Azure School

Financial Planning Lesson 4

Reading materials

• Read chapters 19 to 24 of the book, Practical Guide on Financial Planning, written by Mr. Tan Kin Lian

Investing in life insurance

• You are allowed a free look period of 14 days to cancel the policy for a full refund of the premium

• You are given a benefit illustration. Look at the distribution cost and the effect of deductin.

• The distribution cost is the money that is taken from your savings to pay the commission and marketing expenses.

• The effect of deduction are the total charges, including interest.

• Do not buy a policy that shows a deduction of over 20% of the accumulated premium.

Life annuity

• The consumer pays a single premium to buy the life annuity and receives a monthly payout for a lifetime.

• A basic life annuity does not provide any refund of the capital on death.

• A guaranteed life annuity provides a partial refund of the capital on early death. The payout is lower than a basic life annuity.

• A participating life annuity pays a lower payout initially, but it a bonus is added each year to increase the payout.

Types of structured products

• The structured products were created by banks and were sold to consumers

• Different types of structured products– Capital guaranteed – Capital protected– Equity linked– Currency linked– Credit linked

Capital guaranteed

• The consumer invests a lump sum for 5 years.• The return on maturity depends on the

outcome of certain events. The principal is guaranteed by a financial institution.

• Many investors had been disappointed with the poor return on these products on maturity, and received less than 2% in total for 5 years.

Capital protected

• This is similar to the capital guaranteed product, but does not provide any guarantee by a financial institution.

• There is a risk of loss of part of the principal, if the investments perform poorly.

• The return is slightly better than a capital guaranteed product, but the risk is higher

• Most investors had been disappointed with the poor yield; some have suffered losses.

Equity-linked

• This contract link your investment to a specified share.

• If the price of the linked share stays above a certain level, the consumer earns a return of about 5% per annum

• If it falls below that level, the consumer has to take the delivery of the linked equity and hope that it will recover.

• Some investors have lost a lot of money on this type of contract.

Currency-linked

• This contract link your investment to a specified currency.

• If the price of the linked currency stays above a certain level, the consumer earns a return of about 5% per annum

• If it falls below that level, the consumer has to take the delivery of the linked currency and hope that it will recover.

• Some investors have lost a lot of money on this type of contract.

Credit-linked

• This contract pays an interest rate of about 5% per annum.

• It is linked to several reference entities. If any entity goes into default, the total principal will be lost. The risk increases with the number of entities.

• Some investors were wrongly advised that the loss will only be in proportion to the number of entities.

• Many investors have lost a large part of all of their investments in these contracts during the Global Financial Crisis of 2008

Leveraged investment

• Some investors are advised to take a loan from the bank, at a low interest rate, to invest in the structured products.

• The amount of loan offered is up to 4 times of the initial investment

• If the linked contracts fall by 10%, the total loss on a leveraged investment can be 50%.

• Some investors had lost half or all of their investment in this type of leveraged investment.

Unregulated products

• The following products are not regulated by the government:– Land banking plots– Gold investments– Wine investments

• Investors should avoid investing in unregulated products as they may be a scam or a Ponzi scheme.

Land banking

• The land plots were in overseas locations; the price looked attractive compared to land in Singapore.

• The investor were told that the investment will appreciate by 2 to 3 times, when planning approval is obtained in 5 to 7 years.

• Most investors had waited for the period, but found that the approval was not given.

• They learned that the actual value of the land is less than 10% of the amount that they paid.

Gold bars

• The contract gives the investor a monthly return of 2% and a full return of the invested sum at the end of the contract period of 3 to 12 months.

• The investor can hold a gold bar as security. However, the actual value of the gold bar is less than the invested sum, unknown to the investor.

• The promoter uses the money from the later investors to pay the return to the earlier investors and keeps the differences.

• Several of these schemes have collapsed, leading to large losses for the investors.

Wine investments

• The investors are asked to buy a collection of wine and are told that the wine can be sold for a profit at an auction to be held in 2 to 3 years time.

• In most cases, the auction did not materialize; the investors were pressured to add to the collection to get a better chance at the auction.

• The wine are usually sold to the investor at twice of the actual market price, unknown to the investor.

Writing a will

• If a person dies without a will, the assets will be distributed in accordance with the Intestate Law.

• If a person dies with a will, the estate will be distributed in accordance with the will.

• A person can change the will at any time, or make amendments to an existing will.

• A person can write the will on his own or have it written by a lawyer.

• You should write a will and to revise it every few years according to changes in circumstances.

End of lesson 4

• Read the chapters of the book again in more detail.

• When you are ready, you can do the Quiz.