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.

Avoiding the instant gratification of yield (SingTel, Starhub and REITs).

My blog has pretty useful content in the comments section but many do not read the comments section, I found out a long time ago. 

So, there was a time when I would share the comments in a blog post so that they reach more people. I stop doing that after I found out that Google didn't like it and it affected my blog's page ranking. 

However, I have decided that it really should not matter to me and that making sure that the content reaches more people is more important. 

This was a recent conversation:

redponza said...
Hi AK,
There is a 4th telco getting into Singapore, don't you worry about the intensified competition?

Also, unlike REIT where there is minimum capital expenditure, telco needs to upgrade their network consistently to maintain competitiveness. With the lower yield, and meh growth potential, not sure why it is better than REIT.

In the telco space, isn't Starhub better with a much higher dividend yield?

Thanks.



AK said...
Hi redponza,

SingTel derives less than 20% of its revenue from Singapore. It is truly an MNC.

(Added on 21 Aug 17. Reader:
I look at Singtel's annual report. I can't derive the 20%. It is 40+ % to my calculation. How did u derive it? 

AK:
Well spotted. I meant to say its Singapore mobile business which is, of course, what would probably be impacted by the entry of a 4th Telco next year. That business segment accounts for 13% of SingTel's total revenue.)

As for CAPEX, selling away most of its stake in Netlink NBN passed a heavy baby to other investors. SingTel retains only a 25% stake in the newly listed entity.

If you are worried about the 4th Telco and increased competition in Singapore, you should be more worried about Starhub.

This is also probably why Mr. Market demands a higher dividend yield from Starhub which incidentally also has a higher payout ratio compared to SingTel.

One more thing, we really shouldn't be comparing Telcos with REITs. The yields are not comparable.

SingTel pays out a percentage of its earnings as dividends while REITs pay out from their operational cash flow.

If we were to use the same yardstick for both, we would worry about REITs since their DPU is usually higher than their EPU.





redponza said...
Is telco attractive?

From my point of view, return = dividend yield + dividend growth, taking debt into consideration.
There is lower growth and lower yield in telco, thus I am puzzled why telco is even considered in the first place.

And from a price to book standpoint, they can never beats a REIT =.=

But on the other hand, I saw famous investors grabbing telco companies, hence I must be missing sth here?





AK said...
Hi redponza,

Like I said, they are different animals.

It depends on how we look at investments and how value is created.

Most REITs pay out more than they earn. They do not retain any earnings.

SingTel pay a percentage of their earnings and they retain some earnings so that they become more valuable over time.

I like some REITs and my portfolio is rather heavy in REITs. So, it is sensible to become less dependent on REITs especially when conditions have become less benign for them.

It is about having a more holistic approach.

Frankly, not all REITs are good investments.

We should wonder at the sustainability of distributions.

A REIT could have high CAPEX down the road:

http://singaporeanstocksinvestor.blogspot.sg/2015/08/is-keppel-dc-reit-attractive-investment.html

A REIT could see their assets disappear in the not too distant future:

http://singaporeanstocksinvestor.blogspot.sg/2017/03/viva-industrial-trust-more-attractive.html

So, we must be careful when we lump REITs together to say that REITs can never be beaten in terms of return on investment. The quality of returns and the sustainability are pertinent considerations.

To new readers of ASSI, please read related post #1 below.

Related posts:
1. Instant gratification of yield.
2. SingTel and Netlink NBN Trust.

SingTel and Netlink NBN Trust.

Some people keep asking me what have I bought recently. 

Hmm. Let me see.

Eggs, extra virgin olive oil, butter, dark chocolate, matcha ice cream and some other stuff.

What? Wrong answer?

Jokes aside, to those who like asking me what did I buy or if XXX stock can buy or not, you should know you would be disappointed most of the time with my answers.

You have been warned. ;)

Anyway, in an interview a few years back, when asked what was the first company I ever invested in, my answer was SingTel. 





Like many Singaporeans then, we were given a chance to buy discounted SingTel shares by Mr. Goh Chok Tong who wished for Singaporeans to think about investing in stocks to help grow our wealth. People my age or older would probably remember this.

I am still holding on to those shares and collecting dividends, year after year. 

Is that the best way to achieve greater returns? 

I don't know but I know it generated pretty decent and safe returns.

Since then, over the years, I went on an adventure as an investor, trader and speculator in the stock market. 

I made some money and lost some money. 

I think I must have made more money than I lost or else I would probably be in IMH by now.

In my retirement, I tell myself that I must not be too adventurous with money. So, I bought more SingTel shares in 2015. 

Informed by charts, I added to my investment in SingTel as its share price retraced to what I thought were supports and I did that again recently.




My decision is now partly emboldened by the listing of Netlink NBN Trust which effectively strengthens SingTel's coffers by some $2 billion. 

So, SingTel has become a more valuable company after the sale, more valuable than it was in 2015.

When asked whether I was interested in Netlink NBN Trust at its IPO, the answer was in the negative. A 5% yield just didn't cut it for me.

With relatively high depreciation and replacement costs to be considered as well, a structure that pays out most of its cash flow to shareholders probably means much higher debt in time to come. 

I wonder about the sustainability of its dividends in the longer run. 

To invest in Netlink NBN Trust, therefore, I would demand a much higher yield than 5% as a compensation. 

This could be achieved through a higher DPU which is unlikely or a lower unit price which is probably more likely to happen.

In comparison, I believe that SingTel's dividends are more sustainable. 





There is talk of a special dividend but whether there is going to be a special dividend from SingTel or not does not matter to me. 

With a payout ratio of 60% to 75% of net profits, I will be quite happy with a 3.5% to 4.5% regular dividend yield. Lower than Netlink NBN Trust's 5% but it gives me peace of mind.

Looking at the chart, it looks like there is a chance that SingTel's share price could weaken again in future but it could bounce up first. This is the trader in me talking. 

Don't ask me what could cause this because I don't know.

However, I do know I would like to buy more if SingTel's share price should go much lower, all else remaining equal.

Related post:
1Q 2017 passive income.

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?

CPF-SA savings 10 years from now.

The biggest downside of not being gainfully employed is the lack of mandatory CPF contributions.

To ensure that my CPF savings will become a more significant bond component of my investment portfolio in my golden years, I have been making voluntary contributions.




Checking on my CPF account last night, I wondered how much would I have in my CPF-SA by the time I am 55? 

55 years old. That is also when money from my CPF-SA will be moved into my newly created CPF-RA to fund the annuity called CPF Life.





My CPF-SA savings in January 2017:

$215,862

Assuming that CPF annual contribution limit (now $37,740) remains unchanged in the next 10 years and applying the following allocation rates:

Click to enlarge. Source: CPF Board.

Doing voluntary contributions to the annual limit each year, for the next 5 years, about $8,159 each year will go to my CPF-SA. 

Ratio of contribution to the SA being 0.2162.

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

At age 50, I would have $308,588 in my CPF-SA.




For the 5 years following that, about $11,699 each year goes to my CPF-SA. 

Ratio of contribution to the SA being 0.3108.

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

At age 55, I would have $441,344 in my CPF-SA.





Of course, all else being equal, the number is likely to be bigger 10 years later as the calculations do not take into consideration the additional 1% interest payable on the first $40,000 in the CPF-SA.

Although it is not $1 million, $441,344 is nothing to scoff at either.





This is why I have told some rather worried readers who are pretty risk averse and who are not investment savvy to seriously consider using the CPF-SA as their primary tool to achieve greater financial security in their old age.

As simple as ABC? 

As simple as CPF.

Related posts:
1. AK showing off his CPF-SA.
2. Average HDB household and $1M.

60% higher interest income from age 55?

Reader:
Would you leave your money in CPF-OA (beyond 55)? 

I can understand CPF-SA @ 4%. 

Wouldnt it be better to move into CPF Life for better returns? 

Noted that leaving it in CPF-OA will provide more flexibility. Thanks.

AK:
We have the option of moving more funds into the CPF-RA up to the prevailing ERS (1.5x the prevailing FRS) at age 55. Is it better? 

If what you want is a higher payout from CPF Life, yes.

However, do note that you will be required to move funds from your CPF-SA first and not from your CPF-OA. 

Only when the CPF-SA has insufficient funds, then, the CPF-OA is tapped.





So, let us say we have quite a bit of money remaining in our CPF-SA after our CPF-RA is created and FRS requirement met at age 55, it is not all that more beneficial for us to move more funds into the CPF-RA because we are not getting a higher interest. 

It is the same 4%, assuming things were to remain unchanged.

However, for someone whose CPF-SA is depleted after the creation of his CPF-RA, if he wants to have the ERS in his RA, he would be moving funds from his CPF-OA and the funds would then be receiving 4% instead of 2.5% interest. 

That is 60% more in interest income!





Like you said, flexibility is sacrificed but, in my opinion, the loss is well compensated.

Sweet but not available for everyone.

I have the happy problem of having much more in my CPF-SA than the prevailing FRS. 




So, will I move more money into my CPF-RA at age 55 to meet ERS? 

I will decide when I turn 55.





To anyone who just dropped in, another blog on the CPF was published earlier today. 

See:
CPF Life Escalating Plan.

CPF Life Escalating Plan.

Reader:
(On CPF Life)
Is 70 the max age to leave the money there?
Can continue to leave it there, and then bequeath everything?

AK:
We can choose our CPF Life payout start age to be any age between 65 to 70 years old.
If we did not make a choice, the payout will start automatically under the CPF Life Standard plan at age 70.





We must remember that CPF Life is an annuity and not a legacy planning tool. It is meant to help fund our retirement.

If we would like to use the CPF as a legacy planning tool, we could choose to leave some or all of the remaining money in our CPF-OA and CPF-SA untouched from age 55 instead.

On the subject of CPF Life, there is another plan which will be available from 2018. 





In addition to the Standard and Basic Plans, we will have the option of the Escalating Plan.

*Available from January 2018.

I feel that the Escalating Plan will appeal to people who would like to have a later payout start age, later than age 70, because they want a bigger monthly payout to address the issue of inflation.

How is this achieved?

The payouts under the Escalating Plan will be smaller than even the Basic Plan's payouts in the initial years but will grow at 2% a year.





Since the latest payout start age for CPF Life is age 70 which already allows for another 5 years of accumulation from age 65, the Escalating Plan helps to address the desire for larger payouts when members are older by allowing some of the funds to continue accumulating instead of being paid out from the payout start age.

I feel that the Escalating Plan is a prudent one and if we believe that an annuity is a good retirement funding tool in case one should be blessed with longevity, then, the Escalating Plan is the obvious choice for anyone with this belief.
----------------------------
UPDATE (23 Oct 17):
Which CPF Life Plan for me?
----------------------------
Related post:
CPF Life estimator.

Options with CPF Life and SRS in retirement.

Reader:
Just wondering if you have given any thoughts on when you will start your CPF LIFE payout? Do you mind blogging about it?

I have been building up my SRS savings. By the time I hit the Official Retirement age of 62 (for now), if I start withdrawing my SRS at 62 to 72, the annual sum will be equivalent to CPF LIFE.




Now the question is, should I start my CPF LIFE payout at 65 or delay till 70 to gain more interest and thus a slightly higher monthly payout?

According to the picture you posted on 17th July 2017, at FRS: age 65 = $1,380 mthly. At age 70 = $1,840.

What will you do? A bird in hand is better than a slightly bigger bird in the bush?



AK:
With CPF Life, it depends on whether I need the money. At 65, if I need the money, then, I will start drawing from the annuity. 

If I don't need the money, I will leave it to grow, earning a risk free and, hopefully, meaningful interest rate by then.

With SRS money, once I start the withdrawal process, I would have to empty the account within 10 years unless I use the money to buy an annuity. I have some investments in my SRS account and I would probably have to liquidate these. 

So, I would probably consider withdrawing money from my SRS account in a bull market sometime after I turn 62.

So, depending on the situation when the time comes, I could tap either the SRS or CPF Life first or not at all.
---------



Liu Jiayi says:
From Jul 2015, SRS members will be able to apply to their SRS operators to withdraw an SRS investment by transferring the investment out of their SRS accounts (e.g. into their personal Central Depository (CDP) account), without having to liquidate their SRS investments.

(Please see comments section below for the full comment.)

Related posts:
1. CPF Life Payout Estimator.
2. CPF Mobile Service Centre.
3. Lifelong income with SRS.

QAF's 2Q17 profit after tax fell 72%.

Part of QAF's large decline in earnings should not come as a surprise since, one year ago, in 2Q 2016, QAF recorded an exceptional gain of $9.7 million from reducing its stake in Gardenia Malaysia (GBKL) to 50%. 

If we were to exclude that exceptional gain, however, profit after tax still reduced by 58%, year on year. Not as bad as 72% but still rather attention grabbing.

Singapore and Malaysia

QAF's share of profits in Malaysia is reduced because of its smaller stake in GBKL. However, the reduction is bigger this quarter compared to the last quarter.

It was revealed that QAF experienced issues in its Johor production plant. This affected sales volume not only in Malaysia but also in Singapore. 

Otherwise, QAF would probably have done better in both countries. There were also some one off cost items due to problems at the said plant.

Philippines

The bakery business in the Philippines is doing well but incurred higher marketing and distribution costs. It was revealed that although costs are heightened, the bakery business achieved higher sales and increased market penetration in the country. 

Looking at the Income Statement, Other Operating Expenses saw the biggest increase of 23% and it was revealed that most of this big increase is due to higher marketing costs in the Philippines. This is also a market in which QAF is planning to expand its footprint.

China

The bakery business in China is still losing money but losing less money. Narrowing losses is good news but if it continues to bleed, it might be a good idea to shut it down. QAF will decide by end of the year if it should continue its business in China.

Australia

QAF's pork business in Australia saw a 20% reduction in selling price due to an over supply situation which led to downward pricing pressure. 

The demand for pork is still healthy but the over supply will take time to resolve. It is hard to say how long the situation might persist but I doubt that it is enduring. 

The situation is probably more cyclical than structural.

One quarter does not make a year. It is reasonable to wait and see if QAF is able to recover earnings in the coming quarters as it pursues growth.

To be realistic, however, any recovery could take some time to materialize as new production plants are built. Also, it is my guess that many of the increases in costs and expenses are going to be sticky.

Having said this, note that QAF is meeting the challenges from a position of strength as its balance sheet remains strong. 

Cash and cash equivalents also increased year on year from $97 million to almost $126 million. 

QAF has a good track record and I like to think that the managerial competence is more enduring than the challenges being faced.

Even with reduced earnings in 2Q 2017, QAF is capable of maintaining a 5c DPS but it is harder to say if a reduction will happen or not. With this in mind, while waiting for improvement in performance, I look forward to being paid.

If Mr. Market were to send QAF's share price tumbling, it would be an opportunity for me to accumulate a larger position in a competently run and financially sound company which is likely to do better again in future.





If there should be a decline in share price, I hope it is a big one of, say, 10% or 20% and not just another dip.

See announcement: HERE.

Related post:
Wondering about QAF Limited.

Centurion Corporation's sky rocketing earnings.

I made quite a few new investments in the last six months to a year but, of these, the largest investment was in Centurion Corporation. 

I was attracted not just by their ability and willingness to pay meaningful dividends but also their clear and viable strategy for growth. 

With insiders eating their own pudding too, it was a vote of confidence which regular readers know I have always liked.

2Q 2017 was another stellar quarter.

72% rise in earnings is definitely nothing to scoff at.

However, what I am more impressed with is the gross profit margin which improved some 7% to 73% while gross profit improved 36%.


Much has been said about the increasingly difficult business environment with many more competitors sharing the Singapore foreign workers accommodation pie.

The stellar results tell me that Centurion's management are not only competent, they are also fast to move into a new growth area and they are masters in branding.



An interim dividend per share (DPS) of 1c has been declared and that makes me happy.

Although I had no idea that Centurion Corporation had plans to list in Hong Kong when I became an investor in February, if that should come to pass, we could see its share price going higher.

Of course, although less important to me than the investing for income angle, a higher share price would make me happy too.

Am I going to buy more now? 

You want to read related post #1.

Related posts:
1. Invest in Centurion Corporation.
2. Centurion Corporation to double.

See slides presentation: HERE.

My family almost went bankrupt.

As my blog grows in readership, there are many more questions which are repeated. There is some level of predictability when it comes to questions from readers, I see.

This is why I find it useful to share some older blogs regularly on my Facebook wall. It is mainly for the benefit of my new readers and also readers who are more forgetful.




A question which I get asked before and which has picked up in frequency in recent months is why am I the way I am? 

This is a question I have addressed on a piece meal basis and to make it easier for me in future, I am blogging a reply in the comments section so that I have something which I can find easily to point to readers.





Read only if you are interested in my psyche:

I have some deep seated insecurities which I can never be rid of. I have provided glimpses of these in my blog before. They are, of course, very piecemeal in nature and scattered. 

I cannot remember where they are in my blog exactly. I do remember that I shared in the comments section but I have never really blogged about these insecurities in their entirety. 

I try not to relive those years.

So, I will be brief. 







My family almost went bankrupt when I was entering my teens and our financial hardship lasted many years. Those years left a mark on me. 

I hinted about the financial hardship my family went through in a few blog posts before and one which I can remember is:

The secret to avoiding financial ruin.







My family learned first hand that banks are fair weather friends and I developed a strong aversion to debt. I try to avoid borrowing money for anything.

Sleeping in the living room of a HDB flat for some years as a teenager was a humbling experience. It was awkward too.

I learned early on in life how finances could go wrong so badly and so quickly and how not having enough money was a terrible thing, how being indebted was much worse. 






Living with the constant threat of losing whatever we had left was very stressful but my parents tried to give us as normal a life as they could.

Those years of financial hardship left me with scars and I believe that anyone who had similar experience will always have shadows haunting them.

"Do I have enough money? Maybe, it is not enough. What about my parents? Do I have enough to take care of them? What about my younger siblings?"

So, I tend to overcompensate. 






I tend to save as much money as possible. I put away much more in my emergency fund than what some people think is necessary. 

I do this although, financially, we became more comfortable as I graduated from university and started working. 

I craved greater financial security. 







The CPF-SA was a natural candidate and I blogged about how I transferred funds from my OA to my SA in the first few years of my working life and that was almost 20 years ago.

There are many clues littered throughout the blog about the way I think and why. 

Of course, I don't expect anyone to piece all the clues together to understand AK the giam siap fellow. 







I vowed not to grow old and destitute.

The End.

Another peek into my past:
With some difficulty, AK says good bye. Thank you, mom.

Wondering about QAF Limited (Updated).

Pulled pork as Rivalea calls off IPO
The Australian, November 7, 2017
(See Comments section at the end of this blog.)

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

7 October 2017

Reader:
Hi AK, thanks for the session (i.e. Evening with AK and friends). 

QAF has received shareholders approval to list it's primary production on the ASX. 

Since management has not indicated that the proceeds from listing will likely not translate to special dividend for shareholders, hopefully they can put the money to good use to expand their operations in the Philippines. 

Wonder when the share price will be appreciated by investors and truly appreciate upwards.




AK:
I dunno if the share price will move up or not. One off gains are one off. So, don't place too much emphasis on that. 

Although QAF has a good track record, we could see lower share price if the pork oversupply situation in Australia is prolonged and lasts for several quarters. Earnings will continue to suffer then.

Off the top of my head, in such a situation, we could see $1.00 - $1.10 a share then. 

As QAF should be able to maintain its dividend, I am staying invested and getting paid while waiting.



-------------------------
Reader #1:

I wonder if any of your readers have written to you recently about the longer term aspects of QAF- both in dividend yield and share price?

Reader #2:
Hi AK, I know you are an investor in QAF Limited. Any reason why the share price is plunging? I know a long time director just stepped down last year. Do you think that has an effect?

Singapore's Longest Sandwich

AK:
Don't ask me about share price. Ask Mr. Market. There is no way I can tell how prices might move now or in the future (with certainty). Past prices, I can tell you easily.

Dividend yield? That partly depends on share prices. Refer to what I said above. ;)

There will always be challenges in business. I will say that QAF's track record is a good one and I can only hope that they continue to bring home the bacon (and bread). ;p



Of course, QAF is not just about Gardenia bread although that is what most of us know them for. QAF is also in the business of pork production in Australia (i.e. Rivalea) which is doing very well. 

It was only a few years ago that Rivalea's viability was still a big question mark and some readers might remember that I blogged about it too. 

Now, Rivalea stands shoulder to shoulder with Gardenia in importance to QAF.

Of course, with the strategic review to improve value for shareholders still underway, it is difficult to say what will happen in future but it is reasonable to assume that any action taken will probably result in value being created.

The "worst" thing that could happen from the review is for QAF to maintain the status quo. To an investor for income, this is probably not really a bad thing but to a speculator, it could be.

Know our motivations as investors and know our investments. Then, we will know if the investments are appropriate for us.

If they are appropriate investments for me, I will stay invested. The day they are no longer able to do what I think they should do for me is when I would probably let them go. Time will tell.

Que sera sera.





Slides presentation on Rivalea:
HERE (published in June 2017) 

Related post:
How much is QAF worth?