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UOB, Prudential and what is financially manageable?

Monday, October 5, 2015

As investors, we recognise that we could make investment mistakes. So, it is important to size our positions appropriately so that if an investment turned out to be a mistake, it would not sink our entire portfolio.

It is partly about making losses financially manageable. So, what is financially manageable?

Well, a more prudent way of interpreting whether something is financially manageable is in terms of cash flow. I know we could also interpret whether something is financially manageable by how much we have in savings.

Well, it is nice to have more assets (and cash is an asset) than liabilities but if we should be in a situation that requires us to draw upon our assets to fund commitments, then, we could find ourselves in trouble in future.


So, before we commit to anything financial, ask if our cash flow is adequate and not just whether we have enough savings to see us through especially if it is going to be a long term commitment that is quite demanding.


What led me to say all these?

A couple of readers sent me a link to this article:
Admin executive paid yearly insurance premiums higher than annual pay.

A 57 year old Mdm. Han bought a Prudential endowment policy from UOB a couple of years ago. She now discovers that the maturity benefit is not 100% guaranteed. She might get a sum that is actually lower than the total premiums she would have paid at maturity.

Pertinent question:
How did she get the impression that the maturity benefit is 100% guaranteed?

It also baffles me why she would commit to a $40,000 annual premium when her salary is about $30,000 a year. She might have been persuaded by the free air-fryer and steamer.

Pertinent question:
Was a thorough fact finding session conducted with Mdm. Han or was someone just in a hurry to sell a policy with a fat annual premium?


I don't have the answers to these questions, of course, but these questions aside, if Mdm. Han had asked the important question "Is this financially manageable?" and knew how to answer the question, she would have avoided such a situation.

Please note that I am not even talking about whether the insurance product is suitable for Mdm. Han. That is another topic altogether.

Related posts:
1. Misled into earning 6.3% interest in 4 years?
2. 6 point response to an expensive lesson.
3. A true story about life insurance and grapes.

9 comments:

Singapore Man of Leisure said...

AK,

Sadly, it's not an isolated case.

More than half of those who bought Integrated Policies found out they can't "manage" the hospital class they have paid for in advance...

Singaporeans are generally asset rich but cash flow poor during retirement. The extreme must be that elderly couple living in landed property needing handouts from big daddy...

Same goes for yield hogs who are so enamoured on passive income that they pooh pooh the idea of emergency and opportunity funds. Things don't always go as planned; to be the "weak hands" professional value investors are picking off is no fun :(

AK71 said...

Hi SMOL,

Thinking ahead is an important life skill. Unfortunately, when I do that, I am labelled a worrier by not just some people but by quite a few. So, I tell people I am a worrier.

Of course, there are also people who question why AK needs an emergency fund although he has quite a bit of passive income every year. Why har? ;)

caelitus said...

It is reprehensible that a bank executive can sell that product to the lady. In spite of the 'windfall' she had from the divorce settlement of S$350,000, the bank executive should have considered and investigated her background.

Technology can and should be applied to screen consumers and assess sustainability. At the end of the fact-finding session, both parties have to attest to what was discussed. That may prevent unsuitable consumers from falling prey to hard-sellers.

The Sun said...

Hi AK,

Buyers of insurance policies should not only ask themselves if the product they intend to purchase is financially manageable for them. They should also evaluate if the terms and projected returns of the insurance policy is worth it.

In my opinion, purchasing a policy whereby the expected return at maturity could be even less than the total premiums paid for the life of the policy is a bad deal (unless the insurance company decides to approve the policy to cover the pre-existing conditions of the policyholder - with a premium loading of course).

AK71 said...

Hi caelitus,

No one cares more about our money than we do.

It would be interesting to see if UOB would share publicly the outcome of their investigation into this matter and remedial action to be taken, if any.

AK71 said...

Hi Sun,

Oh yes, most certainly. Whether the product is a good deal or not is a pertinent consideration too. Hence, my closing paragraph in the above blog post.

In this blog post, I was trying to home in on how many people are not forward thinking when it comes to big long term financial commitments and how these should be funded.

amoose said...

My mother faced a similar situation.

She was at OCBC to open a normal savings account, when a "financial adviser" recommended her an insurance/endowment plan, similar to what was mentioned in the ST article. He was selling it as a plan where you get your principal back (plus variable returns from investment), but conveniently did not mention that the guaranteed sum is LESS than the principal (about 15% less).

Needless to say, when my mum let me know about it, I strongly advised her to cancel it (which she did, thankfully), since it was still within the free-look period.

I was quite annoyed that certified "financial advisers" can recommend such plans while glossing over details and only focusing on the benefits. He still had the cheek to dissuade my mum from cancelling the plan, when she went down to sign the cancellation papers. Rah!

AK71 said...

Hi amoose,

My mom had similar experience in DBS and UOB. With DBS, she went down to cancel the plan when I found out in time. With UOB, she didn't sign up but came back to talk to me first and of course, it was a "NO". ;)

What are the banks doing selling these kind of stuff to the elderly? Generally, the elderly just need good H&S insurance and nothing else. Unfortunately, they usually end up as easy prey for the unscrupulous type. -.-"

amoose said...

Yes, sadly, many elderly end up easy prey. It is so easy to dangle carrots and gloss over the unappealing details.

This "financial adviser" didn't even do a proper assessment. My mum has free healthcare (thanks to her CSC card), no income (no need to hedge against income loss), and no dependents. So, what is there to insure against? I am not an expert on insurance though, so I could be wrong.

The utility of the insurance aspect in this plan is zilch. And yet a good portion of money paid will go towards funding the insurance (and the "financial adviser's" commission, of course).

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