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What is the purpose of insurance and are you overpaying?

Friday, September 18, 2015

Regular readers know that I have blogged about the need for having the necessary insurance and how the amount of insurance should be adequate. We also want to make sure that we do not overpay for insurance.

Do you believe me if I were to tell you that many people are paying a lot of money for insurance but are still severely underinsured. 


In fact, a reader wrote to me today to say that after reading my blogs on insurance, she believes that her husband who recently bought a $100K life insurance policy might have paid too much. The premium? $3,500 a year. Wow!

If we think that a young couple with kids might need $1 million of life insurance coverage each, it could amount to quite a bit of money every year. $1 million sounds like a lot to you? 


Well, in case they were to pass away at a relatively young age, $1 million might not be much if we know how much it would cost to bring up a child in Singapore and the cost of bringing up a child is something I have blogged about before. 

$1 million life insurance coverage. How much would the premium be? Well, the good news is that it need not cost a bomb. 




There is a simple tool available to us and we can find out about our life insurance coverage needs using a simple calculator by DIYInsurance: Click Here.

Remember, just because we pay a large amount of insurance premium does not mean that we are getting adequate insurance coverage.

Let is look at an example of a male non-smoker:


•        Policy coverage till 65 years old (when children become independent)


•        S$1 million Death and Total Permanent Disability Coverage


These are the annual premiums payable to various insurers in Singapore (S$): 








*With information from www.diyinsurance.com.sg  and comparefirst. Figures are compiled on 14th September 2015 and includes existing promotions and discounts which are in the knowledge of.


**You are advised to approach a financial advisor for his/her opinion on the features, details and current quotes of the products or if you are considering to purchase, if you should surrender or restructure your existing insurance policies. 


You may want to do a review of your insurance coverage and premium paid. Compare what you are currently paying for your insurance policy against what is currently offered by the different insurers. 

For us to be covered by life insurance for our entire life, it is very expensive to do so with whole life insurance. In many instances, we may find that we are not able to get adequate insurance at an affordable price. 


For a 30 year-old male, a $500,000 whole life coverage could cost S$7,000 annually* (paid annually) for 49 years! 

Are you overpaying for the insurance coverage you have? Are you sufficiently insured?

Purchasing a term insurance is the value for money way to provide for sufficient coverage. To understand the case for Term Life Insurance: Read here.

Many people don't actually understand what is the purpose of having insurance and this is why they end up buying all sort of unsuitable products. 

The purpose of insurance is to transfer our risk of a loss to another party in exchange for money. It is important that we adequately transfer our risk (i.e. sufficiently insure ourselves) and to keep the cost that we are paying for insurance low. 


However, there are many misconceptions when it comes to insurance and here are some common ones: 


a.        "I need life insurance coverage for my whole life.


Our financial obligations tend to decrease as we age due to the fact that, as our dependents grow older, they are dependent on us for a fewer number of years. We should have also built up sufficient assets such that if an unexpected event were to occur, we would have sufficient assets to leave behind for our dependents to live on. There comes a point of time in our life when we do not need any life insurance coverage to provide for our loved ones as they are no longer dependent on us financially.  

b.        "Whole life insurance is always better because I may only have to pay for a limited number of years and I can save as well.


For insurance companies to craft a policy where it is possible for one to pay only for a limited number of years, it means that a lot more has to be paid for the initial years to compensate for the other remaining years. If we are using whole life insurance for savings, for the low liquidity and returns it provides, we could use many other investment tools which allow us the flexibility to draw our money when we need to without any penalties and possibly achieve greater returns with them. 


c.        "More coverage is always better." 


This only holds true if we do not have other financial commitments. Accumulating enough funds to retire is not easy to achieve. In a study done by AIA in 2014, 55% of Singaporean respondents were worried they would not be able to save enough as compared to a regional average of 44%. More worryingly, 35% of Singaporean respondents ranked saving for retirement as the most difficult goal to achieve in life. If we decide to spend more on insurance, something else has to go. This could mean prolonging our working years and pushing back our retirement age.  


Understand what is the purpose of insurance and buy insurance because we need insurance and not anything else.

To compare and purchase insurance, consider DIYInsurance - Singapore’s First Life Insurance Comparison Web Portal by Providend Ltd. 


DIYInsurance aggregates products from various insurance companies and provides 30% commission rebates in addition to ongoing promotions, if any.


Staff from DIYInsurance are all paid fixed salaries and do not participate in sales-based compensation or incentives of any kind.


Not being remunerated on a commission-basis means there is no hard-selling and over-selling. They provide advice on insurance based on no one’s agenda except your own. Request a Term Life Insurance quote through DIYInsurance by clicking Here.

Understand and help to share your understanding on the purpose of insurance and the importance of insuring ourselves sufficiently. 


Buy the right type of insurance and don't overpay. 


Being adequately insured does not have to cost us an arm and a leg.





This is a sponsored blog post brought to you by the good people at DIYInsurance.

How to stop accrued interest we owe (CPF) from growing?

Thursday, September 17, 2015

Added 30 Jan 17:





 --------------------------------------------------------------------------


UPDATED. FROM CPF BOARD (NOVEMBER 2016):

    Q

    I am not selling my property. Can I make voluntary refund on the housing amount withdrawn? If yes, how do I go about doing it?

    A

    Yes.





    You can refund the following amount via a cheque/cashier's order to the Board:

    a) Full principal amount

    b) Partial principal amount

    c) Full principal amount and full accrued interest

    d) Full accrued interest
    (You can only refund the accrued interest after you have refunded the full principal amount.)

    Please complete the Form HSD/VR 

    Updated Form:

    HSD/VR (2017)

    and prepare a cheque/cashier's order made payable to "CPF Board". On the reverse side of the cheque/cashier's order, please write your name, CPF Account No. and the property address. Mail both the form and the cheque/cashier's order, before 20th of the month if you wish to earn interest on the refunded amount from the following month, to:

    Central Provident Fund Board 
    Housing Schemes Department 
    238B Thomson Road
    #08-00 Tower B Novena Square
    Singapore 307685

    Alternatively, you can deposit the cheque/cashier's order and this form at any CPF service centres.

    The refund will be credited to your CPF account(s) within five working days from the receipt of your cheque/cashier's order (subject to cheque/cashier's order clearance).





    If you wish to use your CPF savings to service the outstanding housing loan after making the full cash refund, you will need to submit a fresh application, "Application to Use CPF Savings to Purchase Residential Property" to the Board through your lawyers. You will incur legal costs in the process as we need to lodge a new CPF charge on the Property to secure the refund of new CPF savings used for the Property before we allow your CPF savings to be withdrawn for the Property.
-------------




One of the things I have blogged about is how in using our CPF-OA money to purchase a property, we must be aware of the opportunity cost that comes with the decision. 

CPF money is meant to help fund our retirement. Our CPF money also enjoys relatively attractive interest rates from the government.

In the event that we use our CPF-OA money to purchase a property, we are losing out on interest payments by the government. Also, in line with the idea that our CPF money should grow for it to be a more meaningful source of retirement funding, we would have to pay ourselves interest for the CPF money we have utilised in the event that we sell the property with a capital gain.

Having understood this, a reader wrote and asked if we could voluntarily return the money we used from our CPF-OA in the purchase of our homes and here is the reply from the CPF Board:
 

You can refund the CPF savings that you have used for your HDB flat without selling the flat.



If you intend to make the voluntary refund, you can refund the following:



a) full principal amount withdrawn towards the property and accrued interest; or
b) full principal amount withdrawn; or
c) part of the principal amount withdrawn

With your SingPass, please check the Principal Amount used plus the Accrued Interest if you would like to proceed. The steps are as follows:





1. Logon to CPF website www.cpf.gov.sg and click on "Login Here ---à "

2. Key your SingPass ID and password

3. You will now see your CPF statement and a column of options on the left panel of the screen

4. Click on "My Statement". Scroll down to select "Section C" - "Net Amount Used & Amount Available"

5. Click on "Property >>"

Please note that you will not be able to apply for a refund of the monies once it is credited as the voluntary refund is irrevocable. 

However, the credited monies in your Ordinary Account can be used under the various CPF Schemes.






If it is a full voluntary refund i.e. full principal amount used and the accrued interest, your monthly instalment and the Home Protection Scheme cover (if any) will be terminated and the unused premium will be refunded to your Ordinary Account.

If you would like to make the voluntary refund, please complete the Form HSD/VR and let us have your cashier’s order or cheque made payable to ‘Central Provident Fund Board’  before 20th of the month (e.g. before 20 September, before 20 October and so on). 

On the reverse side of the cashier’s order/cheque, please indicate your name, NRIC number and property address.

Please send your cashier’s order/cheque together with the HSD/VR Form to:

Central Provident Fund Board     
Public Housing Section
79 Robinson Road
CPF Building
Singapore 068897

The refund will be credited to your CPF Ordinary Account within five working days from the receipt of your cashier’s order/cheque.

I would be glad to assist if you require any clarification on the Public Housing Scheme. Alternatively, you may call us on 1800-2271188 
(Monday to Friday 8.00 am - 5.30 pm).





Coincidentally, a friend also did this recently after we had a chat on the matter. He is quite pleased that the government has once again assumed a greater responsibility for helping him grow his CPF savings.

Please note that I am not suggesting that everyone does this but I feel that for people who are in their 40s or early 50s, who might have excess cash and who are somewhat risk averse could consider doing this to build bigger retirement nest eggs. 

In fact, they could also consider doing an OA to SA transfer if they should do this in order to enjoy a higher interest rate on their CPF savings if their CPF-SA has yet to hit the Minimum Sum (now called the Full Retirement Sum).




Why did I mention people in their 40s or early 50s? Well, apart from the fact that they are more likely to have some excess cash than people in their 20s or 30s, they are also closer to the number 55. 

At age 55, that is when we are allowed to withdraw a lump sum payment from our CPF in excess of the prevailing minimum sum. So, it would be like getting a short to medium term investment grade bond with an attractive coupon for people in their 40s and early 50s. Good deal.

Related posts:
1. How AK amassed money in his OA?

2. Retirement: AK buys a 12 year bond.

Could I use the money contributed voluntarily to my CPF?

Tuesday, September 15, 2015

The General Election has generated much more interest in the CPF:

YT:
hmmm.....if I already use the cpf for my first hdb. Now, I got cash to top up my OA. Can I use the OA to buy my second property.....say, a condo?

AK:
Yes, of course, You could use the money in your CPF OA for purchase of a second property. It doesn't matter how the money found its way into the OA.

You could do Voluntary Contributions to max out the annual Contribution Cap, you could do it and see the money flowing into your OA, SA and MA. If your MA is maxed, then, the money flows only into your OA and SA.


I think this gives those who think they might need their CPF-OA money for purchase of a second property (or for some other purposes) some flexibility while earning higher interest. If they decide not to, then, simply keep the money in their CPF accounts and the money goes towards retirement funding. For people who have decided that they want to make contributions to their CPF for retirement funding purposes, then, it is probably better to do a MS Top Up to their SA which also gives them income tax relief for the first $7K contributed per year.


The CPF is a self-help institution. If we are able to help the system to help ourselves, we should give it serious consideration.

Important note:
"If you have already used CPF for a property and wish to use CPF for your second property, you can only use the excess CPF Ordinary Account savings for your second property after setting aside half of the prevailing Minimum Sum in your Special and Ordinary Accounts. The total CPF allowable for your second property is also capped at 100% of the Valuation Limit."(Source: http://www.moneysense.gov.sg/)

Related post:

Should a 20 yo do a VC or MS Top-Up?

Is InvestX Congress 2015 value for money? It depends.

Sunday, September 13, 2015

When a reader asked me for my opinion about InvestX Congress 2015 which is happening next month, I said I feel it is a value for money event and she said whether it is going to be value for money depends on how much she would be able to absorb. 

Then, she sent me this sticker:




I think that is a very responsible way to behave and my respect for the reader went up a notch.

However, having been a teacher before, I know it is also my responsibility to be as clear as possible in my delivery, be it spoken or written. I tried my best to ensure my students understood me.

Even as I blog and talk to myself, I try to be coherent or I might not understand myself. So, I certainly hope that, as a blogger, I have been an effective communicator too.

Certain topics are more difficult to communicate, especially those which are more technical. It could be very challenging for the speakers then, especially if they were to give a speech to an audience who are not familiar with the topic and its jargons. From some of the feedback from readers regarding InvestX Congress 2014 about how they had difficulty understanding one of the speakers (whose topic was interesting but the details very technical), I know this to be true.

Well, at InvestX Congress 2015, I don't know the other speakers but I know Victor Chng and Rusmin Ang quite well and have seen them in action many times before. For those who have gone for their Dividend Machines workshop, they would know that Victor and Rusmin are very good trainers. They know their stuff and they deliver well.



AK with his readers at a Dividend Machines workshop.


Dividend Machines is, of course, about investing for income. I believe Rusmin is going to talk a bit about that at InvestX Congress 2015. However, he and Victor have interest in investing in growth companies which is something rather different from pure income investing. They will be talking more about this at InvestX Congress 2015.

Dividend Machines cost almost US$250 per person and I thought it was great value for money for what was delivered. What about the early bird tickets at S$99 each for InvestX Congress 2015 which is also a full day event? 


See why I think it is a good deal?


InvestX Congress 2014.

In case you would like to know, yes, AK will be at InvestX Congress 2015. 


There is going to be a 1 hour panel discussion at the event and I will be on the panel. So, if you are going to the event, I will see you there. 

Oh, if you have decided to go, please get your tickets early. Don't pay the full price. Yes, you would expect AK to say something like this.

Get your early bird tickets: HERE.

Date: 
17 October 2015, Saturday.

Time: 
9am to 6pm (Registration starts at 8.30am).

Venue: 
Suntec Convention Centre, Level 3, Summit 1.

"Whether socks or stocks, I like buying quality merchandise when it's marked down." Warren Buffett.

Related post:
AK is a panelist at InvestX Congress 2015.


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