Saturday, August 27, 2016

How To Pay Lesser For Insurance Premiums While Getting Higher Coverage?

Do you know that insurance is a big part of our lives? In one way or another, most likely we would have more than one insurance policy throughout our lives. Some policies were bought with a clear mind while others were not. We would have spent hundreds of dollars per month on insurance without knowing what exactly we have or will we benefit from it?

Instead of paying a hefty sum on insurance premiums, there are ways to pay lesser and still get a higher coverage. You would be surprised many of us are actually under-insured even when we are paying so much for insurance premiums. Let's look at how this happens:



Paying A Lot Of Premiums but under-insured

Case 1: Buying too much endowment policies

You may have heard of endowment policies or even have one of these, but what exactly are these policies and how much coverage you are getting?

Endowment policies are basically more of a savings plan. The death or critical illness coverage is very little as most of the premiums are put into a fund to earn about 2-4%. Basically, if you pay about $100/month for an endowment policy, the coverage you would be getting will be less than $50,000. For my own endowment policy which I bought many years ago while I was still a student, I pay $80/month and get only $12,000 death and critical illness coverage. This really isn't a lot of insurance coverage.

Case 2: Buying too much Whole Life Insurance policies 

Another popular insurance policy is whole life policy which many people have today. This policy is so popular because insurance agents push it out so much arguing that we need insurance coverage for life.

However, if you have this policy, chances are you would be paying a lot of premiums for this policy. A simple comparison on a local insurance comparison portal shows that for a $100,000 death and critical illness coverage, the premiums would be around $2300+ per year. This is about $150-$200 per month. $100,000 death coverage is really little so most likely we will be getting $200,000-$500,000 insurance coverage. How much will the premiums be?

For the $200,000 whole life insurance policy, the premiums will be about $4800+ per year.

For the $500,000 whole life insurance policy, the premiums will be about $14000+ per year.

If you're paying about $400-$500/month for whole life plans, the coverage you would be getting will only be around $200,000-$300,000. Is this enough for your dependants or your family if you pass on?


Mixing up insurance with investments

From the above examples, it is clear that the wrong policies bought will result in undermining the true purpose of insurance which is to insure us. There are so many policies in the market but which should we look into to get the most out of our insurance needs?

The problem with being under insured is mixing insurance with investments. Every $1 we pay for an endowment plan, only 10 cents may go into insurance while the rest of the 90 cents goes into a fund for investment. This is similar for whole life plans. This is the reason why the insurance coverage can be quite low even though the premiums we pay is higher.

If we want to get higher insurance coverage, we should look into term life plans instead. Term life plans are true insurance policies with the purpose for insurance only. There are no investment elements in it. We would get the highest coverage for every premium we pay.


The Attack On Term Life Plans

However, term life plans get attacked and branded "not a good plan" most of the time by insurance agents. There are good insurance agents around who advocate the best for their clients so I have to clarify this does not applies to all.

There is no one size fit all approach. Each of us will have different insurance needs and yes term plans may not cover for life so we can get additional minimum whole life insurance for life coverage.

Why term plans are not that popular for insurance agents to market out is simple because of the commission structure. For the first time, the commissions of insurance agents will be revealed in this post, credited to DIYInsurance for writing an e-book to defend term insurance. You can download the free e-book here on term vs whole life insurance.

In the e-book, various scenarios were listed out to compare the premiums and agent's first year commission. Here's a scenario for insurance plans to cover $500,000 death/TPD:


Term Plans PremiumTraditional Whole Life PlansWhole Life Hybrid Plans
Company A (Premium p.a.)$1,922 $15,670 $7,410
Agent's First Year Commission$748 $7,052 $3,335

As we can see, the premiums for terms plans are definitely much lower as compared to traditional whole life plans for the same amount of coverage. This also means the agent's commission will be much lower too.

In just one example, we would have seen why there is always selling pressure for whole life insurance as compare to term insurance. This article may get more attacks but I hope it benefits consumers as a whole. The next time you get your insurance, think of it solely for your insurance needs first. For investments, there are many other ways to invest like all the many articles I've written. For insurance, getting term insurance to cover most of our insurance needs seems more practical to me. Nevertheless, we can still get some whole life plans to complement if needed.

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Wednesday, August 24, 2016

CPF's The Big 'R' Chat Roadshow 2016

CPF is such a big part of our lives where we use it for housing, retirement, healthcare etc. I've written various articles on how we can use CPF to have a better retirement as well as how CPF actually helps us to purchase our first home. It is indeed an integral part of our lives living in Singapore.

The CPF system is here to stay regardless if we like it or not. There have been many changes to the CPF system over the past few years where recently it was announced on more flexibility for us to invest our CPF monies in funds which would yield more returns than the 2.5% we get in our ordinary account. I will blog more on the details in due time when its released.

CPF board is holding a series of roadshows and financial talks in the months of August to November with the first one starting this Saturday at Suntec. This is a free to attend event and I think it is a good opportunity for us to learn more on financial and retirement planning. Personally, I'll be going for the event somewhere in October where I'll be more free.

Some of the highlights of the road show includes:

VR EXPERIENCE

Through an interactive and immersive 360° virtual reality experience, members can find out what is their retirement personality.

RETIREMENT ESTIMATOR

Visitors can calculate how much savings they’ll need to achieve their desired monthly income, and it’ll be given to them in a receipt!


MESSAGE TO MYSELF

After finding out more about their retirement plan, visitors can send a reminder to their future selves to keep them on track!

FUN FOR THE WHOLE FAMILY

For those of you with children, do bring them along. We have activities such as a DIY First Aid Kit for the kids, and lots of other premiums and activities for the whole family.

RETIREMENT PLANNING TALKS

One of the highlights are the free talks they have. I've looked through the topics and think it is quite good especially for those who are planning to buy their first home or planning for retirement.

They have invited good speakers who are prominent in the financial world to give their insights. Some of the topics include buying your first home and future-proofing your retirement plan.

For more information on the event, you can go to the website here.

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Thursday, August 11, 2016

This Will Cause Us To Be Poorer Each Day

What makes a person poorer each day? Is it his daily expenditure? His compulsive spending habits? His indulgence on food? You may be surprised that getting poorer is not so easy. Spending money on food, buying clothes etc will not make us that much poorer. To be honest, how much can you spend on food or buying clothes?

In April this year, I wrote an article declaring that I will stop tracking my daily expenses. In the past, I used to track every single spending I had in an APP but it wasn't that useful for me. Yes it made me conscious of my spending and I did save a lot of money but that is not what I want to live my life on. Being too frugal can have an adverse impact on our lives instead.

Now, I only track my expenses on a monthly basis and I found that even after I stop tracking my daily expenses, the effects are not that much of a difference, only a slight increase except for a month where I went overseas.


Expenses has gone up over the years and I'm actually happy that it has happened. The irony is when expenses went up, my income went up as well.

Now, back to what will cause us to be poorer each day. The answer is LOANS. There are many different types of loans or what we call as debts but some of them work differently from each other. Let's look at some common loans and see whether will they actually make us poorer?


Car Loans

Car loans is quite common in Singapore. Due to the high price of cars now, how many people can actually affoed to pay that $100,000+ in cash for that car?



SGCarMart has a good new car loan calculator which i'm using for the below illustration:

New Car Model: Toyota Vios 1.5 Elegance
Car Price: $104,888
Loan Amount: $73,422
Interest Rate: 2.28%
Loan Tenure: 7 Years

From the above example, the monthly instalment will be $1014. Total interest paid at the end of 7 years will add up to $11,718. This is 11.17% of the original car price. This is still 2.28% per year even though we are paying a monthly instalment whic reduces the outstanding loa amount. This is because car loans interest are always calculated base on the initial loan amount instead of the remaining loan amount


Housing Loan

Housing loan is even more common in Singapore. We can choose not to have a car but we need to have a roof over our heads. For this illustration purpose, I'll be using a mortgage calculator from MoneySense.

Price of HDB flat: $340,000
Loan Amount: $306,000
Interest Rate: 2.6%
Loan tenure: 25 years

For the above example, the monthly instalment will be $1388.23. Total interest paid at the end of 25 years will add up to $110,468.61. This is 32.49% of the property price value.

The interest paid is quite scary to be honest. This means if your property price is not more than $416,469 in 25 years and you sell it, you'll be making a loss instead. Nevertheless, if we calculate the average interest paid yearly, it is only about 1.29%. This is because housing loan interest are amortised. This means the interest is calculated based on the remaining loan amount yearly as compared to a car loan which calculates interest base on the initial loan amount.


Credit Card Debt

Credit card is not considered a loan but it is a debt if we missed the payment or did not pay the bills on time. Let's see how credit card interest is calculated and what happens if we did not pay the bills.

Credit Card debt: $1000
Interest rate: 24% p.a (2% per month)
Years of Owing: 3 years


Base on the above example, if we did not pay a single cent on the amount owing, the $1000 debt would grow to $2000 in 3 years. This is double of the initial amount of $2000. The reason why it doubles is because interest is compounded on a monthly basis. To calculate how long it takes for your credit card debt to double, you can use a simple method called the rule of 72. By using 72 divided by the credit card interest rate per annum, you will get the number of years which the credit card debt will double. In the above example, it is 72 divided by 24 which is 3 years.

Another thing to note about credit card is if we were to make partial payment, the payment paid will be used to pay for the interest first before it is used to pay for the outstanding amount. For example if the credit card debt is $10,000 and interest is $240 per month, if we just pay $240, the initial debt of $10,000 will not reduce at all. We are just paying interest every month for as long as it goes without reducing the debt amount.

Conclusion

Loans or debts can cause us to be poorer without us realising it. Our daily expenditure or spending money on food or clothes can be consciously tracked but for loans, it is sometimes hard to visualise exactly how much money we actually pay for the interest.

For the 3 different loans, all 3 of them work differently:

  1. For car loans, the interest is base on the initial amount
  2. For housing loans, the interest is base on the reducing balance
  3. For credit card debts, the interest is base on the outstanding amount compounded monthly

Before committing to a loan, we should know how much interest we are paying. For debts, we should not get into any in the first place as it can be very hard to get out base on the example above.

Make the right financial choice today!

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Wednesday, July 27, 2016

Understanding Medishield Life and Integrated Shield Plans

There is a saying that you can afford to die but not afford to get sick in Singapore. This is true regardless if we are poor or rich. Unless you are extremely rich, hospital bills will be a problem for most of us here. Once we are diagnosed with some major illness such as cancer or other life threatening illnesses, it will probably wiped out most of our savings.

An important part of financial planning is insurance. In fact, getting insurance should come before starting any investments. One of the key insurance to get is healthcare insurance to cover our hospital bills as hospital bills can add up to quite a huge sum of money. In Singapore, we have social security schemes already in place such as Medisave, Medishield life, Medifund, Eldershield etc. These terms may be familiar to you but maybe most of us are not really sure what it really means and which scheme we have or to get? In this article, let me demystify the terms and break it down into easy to understand concepts.

What is Medisave?

Let's start off with Medisave. This is what all of us have as long as we are Singaporean or Singapore PR. The Medisave scheme is under the CPF. For our CPF, we generally have 3 main accounts:
  1. Ordinary Account (OA)
  2. Special Account (SA)
  3. Medisave Account (MA)
Medisave account falls under part of the 3 main accounts in CPF. Every month, a portion of our salary going into the 3 accounts with Medisave being one of them. Our employer contributes additional to our Medisave account also. This is essentially our healthcare savings account which we can use to pay healthcare insurance premiums and also for some healthcare bills.

Medisave Scheme is a national healthcare savings scheme designed to help us pay hospitalisation expenses incurred in Class B2/C wards in restructured hospitals. Medisave savings can also be used to pay for certain outpatient treatments like chemotherapy, radiotherapy and dialysis. You can use Medisave savings to pay for your own or your immediate family members’ hospitalisation expenses, day surgery and selected outpatient treatments.

For the list of claims you can make using your Medisave, you can refer to MOH website here


What is Medishield and Medishield Life?

Medishield as its name suggests, is a shield plan which protects us from high hospital bills. The word shield will imply it is a insurance plan. Medishield covers basic hospitalisation bills in class B2 and C wards. Medishield has been enhanced with the new Medishield life which covers us for life. Medishield and Medisave are different. Medisave is our own savings money while Medishield life is an insurance plan. The claim limits and claimable items for Medishield life is as illustrated below:

Credit: https://www.moh.gov.sg/content/moh_web/medishield-life/about-medishield-life/medishield-life-benefits.html
Click image to enlarge


What are Integrated Shield Plans?

As we know from the above, Medishield Life does not cover all of our hospital bills. It is only a basic healthcare safety net. If we want to cover our hospital bills fully, there are ways to do it in Singapore. An integrated shield plan allows us to cover more or fully our hospital bills even for Private hospitals.

An integrated shield plan, in laymen terms, is the private insurance we get from all other private insurers such as AIA, NTUC Income, AXA, Aviva etc. Many of us may already have private insurance but some of us may not fully understand what coverage we are getting?

To understand more on the coverage of the integrated shield plan, let me explain a few simple terms. In an integrated shield plan, there are a few things we should look out for:

  1. Is it covered "As charged" or only a percentage of the hospital bills?
  2. What is the deductible?
  3. What is the co-insurance?
  4. Any riders we have?
The above terms may sound complicated but it can be easy to understand in the next 2 mins in this article. Let me explain further. 

As Charged

Covering "As Charged" is an important factor in the integrated shield plan. "As charged" means it will cover any hospital bills as it is charged. This means you can claim 100% of the bill as charged to you. 

Deductible and Co-insurance

Having an integrated shield plan with 'As charged' doesn't mean you can claim your hospital bills fully. In an integrated shield plan, there will always be a deductible and co-insurance portion which we need to take note. 

The deductible is the amount we need to deduct from our the hospital bills before we can make any claims. If the deductible is $3000, this means we have to deduct $3000 from our hospital bills before we can claim the remaining amount. Lets say if our hospital bill is $10,000 and deductible is $3000, the amount we can claim is only $7000 ($10,000-$3000). 

The co-insurance is the amount we have to co-pay before we can make any claims. Similarly to the deductible, we have to deduct this co-insurance portion before we can claim the remaining amount. Co-insurance is mostly in percentage so if our hospital bill is $10,000 and co-insurance is 10%, the amount we can claim is only $9000 ($10,000-$1000). The $1000 is the co-insurance which is 10% of the $10,000 hospital bill.

Riders 

Insurance terms can be confusing and it took me quite awhile to understand it as well. Riders as a word doesn't mean anything if we do not understand it for insurance purposes. To cover our hospital bills 100%, riders are the key to make it happen. As mentioned earlier, an integrated shield plan will always have a deductible and co-insurance portion. This is the portion we have to deduct from our hospital bills before we can claim the remaining amount.

Riders can override the deductible and co-insurance portion. By purchasing riders, we can remove the deductible and co-insurance portion from our plan and claim our hospital bills fully. 


How to know if my integrated shield plan covers my hospital bills fully?

The premiums of an integrated shield plan can be paid by Medisave. However, the premiums for the riders as mentioned above cannot be paid using Medisave. If you're only using Medisave to pay for your integrated shield plan, most likely you will not be able to claim your hospital bills fully. 

If you use both cash and Medisave to pay for your integrated shield plan premiums, then you may be able to claim your hospital bills fully. Check if you have a plan which covers 'As charged' and also riders to override the deductible and co-insurance. If you have all these, chances are you will be able to claim your hospital bills fully. 

Of course, there are always general exclusions in any insurance plans so check your plan properly before you incur any huge bills. Your financial adviser will be able to advise you on what your plan covers exactly and in the event of a claim, he or she will be the one helping you to process.

I hope this article demystifies some complex terms for the healthcare schemes we have in Singapore. Hospital bills can be scary if we're not prepared. If we're prepared, then we will have a peace of mind no matter what happens. Still, it is important to stay healthy and happy in life and prevent any illnesses in the first place.

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Wednesday, July 13, 2016

Finding Your Own Suitable Investment Style

Many of us may wonder what is the best way to invest our money? We see and hear many successful investors making tons of money from the stock market and try to follow their footsteps but fail miserably. How is it possible that these investors can be so successful but when we follow their footsteps, we still end up failing? The reason is simply because we did not first find our own suitable investment style. In this article, let's find out how we can find our own investment style so that we too can be successful in investing.

Finding Your Own Suitable Investment Style

There are many ways to invest and each of us have different risk appetite. Investing is partly a psychology game where if we invest beyond the level of risk we are willing to take, it can drive us crazy to make stupid decisions.

In our quest to find a suitable job for our careers, we may see many successful individuals who are in the sales line such as property agents, insurance agents etc. We may think that maybe joining this industry will make us successful too. In the end, many young people join, and many leave also.

Finding a suitable investment style is crucial in our investing journey. To know what is our own suitable investment style, we must first know the different styles of investing.




Trading in the stock market

The first and most common style is trading in the stock market. I wouldn't consider trading as a type of investing but since many people mistake trading as investing, I feel I should mention it in this article.

Trading offers the potential of high returns. Making thousands of dollars per month can be a reality. We even see advertisements where we can use a software to trade successfully then quit our jobs or use only a few hundred dollars and make thousands of dollars. Making money always attracts people to join in just as in investment scams which offers very high returns.

Yes there are successful traders around but they don't just appear out of nowhere. They have experienced failures before and learnt from their mistake. However, what made them successful is not just the skills or the experience they have but its because trading is their style. If you're a low risk taker who cannot sleep at night because of a few thousand dollars portfolio loss, then trading is not for you.


Investing like Warren Buffett

The next common style is to follow the investment philosophy of Warren Buffett, a very successful investor in his time. Many people read about Warren Buffett and are amazed that he can make so much money in investing. They try to learn his methods of calculating intrinsic value, value investing etc.

Yes calculating intrinsic value and learning value investing can help us buy companies at cheaper valuations but investing is all about business. If we blindly follow the financial ratios such as PE, PB or even intrinsic value, it won't really make us successful investors. Warren Buffet himself said that a young person should learn the skills of accounting as this is the language of business. To learn Warren Buffett's style of investing is to understand a business totally so that we can buy good business with potential. If we get bored reading financial statements in an annual report, probably following Warren Buffett's style of investing is not our style of investing


Investing For Income

Investing for income is a popular investment style in Singapore as we have the opportunity to invest in high yielding investment products such as REITS etc. There are REITS listed in Singapore which gives as high as 10% yield. If you're not sure what REITS is all about, read here.

Nevertheless, investing for income is not suitable for everyone too. It can be a slow process of seeing your money grow. If you're not a person who have the patience to slowly accumulate to grow your money, then investing for income may not be your investment style. I've been investing for income for quite sometime now and see the benefits of it as this is my investment style. It is over a period of a few years then I realise that when I patiently accumulate and buy in more while getting the yield, the investment return was much higher and more stable than when I invest using other styles.

Investing for income is not about finding the highest yielding stock which you can get out there. If it was that easy, everyone would be rich. It is about finding the right stock to get the right yield and having the patience to accumulate while getting the income from the stocks.


Investing in Funds/Unit Trusts

Investing in funds or unit trust in another way to grow our money. This style does not require us to read up on individual companies but instead, we invest in a more macro view of industry and sectors. We can also invest base on countries. A fund is made up of many individually companies which represents the industry or sector. We can view the fund performance and decide whether to invest in it.

Another popular option is low cost index funds which is easily accessible to investors now in Singapore. You can read more about index funds here.


What Is your investment style?

After reading on the various different investment styles, what do you think your own investment style is? It took me sometime to finally find my own investment style so be patient, it may require some trial and error to eventually find the right style that suits you.

A tip on finding your investment style is to take making money out of the equation. Once you do not think about making money, are you still passionate to learn the ropes of that investment style? If you are, then that could be your investment style which you're suitable for. Some people prefer to invest by themselves, analysing and researching on companies while some may choose to invest in funds through their financial adviser. Ultimately, investing is for the long term and should not be for any short term gains. I hope this article helps you to understand your investment style better.

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