Financial Planning Problems

[Chennie]

agree that the allocation is better that what my friends purchased.

but i did a quick calculation. after 4 years, you are down 175%. after 10 years, you are down 165%. you need another 33 years to get back the 165%. i know my estimation is based on 0% appreciation in prices and is not very fair based on what agents project.

Actually this way of estimating is more correct than what most agents do.

It is why I advocate the use of the ad-hoc top-ups in the early years so that you can take advantage of any gains your funds might make in the early years in order to break even much sooner than you initially thought.

For example:

In your first year you invest a regular premium of about $1,400 (usually the lowest it can go). You get 20% of this back in your first year, amounting to $280. Repeating this calculation up to the 4th year (where you start getting 100%), the total amount you are down is:
80% (1st year) = $1120
50% (2nd year) = $700
45% (3rd year) = $630

Total returns required to match in $ terms = $2450

Assuming you ad-hoc top up about $2000 in your first year, your total investment amount for the first year = $2280

You therefore need a return of about 7.5% in your first year (from the funds chosen) in order to cover the amount that you are down from the first three years.

However, you still haven't broken-even!

You must then calculate (and its a lot easier once the agent shows you the B.I. and you factor in the ad-hoc stuff) how much you would need (in terms of returns per annum) in order to break even. This usually occurs around the 12th year (with no ad-hoc) with ad-hoc the cash value accumulates faster so it's usually a good deal sooner than the 12 years (especially considering that fund returns can be higher than 10% p.a. and the B.I.s are all calculated at 8% projected).

Of course, the higher returns will go to those who do their homework on the funds, just like with any other investment product.

 

[limster]

(especially considering that fund returns can be higher than 10% p.a. and the B.I.s are all calculated at 8% projected).

http://mycpf.cpf.gov.sg/NR/rdonlyres/242D16EF-1DD4-4FEB-B42A-6800F03E21FD/0/RCSILP_ListA.pdf

I looked at 3 year annualised performance of the AIA funds approved by CPFIS as of Dec 2013. These are the figures in the CPF report:

1.04%
-1.83%
-6.44%
1.83%
-7.08%
3.21%
-1.06%
-4.10%
2.81%
2.68%
1.58%
1.63%
-4.99%
-0.08%
3.77%
2.21%
1.32%
0.24%
4.18%

Furthermore, virtually all the funds have negative sharpe ratio.
So based on this track record, you project 8% return and say that fund performance can exceed 10%?

 

[focus1974]

Walau.. i simple man.. simple mind.. make simple money..

all i know is if you need to run so many ways to justify an ilp and how to make up for its cost...
then something is wrong somewhere..


If you can't convince them, confuse them at least..

 

[Shiny Things]

You therefore need a return of about 7.5% in your first year (from the funds chosen) in order to cover the amount that you are down from the first three years.

However, you still haven't broken-even!

You must then calculate (and its a lot easier once the agent shows you the B.I. and you factor in the ad-hoc stuff) how much you would need (in terms of returns per annum) in order to break even. This usually occurs around the 12th year (with no ad-hoc)

...or you could just do it yourself, buy ETFs, and you only need a return of about half a percent to break even. Even the most boring short-date bond ETF will break even in about six months. Why exactly would I bother with an ILP?

 

[zhenyue86]

Example of Prudential's ILP. PruLink Supersaver. You get 2.45% instead of 4% if all variables are the same. Illustration is from their brochure.

https://www.facebook.com/photo.php?fbid=10152174936260320&l=84e9c50c85

 

[IFAadvisor]

Actually this way of estimating is more correct than what most agents do.

It is why I advocate the use of the ad-hoc top-ups in the early years so that you can take advantage of any gains your funds might make in the early years in order to break even much sooner than you initially thought.

For example:

In your first year you invest a regular premium of about $1,400 (usually the lowest it can go). You get 20% of this back in your first year, amounting to $280. Repeating this calculation up to the 4th year (where you start getting 100%), the total amount you are down is:
80% (1st year) = $1120
50% (2nd year) = $700
45% (3rd year) = $630

Total returns required to match in $ terms = $2450

Assuming you ad-hoc top up about $2000 in your first year, your total investment amount for the first year = $2280

You therefore need a return of about 7.5% in your first year (from the funds chosen) in order to cover the amount that you are down from the first three years.

However, you still haven't broken-even!

You must then calculate (and its a lot easier once the agent shows you the B.I. and you factor in the ad-hoc stuff) how much you would need (in terms of returns per annum) in order to break even. This usually occurs around the 12th year (with no ad-hoc) with ad-hoc the cash value accumulates faster so it's usually a good deal sooner than the 12 years (especially considering that fund returns can be higher than 10% p.a. and the B.I.s are all calculated at 8% projected).

Of course, the higher returns will go to those who do their homework on the funds, just like with any other investment product.

Hi Chennie,

ILP is a product designed during the boom years where whatever stocks you buy just increase in value. It is the only product for insurer to tap the booming unit trusts market. You look at today's market, which of your funds really can make a good return of more than 5% per annum after netting off the charges on the fund. Let's not include premium allocation.

I am not a investment guru, but which person with a logical mind will want to get invested and immediate suffered a lost of 175% for the first 3 years out of their 300% capital. You are telling me to invest in a unit trust with $1000 and I will get $150 after year one and wait for it to grow? I would rather throw that amount on any blue chips. I don't think i will lose so much in 3 years. And worst still, you recommend to top up my lost just to take advantage and try to "break even."

You see, unit trust is a diversified investment vehicle already. And if you want clients to monitor and diversify some more. Why are they paying the management fee? If you diversify your portfolio, your losses are diversified, anyone shared your earnings are diversified too?

Just FYI, dollar averaging only works when the value of your fund bottom up... If your fund are forever in the red. Dollar averaging just gives you more penny units.

I'm sorry.. I'm a bit angry when advisers get brainwashed by their peers and offer client irrelevant product. I have a client who put $40k plus into such plan, I gave her the phone during presentation and she found out she only has $5k in her investment portfolio. Do you understand her rude awaking.

I'm hoping you will understand more on ILP and help your existing clientele.

 

[kaixmax]

Indeed you are correct, but the probability of loss is high within the next 1 to 2 years. What goes up, must come down, it may not come down immediately, but the risk is higher.

With regards to the second point, that is why I choose to educate clients prior to signing the policy, doing it after is what will result in complaints and clawback of commission. Clients must know and understand that they are the ones who choose the funds to put their money in. I will always ask them for the basis of their choice.

Remember, we are agents, not investment bankers or financial analysts. To provide a solid recommendation and to say that the client will make money is usually asking for trouble. Hence, I always make sure the client understands that the final decision will rest with them and I can only teach them how the system works. How they choose to use it, will be for them to decide

To beat the guys getting 5% dividends p.a. You would need to match your investment as closely as possible and earn above the 5% p.a. Is this possible? Yes, last year one fund had a return of about 16% (so it's not impossible).

Now to clarify your other points:

1) Yes, people buy ILP so they don't have to time it and focus on it too much. However an agent should still educate them on this. If the agent doesn't know and the client doesn't know, then...we can't just stare at each other right? Hence I always try to teach my clients the basics of timing. Even if they want to just throw in the money and hold for 5 - 10 years, it would be better to do it with a fund that is at its 10 year low, since the probability of it going up in the next 10 years is high. However the client should be responsible for checking on their funds at least once every quarter or so. They can then switch funds as they see fit or rebalance their fund allocation (AIA has an automatic rebalancing option for clients, free)

I'm confused, you state that you are an agent not a finance professional, but you are saying you are in a position to educate your clients on market timing?

A lot of assumptions there regarding market cycles and pricing.

There's something that you are constantly absolving yourself from - the client is buying the product through You, and most of the time FROM You. Why is it so hard to not to sell a product that you acknowledged that you have an inadequate understanding of?

 

[dork32]

one point that ts did mention is protection. if my friend dies tomorrow, he will get 70 088 though he paid only 2000. if you buy etf and die, you get back the etf value.

another advantage that i noticed from his statement is that he is able to buy just a few units. if you buy want to buy sti etf with the 2000, you can get only 600+ units. the min lot size is 1000.

dont come and scold me again. I am not for ilp. what i state is every investment has its pros and cons. it is us that should decide whether the form of investment is suitable for us.

 

[kaixmax]

one point that ts did mention is protection. if my friend dies tomorrow, he will get 70 088 though he paid only 2000. if you buy etf and die, you get back the etf value.

another advantage that i noticed from his statement is that he is able to buy just a few units. if you buy want to buy sti etf with the 2000, you can get only 600+ units. the min lot size is 1000.

dont come and scold me again. I am not for ilp. what i state is every investment has its pros and cons. it is us that should decide whether the form of investment is suitable for us.

Buy term insurance then, simple.An ETF is NOT an insurance product.Either you get term coverage, or bit of whole life insurance if you really really want. Nikko AM STI ETI min lot is 100, so it makes your point moot. Yes, and ILP has many many cons and very little pros (saving on taxes, but it doesn't apply here). It's not about personal preferences, it's a product that is ill-suited for 90% of the population.

 

[dork32]

if you noticed, i did mention the break even period for ilp is very long (more than 10 years). but if you look at life policies, it is also something like that. many, including myself, have a life policy. i did not grumble to my agent about the long break even period then. maybe i was a little stupid then.

but term policy will never break even.

Eg I pay 200 per month for coverage of 100k for my life policy
I also pay $12 per month for a coverage of 100k using a term policy

after 15 years
for my life policy, I would have broken even and gotten back my principal
for my term policy, I would have lost everything.

many of you advised people to diy and you can make more. can you tell what i can buy with 188(after deduction for term policy)? at that time, i can barely afford the 200 per month. it is still not enough to buy 100 units of nikko am etf. usually, buying in such small lot size, you will also be hit with high brokerage if you do not use standchart.

of course, today i have built my own portfolio of etf, equitities, bonds and reits. i will say that i do not need the help of insurance agents. but back then, they would be of some help to me.

 

[chopra]

nobody force you to rsp monthly. do it half a year, or yearly. so be it.

 

[keentolearn]

Many young ppl 'duped'

To add on to the lively discussion on ilp,

I vividly remember insurance agents marketing their ILPs to students at my university when i was there. It was when i was introduced to ILP and dollar cost averaging.

It seemed like a good deal, because most uni students and fresh grads don't have a lump sum of $$ to invest. And not to mention all the insurance agents and other FAs who pounce onto the young professionals-to-bes.

Many of my friends are buying ILPs, I myself included (contemplating whether to bail on it - in the bailing-out thread - pls advise if you could).

Not sure of actual statistics but I believe many young people out there who do not actively read forums like HWZ are unable to judge for themselves, especially when insurance agents only talk about all the good things about ILPs - and the schools actually give them airtime during orientation camps -.-

 

[dork32]

nobody force you to rsp monthly. do it half a year, or yearly. so be it.

agree, i could have accumulated enough then start investing.

but my monthly savings of 200 would be rotting in the bank at 0.05% while I try to accumulate. some people want their every cent to earn interest/dividend for them.

noticed no one has done any calculation to verify which is better

1. to invest 200 a month with insurance company and earn their projected 4-8% straight away and pay the agent fees or
2. to wait till you have a few thousand dollars before doing a diy.while doing so you earn an interest of 0.05% but you save on agent fees

But i got a strong feeling that option 2 is better.

 

[dork32]

To add on to the lively discussion on ilp,

I vividly remember insurance agents marketing their ILPs to students at my university when i was there. It was when i was introduced to ILP and dollar cost averaging.

It seemed like a good deal, because most uni students and fresh grads don't have a lump sum of $$ to invest. And not to mention all the insurance agents and other FAs who pounce onto the young professionals-to-bes.

Many of my friends are buying ILPs, I myself included (contemplating whether to bail on it - in the bailing-out thread - pls advise if you could).

Not sure of actual statistics but I believe many young people out there who do not actively read forums like HWZ are unable to judge for themselves, especially when insurance agents only talk about all the good things about ILPs - and the schools actually give them airtime during orientation camps -.-

if i am already in the 105% allocation period, confirm i will not bail out. if i am still in the first or second year, i will be in a dilemma. Bail out you lose almost everything. dont bail out you continue to bleed some more till the 105% come.

One reason why school give insurance agents air time is that the agents do sponsor gifts. Seniors organizing camps is always very hardup on cash. to impress the juniors, they may "sell" air time to agents such that they could improve their goodie bags.

 

[IFAadvisor]

agree, i could have accumulated enough then start investing.

but my monthly savings of 200 would be rotting in the bank at 0.05% while I try to accumulate. some people want their every cent to earn interest/dividend for them.

noticed no one has done any calculation to verify which is better

1. to invest 200 a month with insurance company and earn their projected 4-8% straight away and pay the agent fees or
2. to wait till you have a few thousand dollars before doing a diy.while doing so you earn an interest of 0.05% but you save on agent fees

But i got a strong feeling that option 2 is better.

Well Dork32,

I think you are unaware that we can invest straight with fund houses with $200 via a supermarket of funds and pay sales charges of 3-5% than your 85%.

Even if I put it in the bank and earn 0.01%. I am still better off losing to inflation than a immediate lost of 85% of capital with insurer company via premium allocation. Which logical person will want to lose 85% upfront when he invest? Will u?

Please don't tell us it is coupled with insurance, client pays for it every month and so they can get separate term insurance themselves.

Then again, my main and sole objective is wealth accumulation.

 

[dork32]

Well Dork32,

I think you are unaware that we can invest straight with fund houses with $200 via a supermarket of funds and pay sales charges of 3-5% than your 85%.

Even if I put it in the bank and earn 0.01%. I am still better off losing to inflation than a immediate lost of 85% of capital with insurer company via premium allocation. Which logical person will want to lose 85% upfront when he invest? Will u?

Please don't tell us it is coupled with insurance, client pays for it every month and so they can get separate term insurance themselves.

Then again, my main and sole objective is wealth accumulation.

i have mentioned in my earlier post that i find the 85% deduction very big.

I have also mentioned that i will not put my money in.

i do no put my money in fund supermart. 3-5% is still quite high. but it sounds reasonable compared to 85%

i use dbs vickers cash account. only 0.18% for each trade.

 

[victorlht88]

Just adding in my two cents from the other thread since it's also about ilp.

I've also cancelled my ilp with great eastern recently. The allocations of your monthly/annual premiums are simply atrocious to put it bluntly.
1st year - 15%
2nd year - 50%
3rd year - 75%
4th to 9th year - 100%
10th year onwards - 105%

They've already taken up a substantial amount of your premiums during the initial years so you are already in a deficit which you won't recover even if your funds perform at supersonic speeds. It seems rosy that they give you some sweetening moments by allocating 105% of your funds after 9 years but how many years will you need to recover the outlays you've made during the first 3 years (85% + 50% + 25% of your premiums for the first 3 years go to them which is 160% and from the 10th years you get an additional benefit of 5% which will probably take you 32years to recover your initial premiums)? This calculation is a very direct and simple calculation ignoring the fact your funds u invest in make money. Your insurance coverage is actually paid by yourself anyway and for the amount you put in might as well buy term policies with high coverage and invest the others yourself.

This rationale I came up with might be flawed but it's the simplest way I see it but even the table provided by them shows that it will take at least 25 years to break even, who the hell invests in something which will take 25 years to even recover your capital? It's just like going to mbs/rws to gamble with a initial $100 deficit for the entrance fee.

For the first year, i paid $1200 but only $65 goes into my coverage and so on.

Decided to cancel it after 2 years, luckily this cost me only $1500 but it's a good lesson learnt.

"Never mix investments with insurance. Never let strangers manage your money"

 

[chopra]

Well Dork32,

I think you are unaware that we can invest straight with fund houses with $200 via a supermarket of funds and pay sales charges of 3-5% than your 85%.

Even if I put it in the bank and earn 0.01%. I am still better off losing to inflation than a immediate lost of 85% of capital with insurer company via premium allocation. Which logical person will want to lose 85% upfront when he invest? Will u?

Please don't tell us it is coupled with insurance, client pays for it every month and so they can get separate term insurance themselves.

Then again, my main and sole objective is wealth accumulation.

erm, you can earn 0.8%cimb.
$300plus to buy 100shares of nikko etf.

 

[knightdreamer]

Hi guys,

How much will term policy cost per month?

 

[keentolearn]

Hi guys,

How much will term policy cost per month?

Yes I would like to know to. Know that it's dependent on the insurance company but which is the most value-for-money?

And when does the premium age bracket change? I'm turning 24 this year, does it matter if I start before or after my birthday?