What Should I Do with My AIA Policies?

Fin­an­cial tur­moil has swept through U.S. for quite some time. But the ones that affected Singa­por­ean is the col­lapse of Leh­man Broth­ers and the fin­an­cial crisis of AIG.

Those who bought DBS High Notes 5 may loose part or all of their at least $25k invest­ment. AIA, a sub­si­di­ary of AIG, has its poli­cy­hold­ers anxious about their policies should the par­ent com­pany col­lapse.

So what are the choices for these two groups of people then?

DBS cus­tom­ers can do noth­ings except to wait for DBS to inform them of any resid­ual cash to be dis­trib­uted back to them.

For AIA poli­cy­hold­ers, they will need to stay cool and calm in this peri­od of time. For those who really afraid of los­ing their money fur­ther, they can con­sider auto­mat­ic premi­um loan that will help to pay for their future premi­um by loan­ing against their cash value. It comes with a 5–7% interest rate. But at least you are bet­ter off with con­tinu­ta­tion of cov­er­age and buy­ing time to mon­it­or the situ­ation. Any early ter­min­a­tion of any insur­ance policies, espe­cially those with cash value, is at your dis­ad­vant­age. You can also con­sider with­draw­ing the cash value by loan­ing the amount of the cash value instead of sur­ren­der­ing policies if you really want to pro­tect whatever cash value you have with AIA.

Let’s hope that the U.S. government’s plan to fix the root of the sub-prime prob­lem will show some res­ult soon­er. 

Beat Inflation with Better Financial Tools!

The cur­rent infla­tion rate of 7.5% looks high, so does it means that it is impossible for any low-risk fin­an­cial tool to beat this rate? First of all, let us study the aver­age infla­tion rate over the last 10, 20, 30, 40 years and since 1961 till 2007.

Peri­od 1998–2007 1988–2007 1978–2007 1968–2007 1961–2007
Infla­tion Rate 0.74% 1.55% 2.12% 2.85% 2.65%

In fact, some years like 2002 exper­i­ence a neg­at­ive infla­tion, mean­ing the con­sumer price actu­ally went down. It was only in 1973 and 1974 that we had exper­i­ence expo­nen­tial infla­tion rate of 19.6% and 22.3% respect­ively.

So we can see that the aver­age infla­tion rate is actu­ally less than 3%. Hence, it is not dif­fi­cult to study the dif­fer­ent fin­an­cial products around that deliv­er an interest rate of 3% and more! If most of your asset is earn­ing less than 3%, it means the silent thief (infla­tion) is erod­ing your money every year, and you become poorer with each passing year.

We can divide the fin­an­cial products into 3 main cat­egor­ies. Low-risk, Medi­um-risk and High­er Risk.

Low-Risk

The very com­mon and pop­u­lar choice is with the bank’s short-term fixed depos­it (FD). How­ever, it is usu­ally lower than 2%, espe­cially so in these few years. Hence, bank FD is not a safe haven for a large sum of money.

Money mar­ket provides anoth­er good altern­at­ive with its 1.5%-2.5% (estim­ated) interest rate.  But do note that it can be traded like stock, though it is usu­ally very stable through­out since it is a bas­ket of bonds with matur­ity less than a year. You are allowed to with­draw the money any­time too.  How­ever, this fin­an­cial tool still can­not beat the min­im­um tar­get of 3% interest.

Lump-sum fixed depos­it of more than 5 years, nor­mally offered by insur­ance com­pany, usu­ally yields 3% to 4.x%. Hence, this is a good choice for you to put the big­ger sum into this bas­ket. 

Reg­u­lar sav­ings plan, which offers yearly cash­back for liquid­ity, provides choices for you to spend or save the money back with the insurer. Revosave, offers by NTUC Income, cur­rently gives 3.5% pa interest rate on the money being re-depos­ited. It beats all the interest rate of the above men­tioned fin­an­cial tools flat. Moreover, it also allows you to buy into the funds WITHOUT any sales charge. Hence, the poten­tial of earn­ing bet­ter interest is even high­er, if you have long time-hori­zon. Mostly import­antly, it is a pro­tec­ted sav­ings plan as your cash­back and matur­ity amount will still con­tin­ue even when you are dia­gnosed with crit­ic­al ill­ness.

Recently, Singapore’s 3 loc­al banks have been offer­ing Pref­er­ence Shares to retail­ers, some­thing unheard of in the past  It gives a fixed dividend rate of more than 5% per annum. The bank may redeem your loan with them after 10 years. This is hence anoth­er good altern­at­ive to diver­si­fy your money to earn bet­ter interest.

Medi­um-Risk

If you have more than 10 years to save for your goals, the Dol­lar-cost-aver­aging tool is very effect­ive to deliv­er 7–9% of annu­al interest. You invest a fixed amount of money into selec­ted funds, regard­less the mar­ket con­di­tion. So you will buy more units when mar­ket is low, and buy less units when mar­ket is up. Over the long term, your aver­age cost per unit is kept low. So if you want to retire at age 60, you must be pre­pared to sell your port­fo­lio between age 58 to 62 when the mar­ket is right. Invest­ment-linked dol­lar-cost-aver­aging  is good for those who are sav­ing for chil­dren edu­ca­tion, as it allows you to attach the rider to waive all future premi­ums for the chosen years. This rider will nor­mally waive all future premi­um should the par­ent were to con­tract crit­ic­al ill­ness, encounter pre­ma­ture death or be total per­man­ently dis­abled. Hence, your child’s future edu­ca­tion fund is guar­an­teed to be inves­ted for the chosen num­ber of years. You can con­sider IDEAL plan from NTUC Income.

Lump sum invest­ment in invest­ment-linked fund (ILP). This works like the usu­al unit trust, how­ever lump sum ILP comes with addi­tion­al 25% pro­tec­tion of your invest­ment should there be pre-matured death or Total Per­man­ent Dis­ab­il­ity. Nor­mal unit trust will be required to be liquid­ated, regard­less of the mar­ket con­di­tion. The poten­tial returns vary accord­ing to the funds selec­ted, so seek advice from the fin­an­cial advisor or do your study.  

Recently, Singapore’s 3 loc­al banks have been offer­ing Pref­er­ence Shares to retail­ers, some­thing unheard of in the past  It gives a fixed dividend rate of more than 5% per annum. The bank may redeem your loan with them after 10 years. This is hence anoth­er good altern­at­ive to diver­si­fy your money to earn bet­ter interest.

 High­er-Risk

Stock invest­ment is known to deliv­er the highest rate of returns. If you are invest­ing for the long term and choose your stock care­fully, you will be rewar­ded hand­somely. The safe “stock” that you can con­sider are the Exchange Traded Funds (ETF) that are traded on Singa­pore Stock Exchange of Singa­pore (SES). ETFs track the price of a few selec­ted stocks. For example, STI ETF tracks the blue-chips traded on SES. You will see that ETF has only upwards trend over long peri­od of time.

Unit trusts that are exposed to dif­fer­ent sec­tor and seg­ment are also good invest­ment tool to be included in your port­fo­lio. You may want to seek pro­fes­sion­al fin­an­cial advisor help to man­age your account. How­ever, these advisors do charge an annu­al 1% of your invest­ment port­fo­lio for recom­mend­ing and main­tain­ing your account. But if he can help you to earn 10% interest p.a., why not?

Ref­er­ence: http://www.singstat.gov.sg/statistics/browse_by_theme/prices.html

Performance of Unit Trust and Investment Link Policies

With so many unit trusts and invest­ment-linked pol­cies (ILP)  in the mar­ket that offer invest­ment oppor­tun­it­ies for us to grow our money, how do we know which are the best per­form­ing funds?

You may check out the web­site from Invest­ment Man­age­ment Asso­ci­ation of Singa­pore (IMAS). IMAS com­piled the peform­ance of the unit trusts and ILP every quarter. Each unit trust and ILP is giv­en a star from 1 to 5 and assigned a quad­rant to indic­ate how it is per­form­ing in its sec­tor. So refer to the report to make an informed choice on your unit trust and ILP invest­ment!

Is Value-Cost-Averaging Better Than Dollar-Cost Averaging

Value-Cost-Aver­aging, VCA, in short, works some­how like Dol­lar-Cost-Aver­aging (DCA), but the amount of money inves­ted in each peri­od of time may be dif­fer­ent. VCA var­ies the amount of inves­ted money based on the price fluc­tu­ation of the fund rather than invest­ing a fixed amount at fixed inter­vals.

To illus­trate the concept of VCA, sup­pose you intent to invest $200 per month in a fund. If at the end of the first month, the fund’s value declines and your $200 has shrunk to $190. Then you add in $210 the next month, bring­ing the value to $400 (2*$200). Sim­il­arly, if the fund is worth $430 at the end of the second month, you only put in $170 to bring it up to the $600 tar­get. Hence, few­er shares are pur­chased when price are high and more shares are pur­chased when price are low, facil­it­at­ing the ‘buy low’ aspect of the ancient invest­ment adage, ‘buy low, sell high’.”

If you decide that you want to take advant­age of the sys­tem by wait­ing out for the market’s prices to go down, then you effect­ively become a mar­ket timer. But no one can time the mar­ket: so value cost aver­aging falls some­where between DCA and mar­ket tim­ing. It may be tedi­ous to carry out VCA com­pu­ta­tion monthly, so instead of adjust­ing the invest­ment amount each month, you may recal­cu­late it every six months or a year. As long as you fol­low the basic prin­ciple of buy more share when mar­ket is down, and buy few­er shares when mar­ket is up in a fixed inter­val, you will beat the per­form­ance of DCA.

But like any sys­tem, VCA has its draw­backs too. If the mar­ket goes into a pro­longed slump, you could end up hav­ing to make very large con­tri­bu­tions to keep your account value on track. If you’re not able to double, or even triple, your con­tri­bu­tions, you may have to aban­don your plan, or cre­ate a new one. Moreover, VCA is a self-ini­ti­ated dis­cip­line to save reg­u­larly with vary­ing amount; where­as DCA is offered by many commercial/insurace com­pan­ies that will enforce this good sav­ings habit by reli­giously deduct the fixed amount of money from your bank account. So which has a high­er suc­cess rate of reg­u­lar sav­ings?

Insurance Policies for Kids: What, why and when?

kids01.jpgFlooded with inform­a­tion from insur­ance agen­cies and even banks on insur­ance policies, sav­ing plans… for your child and can’t decide on which works best for you and how much to save for thi­er edu­ca­tion? Read on…

In gen­er­al, the fol­low­ing types of insur­ance policies are recom­men­ded for fam­ily with young chil­dren to provide for cov­er­age from hos­pit­al­iz­a­tion, edu­ca­tion to life­time sav­ings.

Shield Plan. The first and fore­most import­ant cov­er­age for a new young mem­ber in the fam­ily is a shield plan. The pur­pose of such shield plan is to ensure that the fam­ily fin­ance is not wiped out in case some­thing unfor­tu­nate hap­pens to the child. The Shield plan nor­mally cov­ers a child’s hos­pit­al­iz­a­tion fees, pre-hos­pit­al­iz­a­tion and post-hos­pit­al­iz­a­tion con­sulta­tion and med­ic­a­tion fees. The basic Shield plan offered by CPF cov­ers till age 85 and sub­ject to deduct­ible and co-insur­ance, mean­ing you have had to pay some of the charges. Most shield plan offered by insur­ance agen­cies cov­ers for the entire life and option­al low-cost rider to cov­er the deduct­ible and co-insur­ance. Shield plan should be bought as soon as the child is born. See Health Insur­ance for more inform­a­tion on the vari­ous types of cov­er­age.

Par­ents’ Life Policy. Par­ents’ life policy means your own life insur­ance cov­er­age. What has par­ents’ life policy has to do with the child? You may ask. The answer is straight for­ward. The par­ents need to ensure that they are covered adequately so that the fam­ily will not be thrown in fin­an­cial difficulty/turmoil in case some­thing unfor­tu­nate hap­pen to the par­ents. I am sure you do not want your fam­ily mem­bers’ life and your children’s future being affected due to loss of income and lack of insur­ance pay­out when such unfor­tu­nate event hap­pen. Insur­ance pay­out should be suf­fi­cient to tide your fam­ily over for some­time before your fam­ily mem­bers seek and plan for altern­at­ive per­man­ent solu­tion. If you are not sure wheth­er your fam­ily has had enough cov­er­age for your­self, talk to your insur­ance advisor, ask them to do a fin­an­cial ana­lys­is for you.

Edu­ca­tion Policy. Edu­ca­tion policy is a bet­ter altern­at­ive to reg­u­lar sav­ing. Instead of just put­ting a reg­u­lar amount to the sav­ings account that earns you 0.5% interest per annum, you should buy an edu­ca­tion policy instead. The most import­ant bene­fit of buy­ing edu­ca­tion policy over reg­u­lar sav­ing is that once the policy is bought, the monthly premi­um (or sav­ings) is guar­an­teed to be paid to the policy till matur­ity. That is, the policy premi­um will be waived if the payor(parent) suf­fers crtic­al ill­ness, total per­man­ent dis­ab­il­ity or death. Reg­u­lar sav­ings in bank requires your act­ive and con­sist­ent sav­ings regard­less of your fin­an­cial and health status. Most edu­ca­tion policy yields bet­ter returns when you buy earli­er for your child. So, switch from reg­u­lar sav­ing to edu­ca­tion policy early espe­cially for your girl who is likely to enter ter­tiary edu­ca­tion at 19 years old.

cost-of-university-education.png
Source: The Straits Times, 03 May 2009

 

Child’s Life Policy. The main advant­age in buy­ing life policy early is that there is unlikely to have any exclu­sion of pre-exist­ing ill­ness from the policy, espe­cially chron­ic dis­eases like heart prob­lem, dia­betes and even asthma. But does it mean that you have to pay the premi­um for your child for the whole life? No, not neces­sary. Some insur­ance com­pan­ies offered the so called Lim­ited Premi­um Life Policy for your chil­dren. Such policy only requires you to pay premi­um up to 20 years (or more depend­ing on how you want to stretch the pay­ment) but provide the insur­ance cov­er­age for the child for the entire life­time. The monthly premi­um may appear high­er than the usu­al life policies for chil­dren but the total premi­um paid from age 1 to age 20 can work out to be much less than the total premi­um paid if the child will to buy it him­self say from age 25 to age 85.

In brief, make sure you, the par­ents, have had enough insur­ance cov­er­age and get the Shield Plan once the child is born. Save your money for child’s edu­ca­tion with Edu­ca­tion Policy instead of put­ting them in the piggy bank.

Down­load the Fin­an­cial Needs Ana­lys­is spread­sheet  now to determ­ine the amount of funds required for the vari­ous area of insur­ance cov­er­age!

 

Ginny Lim Gek Eng
Email: ginny.lim@income.com.sg
Web : www.aboutfinancialplanning.net

Invest Your First $20K in OA & SA by 31 Mar 08

Now that you know $60K for our CPF accounts (with first $20k from OA) will earn the extra 1 per cent from CPF Board, it also means that some amount of money will be locked up in CPF from invest­ment under the CPF Invest­ment Scheme (CPFIS). This is a fair deal between the Gov­ern­ment and the Cit­izen. Just like Fixed Depos­it, you are giv­en high­er interest provided you don’t with­draw the prin­cip­al with­in the agreed peri­od.

So hurry, if you have the inten­tion to invest your money in share, unit trust, invest­ment-linked fund, you have to do so by 31st Mar 08. From 1st Apr 08 onwards, the first $20K from CPF OA and anoth­er $20K from CPF SA account will NOT be allowed for invest­ment.

Do Your Own Financial Analysis Now!

Need help to determ­ine the amount of funds required for the vari­ous areas of insur­ance cov­er­age? Down­load the Fin­an­cial Needs Ana­lys­is Spread­sheet now. Enter your cur­rent insur­ance cov­er­age, income and expenses; assests and liab­ilites and sav­ing plans and voila, the estim­ated amount of funds required for each insur­ance cov­er­age will be com­puted for you.

Down­load the Fin­an­cial Needs Ana­lys­is spread­sheet now!

Savings and Investment Plans

Sav­ings and invest­ment can be done through either reg­u­lar or lump sum invest­ment. For those who are risk averse, you may invest with those tra­di­tion­al endow­ment plans that will give con­sist­ent rate of returns between 3–6%. For those who do not mind short-term fluc­tu­ation but poten­tially may attract much bet­ter returns may con­sider invest­ment-linked policy. The cap­it­al is pro­tec­ted upon death, total per­man­ent dis­ab­il­ity of the insured as the insur­ance cov­er­age is at least 5 times the annu­al premi­um.


Con­tin­ue read­ing

Rule of 72 on Doubling Your Saving

The Rule of 72. For­mu­lated by Albert Ein­stein, it states that if you take 72 and divide it by the annu­al interest per­cent­age, it will give you the num­ber of years your money would double in value. Hence, with an interest rate of 2.5%, it takes 28.8 years to double our prin­cip­al sum in your CPF Ordin­ary Account.

This simply tells us that CPF sav­ings alone is not likely to be suf­fi­cient to cov­er your liv­ing and med­ic­al expenses after retire­ment. Assum­ing that you work for 30 years, you need to con­trib­ute about $150 monthly to your CPF Orid­in­ary Account (after pay­ing your mort­gage loan, chil­dren study loan…etc.) to achieve the min­im­um cash sum of $99,600 at age 55. If you choose to leave the min­im­um sum in the CPF account, then from age 62 you will receive every month $790 for about 20 years till age 82. And zero cent after that.

So, start your fin­an­cial plan­ning now. Sav­ing through a vari­ety of insur­ance plans, for what you know, could be a way to increase your net worth while pro­tect­ing your life at the same time. Find out more about the vari­ous types of insur­ance at Insur­ance Plan­ning. For those turn­ing 55, con­sider buy­ing an annu­ity which guar­an­tee pay­outs for life instead of leav­ing the min­im­um sum in your CPF account.