*Official* BBCWatcher club

[BBCWatcher]

Is it prudent to look for a different insurance agency for DII to not "put all your eggs in one basket"?

That's kind of a tie breaker consideration, but fortunately you probably won't have that problem because Prudential doesn't sell DII. Aviva does (and so do Great Eastern and AIA), but it might be prudent to cancel your Aviva coverages and then pick up the term life insurance coverage again once you have at least one dependent, and if that's allowed. Aviva's SAF/MINDEF Group Term Life Insurance is quite a good value -- when/if you need it. (The accident insurance I can definitely pass up, assuming your core coverages are good.)

 

[ChuQianYiDing]

Hmm... try posting the code that appears after imgur.com i'll find it from there

i.imgur .com/St2vrCk.png

Hopefully this works?

 

[tangent314]

Ok, let's check two scenarios.

1. You keep your current plan and surrender it at age 65 when your children are independent, you are ready to retire, and you don't really need life insurance anymore. Prudential PAR Fund performs at an average of 4.75% so you get your G + NG surrender value of $172983

2. You surrender your plan, and replace it with Aviva Direct Term Life + Critical Illness with $150k coverage from age 28 to 65. The premium is $360 per year. So you take out the current surrender value of $7539, invest that, and then invest the balance $1528 per year.

Now, in order for your Plan 2 investments to hit $172983 at age 65, you will need to achieve 4.39% IRR.

 

[BBCWatcher]

Prudential PAR Fund performs at an average of 4.75%....

Will it? That's an assumption, and it's a bold one.

 

[tangent314]

Will it? That's an assumption, and it's a bold one.

I think you have missed the point. We are comparing Scenario 1 and 2 here.

So let's say in scenario 1, Prudential gets 4.75%. With the same market conditions, how much will you be getting if you go self-investing in scenario 2?

If times are bad, and Prudential only gets 3.25%. With the same market conditions, you are going to get less when self-investing in scenario 2. Similiarly if times are good, and Prudential gets 6%, your self-investing performance will also be greater.

 

[BBCWatcher]

I think you have missed the point. We are comparing Scenario 1 and 2 here.

OK, I think I understand you now. Let me see if I can summarize the main point.

Your calculation shows that if Prudential delivers 4.75%/year returns, net of their high costs (to the policyholder), you, as a DIY investor, would have to achieve 4.39%/year returns over the same time period to match Prudential. So you can fall 35 basis points below Prudential's performance and still come out ahead doing this on your own.

I think I'd take that bet, and DIY. But that's me, and it's an interesting bet. For example, there is some SDIC backstopping on that insurance policy which might have some minor value.

There are some individuals and firms that'll make higher offers to take the policy off your hands than what the insurance company offers in surrender value, right? It's worth getting a couple quotations on that, then re-running the numbers with the higher third party surrender value.

 

[viventa]

There are some individuals and firms that'll make higher offers to take the policy off your hands than what the insurance company offers in surrender value, right? It's worth getting a couple quotations on that, then re-running the numbers with the higher third party surrender value.

As always, I find myself learning new things from reading this thread (and the ST thread). It was only after reading this post that I discovered that there are entities out there in the business of buying over endowment policies and the like. My question is - what's in it for them? It seems like a bad value proposition, since the company doesn't receive any "benefit" from the insurance side of the policy, and they only get the relatively low payout (compared to investing the same amount on your own) for the premiums they have to continue to pay under the policy.

 

[Shiny Things]

As always, I find myself learning new things from reading this thread (and the ST thread). It was only after reading this post that I discovered that there are entities out there in the business of buying over endowment policies and the like. My question is - what's in it for them? It seems like a bad value proposition, since the company doesn't receive any "benefit" from the insurance side of the policy, and they only get the relatively low payout (compared to investing the same amount on your own) for the premiums they have to continue to pay under the policy.

Nah, this is a great deal for the companies, because:
1) They offer a lot less than the policy is actually worth;
2) They can borrow to fund the purchase, and borrow cheaply.

Imagine that you're one of these companies, and someone comes to you with a policy that's going to pay off $100,000 in one year's time. You'd pay, say, $95,000 for that policy all day long, because you can (probably) borrow that $95k from the bank at around 2% for one year. The buyer's getting a raw deal, but they're coming to you because they need the money now, not in a year's time or twenty years' time or whatever.

On day 365, the policy pops off and pays you $100k. You pay back about $97k to the bank, and you've just made $3k for very little risk and just a bit of patience. Drinks on you tonight.

The only thing you have to do is make sure you don't inadvertently offer more than $98,000 for the policy, because then you're losing money.

If the policy's got a long time to run, the numbers get even worse. If someone came to me and asked me what I'd pay for a $100,000 life policy on a 55-year-old dude, I'd probably say "right, if I borrow 1-year and roll the loan for 30 years, I can probably borrow at 3%, so I'm going to charge 5% to put some margin in there for me; the dude's probably going to pop off in 30 years but let's say 35 to be safe... I'll pay you, what, $16,500? Well, if you don't like it, you can wait thirty years..." The only way I lose out is if short-term interest rates rocket higher and stay higher, or if the dude lives to be like 130.

Hilariously enough: it's actually possible to screw this up! A company called JG Wentworth, based over here in the States, is in the business of buying these "structured settlements"—life insurance policies, lawsuit payouts that pay a fixed amount every year, lottery winnings that pay a fixed amount every year. And they've managed to screw the business up so badly that they've gone bankrupt twice in the last decade.

(The business of buying these structured settlements, annuities, life policies, etc etc, is surprisingly competitive. So the margins are slim, and the customer acquisition costs are through the roof; that's what blew up JG Wentworth.)

 

[tangent314]

As always, I find myself learning new things from reading this thread (and the ST thread). It was only after reading this post that I discovered that there are entities out there in the business of buying over endowment policies and the like. My question is - what's in it for them? It seems like a bad value proposition, since the company doesn't receive any "benefit" from the insurance side of the policy, and they only get the relatively low payout (compared to investing the same amount on your own) for the premiums they have to continue to pay under the policy.

A lot of policies, especially the endowment ones, are structured to have low surrender values in the early years, which then sharply rises when approaching maturity. For example, I have a 30 year endowment plan that I'm halfway through. The first 15 years is giving me an IRR of about 2% but the next 15 years is giving me an IRR of about 7%.

 

[ChuQianYiDing]

Thanks alot, BBCW and Tangent for all the advice and help given. Especially thanks to Tangent for actually calculating the IRR to beat that amount. I should've realized earlier how to answer that question myself, so thanks a lot for showing me the light haha.

Now, in order for your Plan 2 investments to hit $172983 at age 65, you will need to achieve 4.39% IRR.

Your calculation shows that if Prudential delivers 4.75%/year returns, net of their high costs (to the policyholder), you, as a DIY investor, would have to achieve 4.39%/year returns over the same time period to match Prudential. So you can fall 35 basis points below Prudential's performance and still come out ahead doing this on your own.

If times are bad, and Prudential only gets 3.25%. With the same market conditions, you are going to get less when self-investing in scenario 2. Similiarly if times are good, and Prudential gets 6%, your self-investing performance will also be greater.

It makes sense that in a bull market, I could probably DIY better than Prudential since they would keep some of the profits for themselves, but if times are bad like the 3.25% scenario, would there be a risk of them offloading the costs to insurance holders? I'm not very clear on why DIY would necessarily do worse in a bad scenario (assuming some typical global/local stock+bond index choices like IWDA+ES3+some bond component). Sorry if this is a dumb question.

 

[BBCWatcher]

It makes sense that in a bull market, I could probably DIY better than Prudential since they would keep some of the profits for themselves, but if times are bad like the 3.25% scenario, would there be a risk of them offloading the costs to insurance holders?

That's exactly what would happen. That 4.75% (net of costs) is a projection, not a promise. The only reason the insurance companies use 4.75% is because that's what the Monetary Authority of Singapore lets them use in their marketing simulations.

Tangent314 calculated that if Prudential actually achieves and delivers 4.75%/year over the life of the policy to the policyholder, then an investor who achieves a lower return/year over the same period would beat Prudential, as long as the lower yield is no more than 35 basis points lower.

If Prudential only achieves 3.25%/year, let's suppose, then an investor accomplishing 3%/year should beat Prudential. Both numbers fall, and both numbers rise, together. You don't have to beat Prudential's actual returns to beat; you just have to come reasonably close to their returns to beat.

It appears to me that a prudent investor taking an appropriate level of risk would indeed consistently beat Prudential. That's especially true if you can obtain a higher surrender value from a third party than Prudential is offering, and often you can. However, this decision is still somewhat "interesting," and I think some policyholders would still choose to ride along with Prudential once this deep into the policy. Which is by design, really. The insurance company understood and understands this deal quite well, and the insurance company has done and will do well.

I don't want to discount completely what insurance companies do in offering such deals. There are many people that feel uncomfortable investing on their own, or they're unable to invest prudently in an age-appropriate way, or they really need the discipline of a premium bill, or they just like their insurance salesperson, or some combination. If the insurance company's offer is convenient to you, and if you don't mind paying something for that convenience (and understand the deal at least reasonably well), I certainly have no objection. That said, there are some really, really awful products that insurance companies sell that really don't add value, or even subtract it.

 

[a4973]

It appears to me that a prudent investor taking an appropriate level of risk would indeed consistently beat Prudential. That's especially true if you can obtain a higher surrender value from a third party than Prudential is offering, and often you can.

thanks to BBCW & Tangent314, i had surrendered an endowment policy back to the insurance co.
may i know what are the upside / downside of selling the endowment to a 3rd party instead?

 

[tangent314]

It makes sense that in a bull market, I could probably DIY better than Prudential since they would keep some of the profits for themselves, but if times are bad like the 3.25% scenario, would there be a risk of them offloading the costs to insurance holders? I'm not very clear on why DIY would necessarily do worse in a bad scenario (assuming some typical global/local stock+bond index choices like IWDA+ES3+some bond component). Sorry if this is a dumb question.

No, your SV will never go down it value. It will always go up by at leas the difference in the G value, so in those cases they may lose money.



Looking at some of the retirement plans that project G+NG SVs for 3.25% and 4.75%, and provide fairly flat payout benefits, it seems that they insurance companies give you about 2.8% returns for 3.25% PAR fund performance, and about 4.0% for 4.75% PAR fund performance.

In practice, it looks like they also smoothen out the returns over about 3 years.

 

[tangent314]

Tangent314 calculated that if Prudential actually achieves and delivers 4.75%/year over the life of the policy to the policyholder, then an investor who achieves a lower return/year over the same period would beat Prudential, as long as the lower yield is no more than 35 basis points lower.

Note that 4.39% is specific only to this plan. Depending on the plan and the number of years the plan has been in force, this number can vary quite widely.

Remember those private life annuity policies you were discussing about on another thread? Those are offering ~4.0% returns on 4.75% PAR fund performance...

 

[dork32]

this time round, i stand on the side of bbc

i do not believe in endowment insurance. it is like cpf life. it is locked up for a long, long time.

if i were to diy and buy shares or ut or ssb, i can encash it anytime i like. i dont have to wait for the full 30 years before i can see any profit.

 

[henrylbh]

I had a 15 years endowment policy paid annually by CPF OA.

The BI showed a compounded return of 5.77% based on projected maturity sum. In the end, it fell far short of projection. Fortunately, the final return was 3.72% which is much better than CPF return of 2.5%

 

[EagleToThesSky]

Yes, that is a broad question.

Humans aren't too dissimilar around our planet, but there are a few differences between those two particular countries. The United States is the third largest country in land area and the largest national economy in the world. It's almost incomprehensibly bigger than Singapore. Chances are, no matter what you're into, it's available in the United States, usually with lots of fellow travelers. The sheer diversity of experiences is incredible, perhaps even overwhelming.

Along with that bigness comes some insularity, although that's changing. For example, in 1994 about 10% of Americans had passports. Now the percentage is over 40%.

There's more violent crime in the United States than in Singapore, but Singapore's violent crime rate is particularly globally low. However, crime rates have fallen a lot in the U.S. Yes, there are some well publicized mass shootings in the U.S., and the gun manufacturers (and their lobby) deserve much of the blame. But it's still a pretty safe place that's generally still getting safer.

The so-called "Obamacare" reforms represented a major improvement in the U.S. healthcare system, including for immigrants. Unfortunately, one major party wants to go backwards. It'll take another election or two to get back to sanity. If you have (and hang onto, which isn't always easy) employer-provided medical insurance, or qualify for Medicare (at age 65 and after at least 10 years of payroll contributions), you're in pretty good shape. So far Obamacare is remarkably robust, but it won't be truly nailed down and improved without a party change.

Imagine if the ethnic Chinese community in Singapore were to become 50% of the population (and falling) rather than >70%, and you have a rough idea of the roots of the social angst in the United States right now. The United States will very soon become a majority-minority country, and that's exciting and wonderful. The diversity is a major national strength. However, there are some people who don't like these demographic changes, much like some of their ancestors didn't like slavery. So it's one of the few countries that has ever elected a member of a racial minority as its national leader, twice, and then the same country elected (with millions fewer votes -- that's another oddity) Donald Trump. Now that's a special country!

Attitudes are changing quickly. For example, the LGBT community has made and continues to make enormous strides in civil rights and acceptance, and same sex marriage is officially recognized everywhere in the United States. Most people have absolutely no problem with this, and those that still do are dying off. As another example, marijuana legalization is quite popular, and I think it's only a matter of time before the United States follows in Canada's national footsteps. Marijuana is already legal at the state level in many places, with more states to follow in this 2018 election cycle. Federal legalization is really necessary to make it work, though.

The U.S. economy is rather strong at the moment, so it's a pretty good time to be in the labor market there. The late 1990s were better in that respect, but it's pretty good right now.

I'll stop there for now.

Hi BBC, you have a BIG HEART!

I am more thinking of how the changes will impact me, like way of life, retirement planning, taxes etc, rather than at a level this high as you demonstrated here. It is great to see you compile all these stuff together and reach a conclusion that it is an interesting country and time to enter is considered good now.

Really appreciated! Thank you!

 

[EagleToThesSky]

Understood!! Thank you!

When chasing the new BHS, it's best to top up your MA before the January payroll contribution hits. Other top-ups can wait until late in the month.


That's right, and also because MA can be useful at any/every age.


Yes, it increases on January 1, or at least that'll be true for the next few years.


If MA is pegged at the BHS, and assuming the Retirement Account is funded, then an "all three" top-up can all be withdrawn at age 55+. In other words, CPF turns into an interesting little piggybank at that point, where you can deposit up to $37,740 per year, earn a lovely interest rate (>2.5% blended rate), and withdraw funds whenever you wish. If your MA is not pegged to the BHS it's still a pretty nice deal, but some portion of your "all three" top-up will flow into your MA.

As an aside, the Medisave Account can be a pretty decent bequest vehicle, if that's your goal.

 

[EagleToThesSky]

The image's a bit too low-res; could you post a better/higher quality one, please?

Here you go. Hope this one is better.

Sent from Samsung SM-G955F using GAGT

 

[BBCWatcher]

Possible Simple U.S. Bank Accounts for Non-Residents

I know there are some non-U.S. persons who are interested in opening a U.S. bank or U.S. credit union account. Why would you need a U.S. dollar bank account in the United States? There are some reasonable justifications, such as:

1. You need to receive legal payments in U.S. dollars for services, such as online marketing.

2. The bank account would help support your global investing, through Interactive Brokers and/or possible other U.S. brokers.

3. You want a low cost ATM card to support your international travel.

If you have ever received a U.S. Social Security Number (SSN), then it's yours for life. And it's rather easy to open a U.S. bank or U.S. credit union account if you have a U.S. Social Security Number and if you physically visit the United States for a little while. My favorite example is the American Express/Walmart Bluebird card and its associated simple consumer bank account. The Bluebird card is basically fee free in every dimension. But you must have a SSN to make Bluebird work even reasonably well.

If you have a U.S. Individual Taxpayer Identification Number (ITIN), then it's somewhat difficult to open a U.S. bank or U.S. credit union account, but it should still be possible. For example, you can draw inspiration from the large undocumented immigrant community in the United States and visit a credit union that likely can help you establish an account. However, ITINs are now tough to get, and they are revoked within a couple years if you no longer need one. (The latter might not be a problem if your account is already open.)

What if you don't have either a SSN or ITIN? I've been researching alternatives, and here are a couple candidates:

A. TransferWise offers a so-called borderless account that may suit your needs.

B. Motiv, an online/mobile FDIC insured bank, claims it is willing to open accounts for non-citizens if you can provide a passport or other acceptable form of ID. You'll still need a U.S. postal address (for a little while) to receive their physical ATM/debit card. Motiv is broadly similar to Bluebird, i.e. it's a non-interest bearing account with zero fees for practically everything. But you can deposit U.S. checks made payable to you, pay bills in the U.S. (via free mailed paper checks if necessary), and transfer funds via ACH, at least for "first party" purposes. I would welcome reports from those who've tried to open a Motiv account.

C. N26.com, the now famous German online bank that European "digital nomads" like, is planning to open a U.S. affiliate. That might be a good candidate if it comes to pass.

OK, what if you don't have a physical mailing address in the United States? You may be able to sign up for an account with a U.S. Postal Service (USPS) authorized mail forwarder. Authorized mail forwarders require U.S. Postal Service Form 1583, and a lot of them are based in South Dakota. I have no particular recommendations here, except that if you live outside the United States you might want a mail (and package) forwarder that offers an address in one of the "lower 48" states that has no sales tax: Delaware, Montana, New Hampshire, or Oregon. Of these I'd avoid Montana simply because domestic U.S. shipping to/from Montana is likely going to slow down total transit times to some extent. I'd probably start with Oregon and, if unable to find a good deal there, look at offers in Delaware and New Hampshire. Of course there's a fee to have U.S. mail forwarding service, typically around US$100/year (or more) plus international postage, although a few of them might be monthly fee free if you have particularly low mail volumes.