have frequent and direct access to this person.

There is a similar practice in the commercial world. If a Singapore company enters into a joint venture with a foreign company, e.g. to manufacture or sell its product in the country of its foreign partner, the Singapore company will usually insist that they have the right to appoint the chief financial officer, while the foreign partner appoints the chief executive officer or the other way around. This ensures that the financial interest of both partners are protected.


City Harvest Church - a moral issue

Mr. Tan
The question that I like to ask you can be quite sensitive, so you do not need to answer it if you find it too controversial.

You have written many times about bad practices in the financial industry, and that many people were "cheated". I did not see you write any comment about City Harvest Church. Do you think that the church leaders were morally wrong in abusing the funds contributed by their followers for the church? As you know, they have been found to be guilty by the court..

What are your views?

The first question that has to be asked is - why is this church able to collect so much money? Sure, they are a mega church with many tens of thousand of followers, but still the funds are of a staggering amount.

My Christian friend told me that in the bible, there is a command from God that each person must contribute 10% of the income to the church. Although this is a high percentage of income, especially as the earnings are not sufficient to meet the high cost of living in Singapore, many fervent followers struggle to meet this command in the bible.

Although I am not familiar with the teaching in the bible, I believe that the church in the old days use the money to help the needy and the poor and to provide education and other services for the community.

The world today is different from the world when the bible was written. We now have a government that provide many of the welfare and education services that were done by the church of the old days. The government collect taxes to meet these needs.

If the church does not provide many of the traditional services, there is no need for the church to collect such a large percentage of the earnings. A smaller percentage would be sufficient.

Your question is - were the leaders morally wrong?

I guess that this question has to be answered by each member of the church, especially those who struggled to meet the expectation of the church. I will leave it to their judgement.

Perhaps, there are other churches that interpret the command in the bible more flexibly to allow for modern day circumstances.

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