Category Archive: Ask a Question

Dec
20
2010

Insurance Policy Fee

Categories:

by Martin Lee

December 20, 2010

Hi Mr. Lee,

Recently my husband bought an insurance policy. As he read through the policy’s statement, he came to this term called “policy fee”. May I what is this “policy fee” and is it apply to all insurance companies in Singapore? I have another insurance policy but from another company, i didn’t see this “policy fee” stated in the statement.

Thank you for your time to read my questions. Greatly appreciated. :)

Thanks & Regards.

When you buy an insurance policy, there are various costs involved. Some of these include distribution costs, policy or admin fees and mortality charges.

Distribution Costs

This is the amount paid to distributors (as commissions) or other marketing costs.

Mortality Charge

This is the amount that the insurance company needs to charge to pay for the cost of providing the insurance. This might confuse you as most people will think of the actual premiums as the cost of insurance. From an insurer’s point of view, they need to charge a certain amount (that is calculated by their actuaries) so that the pooled funds are enough to pay off future claims. This would be less than the actual premiums that you pay.

Policy or Admin Fee

A policy fee is simply an administrative fee that the insurance company charges you. The amount could range from a fixed amount like $30/year or $5/month to a percentage of the assets (for some investment-linked plans).

Depending on the plan (and the company) you are buying, the breakdown of the fees might or might not be apparent to you.

For example, a wholelife plan will usually not tell you what is the policy fee as it is already factored into the premiums.

On the other hand, NTUC family insurance plan will tell you the policy fee as it’s basically a shell policy (with an ala carte concept) that allows you to add whatever riders you want.

The fees for investment-linked plans are also quite transparent but you will need to read them very carefully as it is possible in certain scenarios that the premiums paid are not sufficient to pay for all the costs. When that happens, topups might be required.

However, MAS does require all insurers to disclose the distribution costs and put in a table showing the effects of deductions (for those plans with cash values).

The table allows you to compare how much money you will save if you invest money growing at 5.25% p.a. yourself (assuming no fees), to how much cash value an insurance policy will give you if their funds grow at 5.25% p.a.

Obviously, the second amount will be lesser as it needs to factor in the mortality charges and all the other fees.

This post has no tag

4 comments


Permanent link to this article: http://www.martinlee.sg/insurance-policy-fee/

Feb
28
2009

Newbie in Stock Investing

Categories:

by Martin Lee

February 28, 2009

Question from a reader:

I’m a newbie who have recently opened up an account with a trading company and now, I’m not quite sure where to begin.

I’ve heard from my broker, my friends and family to invest in some low risks stocks to start the ball rolling but I feel like taking a more diversified approach. Probably have a basket of low to high risks stocks. What sector do you think I should concentrate on? i’ve heard so many opinions but don’t know who to trust. They say banks are the sure way to go but bank stocks have been falling so rapidly. i was wondering if you can share with me what you think is the ideal basket or combination of sectors I should consider investing in.

Thanks so much!

Sylvia

My reply:

Hi Sylvia,

When you say high risk stocks, are you refering to stocks with high volatility, or are you refering to stocks with “risky” fundamentals?

Personally, I would avoid stocks with high gearing and weak cashflow at the present moment. I will also stay clear of financials.

Also, when you do invest in a stock, you need to have a strong conviction of why you are investing rather than just depending on the opinion of others (myself included).

Things change rapidly. A person could be correct in telling you that stock A is good at a certain point in time. But if it becomes “bad”, will that person still be around to tell you when to bail out? That is why it is important to form your own opinion, and monitor closely the stocks that you finally do decide to invest in.

If you find this difficult, you might be better off investing via collective investment schemes. The ETF market is growing and we now have close to 30 ETFs listed on SGX. You might want to have a look at those.

This post has no tag

4 comments


Permanent link to this article: http://www.martinlee.sg/newbie-in-stock-investing/

Jan
25
2009

Newbie Investing in Stocks and Shares

Categories:

by Martin Lee

January 25, 2009

Question from a reader:

Hi Martin,

I have never invested in stocks and would like to start.

What are the good websites to monitor Singapore stock prices? How does one start to buy stocks and sell? I understand when an investment goes wrong, it is possible to lose the principal amount you have invested, e.g. when the company goes bankrupt. Why is it that I hear sometimes you have to “top-up” with more money or you lose everything? Is this the same as the practice of short-selling where you borrow stocks?

What about commodities like gold and silver? How does one start to invest in these?

Vincent

My reply:

Hi Vincent,

The  SGX website provides an update of the stock prices of SGX listed shares.

To be able to buy or sell securities, you need to have both a CDP account as well as an account with one of the stock broking firms in Singapore. This can be done by going down personally to one of the branches of the stock broking firm that you want to use.

The CDP is a central depository where your shares are held while the stock brokerage will provide the platform for you to transact. You only need one CDP account but you can open a few stock brokerage accounts.

Checking prices via the platforms provided by stock broking firms will be more user-friendly than going to the SGX website as you can create your own customised watchlists.

Yes, it is possible to lose 100% of your capital when the company you invest in go bankrupt.

The “top-up” that you mentioned refers to those who trade using margin or leveraged accounts. For these accounts, you put up some collateral (in the form of cash or shares) with the value of $X but you can buy shares worth much more than $X. If the value of the shares drop beyond a certain value, you are required to “top-up” more cash otherwise they will force sell your positions.

As a margin account using leverage, it is possible to lose more than your starting account. Unless you know what you are doing, using a margin account is not recommended.

Borrowing shares to short also requires a collateral. Similarly, you might be required to “top-up” if the share price rises.

To invest in gold, you can look at STREETTRACKS GOLD SHARES, a gold ETF traded on SGX. Another way is to invest via unit trusts.

This post has no tag

4 comments


Permanent link to this article: http://www.martinlee.sg/newbie-investing-in-stocks-and-shares/

Dec
09
2008

Managing Unit Trust Investments

Categories:

by Martin Lee

December 9, 2008

Question from a reader:

Hi Martin

I wonder whether you could enlighten me. Being novice in the financial market, upon the recommendation of my banker I bought about $100 K of UT wth cash in July 07 and $40K in Jan 08 with CPF OA funds.

Unfortunately that banker has now left the bank so I have to seek the advice from friends and other financial advisors/ bankers regarding UT investment. However, I am quite confused by the different recommendations I received regarding the unit trusts I am holding. Some advised me to sell all asap as the prices will plummet further. With the money received from the sale, re-enter the market to buy value stock since their prices are historically low at the moment. Another reason being the fund size will get smaller and those investors who had not sold their unit trust will have to pay higher management fees.

But another group felt this is suicidal move. I might be selling almost at the bottom and then may missed out on the rebound. This group felt that it would be better to hold the unit trusts since I have already “missed the boat” to sell, I might as well wait it out. The third group suggest that I do reallocation of my funds by switching. Most of my unit trust funds are invested in the Asia markets. I am not keen on switching as it involves extra cost such as service fee and the realisation of the loss in value of my investment. Moreover I find those funds recommended to me are not moving anywhere except down although maybe at a slightly slow rate than those funds I am holding. Is there such thing as the right approach or strategy in investing in unit trust.

When I first invested in UT, I thought this would be easier to handle than shares. However, my relatives who invested in shares said I had made big mistake in not investing in those valued stock which gives dividends. Buying into such shares would be me give liquidity and income. There is no need to pay 3-5% of service fee and yearly management fees regardless the market situation. I would only have to pay brokerage fees for buying and selling which are cheaper than those paid for investing in UT. Is their advice valid?

Is it wise also to leave my investable funds with a reliable investment firm/ financial advisor with a guarantee of reasonable return per year. Of course, I understand I would have to pay a certain %age of my profit earned as management fees. Would this be better than I invest my own money since I find it difficult to manage it.

I am sorry for this long letter but I guess you seem to me to be the only unbaised source of info. Looking forward to hear from you soon. Thank you.

Lim

My reply:

Hi Lim,

You bought up many points which I will try my best to address. I can’t make specific recommendations as to what you should do without knowing your profile. However, I will provide some pointers which hopefully will be useful to you.

1) It is impossible to time the market bottom. Should you sell now, do you have a plan for re-entering the market again? Do you buy again when it drops another 5%, 10% or 20%? Or will you instead wait for the market to show signs of recovery before you buy? Does that mean waiting for prices to go up 10% or 20% from the current levels? 

2) True, the expense ratio for funds would be higher if the fund size was smaller. This is because they have certain fixed operating costs. However if the fund is big enough, it shouldn’t be too much of a problem. So, you might want to refer to your fund fact sheets to see how big they are.

3) A proper unit trust portfolio should be diversified across different geographical regions and asset classes. If you have three funds all investing in China, that is not diversification at all. A diversified portfolio (with regular rebalancing) helps to reduce portfolio volatility and enhances your returns. Having said that, it still won’t escape the massive selldown that occured in the past few months.

4) Stocks or unit trusts? With stocks, you have to do your individual research, make your own stock selection and monitor them regularly. With a capital of say 50k, you can probably diversify to about 5-10 stocks. If you do not want to do that, you will have to go for either unit trusts or exchange traded funds (ETF). ETFs are passively managed funds with lower fees than unit trusts. You can find a list of  exchange traded funds that are traded on SGX here.

5) You do not really lose out on the dividends when you hold unit trusts. Ultimately, the unit trust owns the stocks and will collect the dividends (on your behalf). This will be reflected in the fund’s NAV. Some funds do give out dividends to their investors. Usually, they are automatically re-invested in the form of more units for the investor. If the regular cashflow is important to you, then you will have to look into stocks with regular dividends. 

6) Nowadays, you can buy unit trusts for only 2% upfront fee. Two platforms that are popular with DIY investors are fundsupermart and dollardex. You can even transfer your existing holdings to them. They allow you a certain number of free switches (peer to peer) every year, so you won’t need to incur extra fees to do your re-allocation of funds.

7) If you transact through an advisor, you are looking at around 2-3% upfront fee and 0.5%-1% annual fee. Ultimately, you are paying for his time and expertise. However, I don’t think any firm or advisor can guarantee you a fixed return per year when it comes to equity investments. If you are looking for guaranteed returns, certain low rates of returns can be achieved through other products.

Click here to leave a comment.

This post has no tag

1 comment


Permanent link to this article: http://www.martinlee.sg/managing-unit-trust-investment/

Dec
03
2008

Returns on Endowment Plan

Categories:

by Martin Lee

December 3, 2008

Question from a reader:

Dear Martin,

I am enquiring on behalf of my father who has been approached by an insurance agent in signing up an Endowment Plan.

The amount is $50,000 is single premium for 5 years term. The insured amount is $62,500. The part that I am uncertain is on the Projected at 2.80% and 4.30% on investment return (which both are non-guaranteed) described.

The agent explained that it is based on compound interest 0f 2.997% upon 5 years maturity. She also explained that the non-guaranteed investment return is required by MAS to provided.

Appreciate if you can advise on:-

1. Can I deemed the compound interest as 2.997% as the guaranted interest rate? Cos I have some concerns on the so-called non-guaranted is like too good to be that attractive.

2. Is this endowment plan similar to a fixed deposit? Which one would be a safer option, this or the recent fixed deposit with BEA over 2.125%?

Thank you for your time in reading and hope to hear from you soon!

Year Total Premiums Paid Surrender Value
Guaranteed Projected at 2.8% pa Projected at 4.3% pa
Non Guaranteed Total Non Guaranteed Total
1 $50000 40937 9063 50000 9063 50000
2 $50000 41250 9302 50552 9755 51005
3 $50000 41562 9693 51255 10722 52284
4 $50000 41875 10196 52071 11929 53804
5 $50000 50000 4530 54530 7963 57963

 

My reply:

First of all, you might want to refer to my earlier post on participating funds.

In this case, the insurer is showing you the projected returns based on the figure of 2.8%pa and 4.3%pa for their par funds.

If their funds managed to achieve a 2.8% p.a. return, you will get back $54530 on maturity. This works out to be an annualised return of 1.75% p.a. On the other hand, if they can achieve 4.3% p.a., then your annualised returns works out to be 2.997% p.a. as correctly pointed out by your agent.

As you probably realised by now, this 2.997% return is not guaranteed. The only guaranteed portion is the return of $50000 on the maturity of the plan. Your actual returns might be higher or lower depending on the performance of the par fund.

Your benefit illustration will show you the track record of the par fund for the last three years as well as their asset allocation.

Insurers also usually practice a concept of “smoothing” to spread out the gains/losses evenly to policy holders. In layman terms, this means keeping some buffer (when they declare bonus) during good years to make up for bad years.

Lastly, an endowment plan is not the same as a fixed deposit. There is always a trade-off between risk and return. With an endowment plan, you stand a decent chance of getting a better return than a fixed deposit but you bear the risk of the par fund underforming. You also bear the liquidity risk (funds locked up for five years). 

Ultimately, it is up to you dad to decide which are the risks he wants to get paid for because ultimately that is what investment is – understanding the risks and being paid for those risks you are willing to take.

Click here to leave a comment.

This post has no tag

8 comments


Permanent link to this article: http://www.martinlee.sg/returns-on-endowment-plan/

Older posts «