How insurance weakened a family's balance sheet?

This is the continuation of a conversation with a reader who is having difficulty accumulating an emergency fund and who depleted her savings after her dual income household became a single income household.

Reader:
I just read on "How many 20 years and $29,000 do we have?"

I have the Prulink too and have been paying for 12 years now.

Apart from this I have an endowment plan to be paid for another 9 years before mature.

My husband and I plus 2 kids have whole life plans, personal accidental and hospitalisation plans.








AK:
You are (probably) paying too much for insurance.

Your children don't need life insurance. Life insurance are for people with dependents. Children don't have dependents.

I won't touch investment linked policies or ILPs (e.g. PruLink) even with a 5 feet pole. I don't mix investment and insurance.





My action plan if I were in your shoes:

1. You and your husband just need term life insurance (+Critical Illness cover). (You need life insurance until your children are no longer financially dependent on you.)

2. You do not need whole life insurance. Definitely, your children don't need life insurance (until they have dependents). It is a luxury.

3. ILPs are terribly expensive life insurance. (I would get rid of this.)





4. Keep the hospitalisation insurance (H&S). (This is essential.)

5. Accident insurance is not a must but they are pretty cheap. You can keep this if you like. (Otherwise, don't renew when it expires.)

6. Endowment plan, 9 more years. A form of forced savings. Just complete it. (A plain vanilla endowment is less problematic than an ILP.)

Before terminating any of your life insurance policies, get covered with term life insurance of equivalent level of protection first.







We should increase our income if we can but we must be sure that in the event our income suffers a dip or disappears, we are able to cope.

We want to be especially careful with any long term financial commitment that takes up a significant percentage of our regular income.

Making sure that these long term financial commitments are absolutely necessary will help to avoid weakening our financial health too much.






This family can bring down their expenses rather significantly and strengthen their balance sheet by not overpaying for insurance and to buy only what they need.

Related posts:
1. Critical illness insurance.
2. Disability insurance.
3. Term life insurance.

Insurance agent told me I am a valuable piece of art.

Agent:
"We should do a review. Your salary is higher now. You should need bigger insurance coverage."

This was what one of my insurance agents said to me many years ago.

I was wondering why did she say something like that. 

Wasn't I financially more secure by then? Why would I need to increase my insurance coverage?

Agent:
"You are worth more now. Your life is more valuable. It is like insuring a valuable piece of art. More valuable the artwork, the higher the coverage."

OK, at that point, I think most people would have just bought into the argument.

I didn't.

I decided that the agent was only interested in lining her own pockets with more of my money.






Read this conversation I had with a fellow blogger on the need to buy insurance and how this need correctly changes with our circumstances.

AK:
We should look left and right before crossing the road. In some instances, we should look back as well to make sure we are not in the way of some speeding motorized scooters.

Risks have to be managed and having insurance helps to manage risks.

Since we are talking about risks, actually, insurance companies could go bust too. What then? OK, I am being a little perverse. ;p

So, even if we have insurance, it is still important to have a meaningful emergency fund and I do maintain a very large emergency fund well beyond the 12 to 24 months of recurring expenses that I usually suggest.






The need for certain insurance products in life diminishes if we have a large enough emergency fund as well.

Insurance is most relevant when we want to transfer risks which could result in catastrophic financial losses or hardship.

So, we have to insure ourselves against events which we or our loved ones might find hard to cope with on our own.

The financial ability to cope will, of course, differ from person to person and from family to family.






la papillion:
I think it's a important to know that everything we do runs a risk. Even if we buy insurance, it's also possible for the company to close down, as u had mentioned. (that's why don't buy all your policies from one single company).

That's not the only risk of buying insurance. These days, even if u bought a plan, u might not be able to claim because of some disclaimers laid out but u didn't know about.

So, I agree that we should progressively take the risk ourselves as our financial situation improves.

When we just started working, the insurer should bear a big part of the risk because we don't have the means to shoulder the risk. It should be inverted when our situation improves.






Don't think of ourselves as a valuable piece of art that needs insurance coverage.

We should become more valuable as a person because our wealth has grown.

As we become wealthier, we shouldn't need to have more insurance coverage.

How to become wealthier?

What?

Make more money and buy more stuff that we need to buy insurance for?

OK, maybe, I will ask that insurance agent who said I was a valuable piece of art to give you a call.

Related posts:
1. Emergency fund.
2. Best insurance.
3. Become wealthier.

Is 2.02% interest attractive? It depends.

Reader:
Good day, have been reading your blog for few month. found many useful tip . esp the CPF sa. should have transfer once hdb loan paid off. 😞 

Would like to ask for your view on an endowment plan which is 3year at 2.02%per year. It stated protected under Singapore Deposit Insurance. Thanks for your time.

AK:
2.02% interest per annum for a lock in period of 3 years is unattractive to me. Liquidity is important to me as an investor.

Unlike a fixed deposit where the only thing we give up is the interest if we should break the deposit, premature termination of insurance policies is usually punitive and we might not recover all our money.

For a lock in period of 3 years, the interest rate offered would have to be much higher. Otherwise, I would rather settle for a lower interest rate offered by some banks for fixed deposits (e.g. 1.55% p.a. for a 2 year FD) and retain some flexibility.







Even if you are not an investor, if this is money from your emergency fund, this would not be a good choice as money in such a fund should be something you can get at immediately without delay nor suffering a loss.

If you are not very savvy when it comes to investments and the money to be put away is merely extra money on top of your emergency fund (i.e. liquidity is not a major consideration), then, this might be something you could consider.

You might be interested in related post #1 below and take note of the 6 points mentioned when it comes to buying insurance.

If you are 55 or older and a CPF member, you might be interested in related post #2 below.

Related posts:
1. Sumiko Tan's expensive lesson.
2. Use CPF as a savings account.

"Is this ILP good for my mother?"

Reader:
My mum's insurance agent sent this. Would you consider this ILP? It's also being marketed at an event at the sports hub...

AK:
Generally, I would say to anyone not touch ILPs even with a 5 feet pole. 

However, ILPs are especially unsuitable for older people as the cost of life insurance jumps after age 55 and from age 60, it becomes very costly. 

This is because mortality risk increases as we age.

In an ILP, the cost of insurance is deducted from the policy value by selling units. 

As we age, the cost of insurance goes up and in our golden years, it goes up more rapidly.

So, imagine units in the ILP being sold down more rapidly to pay for the cost of life insurance as we age.

Unless the unit price of the ILP goes up more rapidly and significantly than the increase in deduction, when the value of the ILP becomes zero, the insurance coverage is terminated.






In my opinion, this particular insurance agent who is trying to sell the reader's mother an ILP does not have her interest at heart.

It is no secret that ILPs are probably the most lucrative products available to insurance agents.

So, I am not surprised that less scrupulous agents would try to sell them to any Tom, Dick or Harry or, in this case, Mary.

Related posts:
1. 20 years and $29K.
2. Reader regrets ILP.

When to get a private annuity?

Reader:
Been reading your blog for a while now and wanted to ask you what do you think of XXXXXXXXXXX as a retirement plan.

My financial consultant suggested this (product) to me recently but I wanted to get a second opinion on this.

Could you talk to yourself about this please?

AK:
As a retirement plan, there is nothing out there that can beat the returns offered by CPF Life.

Unless I have maxed out my CPF account, I would not consider putting money in a private plan.

http://singaporeanstocksinvestor.blogspot.sg/2015/02/an-annuity-would-you-rather-have-it-or.html




I have done a case study of a private plan before and how it could not beat CPF Life. 

You might want to use this as reference when looking at the product offered to you:

http://singaporeanstocksinvestor.blogspot.sg/2014/07/an-annuity-proposal-case-study.html




In summary, max out your CPF account first (i.e. top up your CPF-SA to hit prevailing FRS) or if you are above 55, think about maxing out your CPF-RA.

Only then, think of possibly getting a private plan to supplement CPF Life.

Related posts:
1. 4 ways to beef up CPF savings.
2. CPF savings 10 years from now.

Total and Permanent Disability (TPD) Insurance.

Reader:
Won't you be also concern for yourself? The TPD part.
Medical is already covered for everyone aka Medishield.
I believe most people say not afraid to die, but afraid cannot die.

AK:
Why should I be concerned?






Reader:
Sick and disability. I imagine this 2 are for everyone to think about. Sorry I don't mean to pry. But sought your thoughts on what's necessary to insure for own self. If not necessary one then don't have to pay for it.

AK:
If we have dependents, we need life insurance. Buy term. We also need the following:

For hospitalization, H&S.
For critical illness, CI insurance.

If you are still reliant on your earned income, then, TPD coverage is relevant to you.

It is relatively costly but it will give you peace of mind while you are building your portfolio or until you are able to tap your CPF savings.

Reader:
The insurance agent out there won't really think for customers. We have to be our own agent. But sometimes can't get the "logics" yet. Thank you again.

Best insurance is still: THIS. 






Of course, not everyone is able or willing to be an investor. 

For many people, building up their CPF savings is probably the best way to bolster retirement funding adequacy.

For them, if a meaningful lump sum is available for withdrawal from their CPF account at age 55, having TPD coverage till age 55 could be sufficient.

Otherwise, some amount of TPD coverage till age 65 is probably a better idea as the earliest CPF Life would start paying a monthly income for life is at 65 years old.






Whether we need TPD coverage and to what age we need it will depend on when we will be able to work when we want to and not because we need to.

Yes, if you are a regular reader of my blog, this should sound very familiar.

Related posts:
1. Term Life.
2. H&S (Medishield).
3. Critical Illness.
4. Eldershield.
5. CPF Life.
5. Start with a plan...
6. Work because we want to...

Is early critical illness insurance necessary?

I have blogged about the importance of having critical illness insurance before and because I get questions from readers now and then on whether early critical illness insurance is essential, I decided I should blog about it.

Please bear in mind that this is just my opinion and some might disagree.

Reader:
I've started my investing journey and I am quite amazed I've learnt quite a lot ever since I started reading your blog last year. 

I would like to seek your talking to yourself opinion. 

Is it essential to get an early critical illness term insurance? 

The premium is really high.





AK:
When we buy insurance to cover ourselves against critical illnesses, it is so that we get paid a lump sum of money if we should be diagnosed with one of the dread illnesses.

The difference between regular and early forms is that the latter will pay the insured once diagnosed with a dread illness even if it should be at an early stage. 

The regular form would only pay if the illness is at an intermediate stage.

I am of the opinion that we need regular critical illness coverage because it could be that we must stop working to undergo treatment. 

We could be too ill to work. 





Critical illness coverage gives us a lump sum payment. 

Now you know why this is necessary. 

We need this in case we have to stop working. 

It provides us with money to continue living our life as if we were still working (for a long while, hopefully) until we get better.

At the early stages of an illness, it is conceivable that we would still be well enough to work and would not have to give up our regular income. 




So, it is my opinion that it is not essential to have early critical illness insurance. 

We don't need it.


Any medical treatment required if we should be diagnosed with a critical illness in the early stage should be covered to a large extent by our H&S insurance. 

Think Medishield Life, for example. 

We don't need early critical illness coverage to pay for our medical treatment.


The early variant of critical illness insurance is also unattractive because it is very pricey. 

How much more does it cost?







For example, 

A 30 year old male might have to pay almost $800 per year for a $200,000 death with regular critical illness benefit till age 65 but he might have to pay more than $2,000 per year if he were to opt for early critical illness benefit.

That is 150% more! 

If it were 10% or 20% more, maybe, but 150% more? 

Mind boggling.

I have blogged about what I feel is the best insurance in life and I feel that the extra money used to pay for early critical illness insurance could be better used towards this project.






If you don't know what I am talking about, see related post #2 at the end of this blog.

Insurance is absolutely necessary against events which we will not be able to recover from easily without financial help.

For all other events, insurance is probably a "nice to have" and not a "must have".

Buy what we know we need and not what sales people want us to think we need.




Related posts:
1. Without CI coverage?
2. Best insurance to have in life.

Reader regrets ILP but what to do?

Reader:
I was introduced by my colleague to your blog and only started to read it last night. Many useful tips indeed and I really regret not reading it earlier. 

I am single and 47 this year. I bought an ILP from Prudential for an assured sum of $100,000 when I was 27 for an annual premium of $2,000 for death, PD and CI. My surrender value now is about $40,000. 

Shall I follow your blog advice to terminate it and purchase a term policy till 62? 

Currently almost half of my annual premiums is used to cover the cost and will escalate once I enter into my 50s. 

Any advice would be greatly appreciated.


What is the purpose of insurance?




AK:
(Alamak, paid $2,000 a year for 21 years and now can get back only about $40,000?)
Since you have read my blog on the subject, you know why we should not mix insurance with investment. I wouldn't touch an ILP even with a five feet pole.

We need life insurance if we have dependents. If we no longer have dependents, we don't need life insurance. 

Even if we do not have dependents, if we do not have a meaningful level of passive income, we still need coverage for CI because we might not be able to work for a long time. 





So, before you terminate your ILP, find out first if you are still able to get term life and CI coverage. 

If that option is still open to you, then, terminate the ILP. You will be saving a lot of money to get the same level of coverage.

Related posts:
1. How many 20 years do we have?
2. Without CI coverage?

Do this to get higher interest income with UOB ONE?

Reader:

Understand that you have UOB One Card.

Recently, a UOB Personal Banker approaches me regarding the other usage of One Card to earn higher interest in the One Account.

Instead of spending $500, one can just save that $500 through a Prudential savings plan. This $500 will be deducted from the One Card every month for 5 years. After which, the total amount deducted will be locked for another 10 years. 

At the end of the 15 years, one can earn an effective interest p.a. of about 3.13%. The principal is guaranteed. 

In this way, one does not need to force spend every month to reach the $500 target in order to earn a higher interest on the One Account. Through this method, one can also earn higher interest as this $500 is "spent" on the savings plan, by utilizing the One Card.

What do you think of this? Appreciate if you can talk to yourself...

AK:
I will avoid an insurance cum savings (which is really insurance cum investment) product. I always say buy term and invest the rest. Instinctively, I would say 'no' to this offer.

I believe that 3.13% per annum is the potential interest rate and not guaranteed. I do not know if you would be disappointed 15 years later if you only get back your capital then (if Prudential does not go bust).

If you have trouble spending $500 on your UOB ONE Card each month, it might be better to simply forgo the UOB ONE Account. Forget it.

Doing this, you would be forgoing an additional interest income of about $800 a year (assuming you have $50,000 in the savings account which would have earned a bonus 1.6% in interest with a monthly spend of $500) but it gives you greater financial flexibility and a chance to build a bigger war chest for the next bear market.

Related posts:
1. UOB ONE Account?
2. How many $29,000 do we have?

"Insurance agent helped himself to my money."

Recently, I met up with a friend whom I have not been in touch with for a few years and, inevitably, we also talked about money matters.

Mania over Chinese art. Huh? I blur.
Friend:
So, how is your investment in Japanese apartments now?

Me:
Oh, you mean Saizen REIT?

Friend:
Ya, you asked me to invest in this that time because it pays good dividends.

Me:
Gone already.

Friend:
Gone?

Me:
Ya, they sold all their assets to an institutional investor.

Friend:
Sounds like you made money!

Me:
OK lah.

Friend:
So lucky. That time I should have listened to you. Shouldn't have listened to my brother's insurance agent and bought the investment from him.

Me:
That was many years ago. How is it?

Friend:
I got fed up with it and sold it at a big loss.

Me: 
But you said that guy is very smart and can help you with your money, right?

Friend:
My brother say one, not me. Ya, very smart but not to help me with my money. Smart to help himself to my money. He left his job liao.

Me:
..................

Friend:
Now, you got any other money making lobang?

Me:
I have some investment in Japanese shopping malls.

Friend:
This time, I am going to invest.

Me:
But it is being sold to another institutional investor too. Not confirmed but it could happen in the next few months and the share price has shot up quite a bit by now.

Friend:
...................


The mood was gradually getting a little bit too heavy for my liking. So, I changed the topic.

My friend regrets investing in something and not investing in something else but is he really an investor? I wonder.

Related posts:
1. How many $29,000 do we have?
"Every year put in money. 20 years..."
2. Bought ILP from a friend.
'...if I cancel the plan now, I (lose) the money...'
3. Saizen REIT.
The investment was a good fit for my motivation.
4. Croesus Retail Trust.
Of course, being paid while waiting is not a bad deal.

Financial security in Singapore plain and simple.

Singapore retrenchment: Will Malaysia share the same fate?






Reader:

I found your blog over the past week, and I have been looking your posts when I have the time.  

I don’t want to be a slave to my job when I am in my late 40s or 50s. 

I know that being an average salaried employee, it is quite difficult to ever be financially free.

Some facts about me:

• Working since 2013, earning $5.7k a month
• 
  
• Save about $900/month in cash
• 
  
• Invest $300/month in STI ETF (I read blogs for beginner investors that said STI ETF as a low risk, simple, long term investment that seemed to be ideal for young investors without much capital)

I have just bought a 3 room BTO for my mom and myself. 

Hence, I have emptied out my OA for house payment and spent my cash savings for renovation. 

In a way, I am starting over from scratch again, with $0 in CPF OA and very little in cash savings.

I understand that since my loan interest rate is much higher than the OA interest rate of 2.5%, I should look to repay the loan as soon as possible (assuming I don't re-finance with a bank loan).
(Parts of the email omitted.)

For only $300, you gain instant diversification.

AK:
What you do depends on what you want to achieve but what you do should also depend on the resources available and your ability to stomach volatility and some risk.

Investing through an STI ETF is good for someone who does not have the inclination nor time to research into specific stocks. 

It is a long term strategy that should yield decent results over a 20 to 30 years period. 

This is your exposure to the local stock market.
http://singaporeanstocksinvestor.blogspot.sg/2013/07/tea-with-matthew-seah-posb-invest-saver.html







You can think of the CPF as your exposure to an investment grade sovereign bond. 

In this respect, you might want to use less of your CPF money for housing loan repayment and use more cash instead. 

This will give you better returns than leaving your savings in the bank right away. 

Remember, this is a long term savings tool and you won't be able to access the money till you are 55 and, later, 65.
http://singaporeanstocksinvestor.blogspot.sg/2015/11/retire-with-investment-grade-bond-and.html







Of course, please ensure that you have an emergency fund first. 

How big should it be? Read this:
http://singaporeanstocksinvestor.blogspot.sg/2015/05/how-much-should-we-have-in-our.html

Also, you want to be adequately insured because you have to take care of your mom. 

I would suggest buying a term life insurance for yourself.
http://singaporeanstocksinvestor.blogspot.sg/2014/09/term-life-insurance-why-buy-term-how.html







We don't need some magic formula or complicated strategies to be more financially secure in Singapore.

Of course, if you decide to become an active investor or trader, you could make more money but you should know if you have the temperament for this. 

That is all I will say. :)







Related post:
Taking steps towards financial security.

See: PMET took a 30% pay cut but thankful.

What should I do with my bonus?

Reader:
I received a bonus and I was wondering which of these should I do:

1) voluntary top up my CPF SA

2) contribute to SRS

3) help my parents to buy hospitalization insurance

4) keep it as warchest

I would be required to pay income taxes for this year of assessment. I would like to ask for your opinion.


AK:
You have to decide what is more important for you. No one can do this for you. 😉

For me, having insurance is important. Bad things happen and could wipe us out.

Having said this, your parents should be covered under Medishield Life. Check to be sure. If they are OK with staying in class C or B2 wards, there is no need to buy private shield plans.

You might be interested in this:
http://singaporeanstocksinvestor.blogspot.sg/2015/03/should-i-top-up-my-cpf-sa-cpf-ma-or-srs.html

Related post:
Enough H&S coverage for parents?

Prudent retirement funding strategy for elderly parents.

Reader:
Hi AK, apologies for the multiple questions from me. 🙂 I am looking to help my parents with their retirement planning and hope you could shed some light.

For convenience of calculation and discussion, assuming the following hypothetical figures, can you share how you would do the planning?

Parent A - 500k cash
parent b - 300k cash,
Zero CPF for both,
No existing loans at all
Children all financially independent
Require about 2k per mth for expenses
Occasional traveling

Given the above I was thinking of topping up their retirement account to the ERS and opt into cpf life at 65.

The remainder will be kept in minimum risk instruments like FDs etc and maybe just a small percentage into shares. Hope you can help me out in your free time. Thanks a lot!

Both parents have basic health insurance. I am thinking of getting them to surrender their whole life policy bought donkey years ago with low sums assured as we children are all financially independent.



AK:
What you are planning to do sounds like what I would do if I were in your shoes. Spooky!
Old folks should not be too adventurous with their money.

Reader:
I read your blog daily! I guess that's where I get all my thoughts mainly. Can't thank you enough!

Related posts:
1. Elderly with spare cash.
2. How to make money last longer?
3. FRS, BRS and ERS.
4. Parents have enough H&S cover?
5. Dad terminated his whole life policy.

The best insurance in life revisited.

Reader:
I like your view on how to see term insurance as paying a sum of money for the protection from the accidents in life. Also how passive income is an alternative to paying for disability insurance. 

I like to seek your views, since it take time to build up passive income, would u view buying disability insurance as an temporary expense before we reach our passive income targets?






CPF Dependants Protection Scheme.
Start watching from 1.40 minute.

AK:
The best insurance in life:
http://singaporeanstocksinvestor.blogspot.sg/2014/07/the-best-insurance-to-have-in-life.html

But before we get there and if we need our earned income, yes, please be well insured:
http://singaporeanstocksinvestor.blogspot.sg/2014/08/in-my-40s-married-with-kids-what-would.html

Related post:
Term life insurance.

Family is financially healthier after retrenchment.

"...online marketplace for jobs."
I won't be wrong to say that many workers live in fear of retrenchment because they are not financially prepared.

Many are wage slaves and are utterly dependent on their earned income for daily expenses. The problem is that many are not even aware of this.

I have shared stories from readers who have been retrenched before. Retrenchment is a terrible thing if we are not prepared for it and especially if the period of unemployment that follows lasts a long time.

However, in all the stories I have shared, there was always something positive that came out of a bad situation. The story today is no different. 

This is about how a dual income family actually became financially healthier after retrenchment.

I believe that life can be and should be better. Even if bad things should happen, I still believe this. 

To be financially healthier, it is not necessary to make a lot of money. Take a hard look at our expenses. 

Even if we make less money now, if our expenses should reduce a lot more, we could actually be saving more money than ever.

It is not how much we make but how much we save that determines if we have money.

Bad things happen in life sometimes but like a Phoenix, a beautiful symbol of rebirth, good things can emerge from the ashes.

Related posts:
1. Prepared for retrenchment.
2. Don't think and grow rich.
3. Downsizing our homes.
4. FREE Medical Insurance!
5. FREE ILP or Term Life?
(This blog post almost got AK in trouble back in 2014.)

What an unemployed 53 year old can do with $20K?

Dear AK,
I am 53 and I have been jobless for more than a year. I have given up on job search. Fortunately, I am a saver and have almost 200k in savings.
Jobless 10 years too soon, I need to make my savings last longer. 
My sister told me about a 5 years endowment plan from _____Life.
Minimum required is $20,000.
2.25% p.a. is more than fixed deposits. (Email truncated.)


Hi JK,

5 years is a long time and if we believe that interest rates are rising and could continue to rise in the next few years, then, this endowment plan is not attractive to me. In another year or so, could FDs offer 2% interest per annum? I wouldn't be surprised.

Unlike a FD, a premature termination of the endowment plan would mean losing quite a bit of money. With a FD, if you break it, you just lose all or some of the interest you would have otherwise earned. Your principal sum is safe.

Here is an idea. If you are quite sure you do not need the $20,000 for the next 5 years, if you have enough in your CPF to meet the Full Retirement Sum (formerly the Minimum Sum) and if your Medisave has already hit the BHS* level, you could consider a voluntary contribution to your CPF account.

*(Basic Healthcare Sum (BHS) which was known as the Medisave Contribution Ceiling (MCC) in the past has been raised from $49,800 to $52,000 in 2017.)

Being 53 years old, the "lock in period" is only 2 years. At 55, you would be able to withdraw from your CPF account all money (including this $20,000 and the interest earned) in excess of the Full Retirement Sum.  

In effect, you are getting 2.5% to 4% interest per annum for a 2 years "fixed deposit".

In fact, you might want to max out the CPF Annual Limit ($37,740) this year and next. I am unemployed like you and that is what I plan on doing.

I hope you like a shorter lock in period and higher interest rates. I know I would if I were in you.

(Watch the video at the top of this blog post and you will learn that AK is economically inactive and JK is a discouraged worker. We are not considered unemployed by the Ministry of Manpower.)

2016 ALLOCATION RATES:

Related post:
AK is buying a 12 year bond.