Buy Term, Invest the Rest - What does it mean?

Buy term, invest the rest (BTIR) is a financial strategy that advocates buying a term life insurance policy and investing the remaining money that would have been spent on a more expensive permanent life insurance policy. This strategy allows policyholders to allocate more money to investments and achieve better long-term financial growth. Term life insurance policies offer a death benefit for a specific period of time, usually 10, 20, or 30 years. They are generally more affordable than permanent life insurance policies, which often include a savings component and can cost up to ten times more than term life policies. By purchasing a term life policy, policyholders can allocate more money towards investments that have the potential to grow their wealth over time. Investments in stocks, bonds, and mutual funds can yield a higher rate of return than a permanent life insurance policy's savings component. By investing the money that would have been spent on a permanent policy, policyholders can accumulate wealth and achieve long-term financial goals, such as retirement or buying a home. One of the key advantages of the BTIR strategy is flexibility. If a policyholder's financial situation changes, they can adjust their investments accordingly without being locked into a permanent life insurance policy. Additionally, term life policies can be converted to permanent policies later on, providing policyholders with more options for protecting their financial future. Another benefit of BTIR is that it is easy to understand and implement. Unlike more complicated financial strategies, BTIR does not require a high degree of financial literacy or expertise. Policyholders can simply purchase a term life policy and invest the remaining money in a diversified portfolio of stocks, bonds, and mutual funds. However, there are some potential drawbacks to the BTIR strategy. One of the main risks is that investments may not perform as well as expected, potentially leaving policyholders with less money than they would have had with a permanent life insurance policy. Additionally, term life policies only offer coverage for a specific period of time, so policyholders must ensure that their investments are performing well enough to cover future insurance needs. In conclusion, the BTIR strategy can be a good option for individuals who want to maximize their long-term financial growth while still protecting their loved ones with a life insurance policy. By purchasing a term life policy and investing the remaining money, policyholders can achieve a better rate of return on their investments and have more flexibility to adjust their financial plans as their needs change. However, it is important to carefully consider the potential risks and benefits of the strategy before implementing it. 

Car Insurance Money Saving Tips

If you drive a car, you will need car insurance or motor insurance. While there are many insurance companies out there, you will be amazed at the different quotes that each insurer will actually give you. Recently, I went to get some quotations to renew my insurance for my car and was surprised that the quotes given varied from $1200 to $1600. I spoke briefly to a general insurer and found out why these quotes vary. Here are some tips on how you can save on your car insurance.

Shop Around For the Cheapest Car Insurance

Each insurer will give different quotes due to different claims experience. Another reason why there are different quotes is also likely due to the fact that these companies have certain "quotas" on the number of vehicles of a certain model that they are willing to insure. For example, Insurance Company A might decide that the risk it can take for insuring Toyota cars is only maximum 1000 cars this year. As such, they might give high quotes especially when their quota is filled so as to price themselves out of the competition. So do shop around and get as many quotes as you can. You will be surprised at the different prices.

Increase Your Excess

Another method to reduce your car insurance is to actually increase your excess (simply put as the amount that you will have to pay first during an accident before you can claim any money from the insurance company). I learnt this trick from an insurance agent some time back. The intial quote I got then was around $1400 based on a $500 excess. By increasing my excess to $2000, I was able to get a quote that was cheaper. Of course, the reason why I was willing to take the extra risk was because I wasn't accident prone and I also had the means to pay the $2000 excess. Weighing the probability, I figured that the increase in excess was something that I could afford to risk.

Buy the Correct Car

Yes. You guessed it. Certain car brands/models are more expensive to insure than others. Generally, Toyotas will be cheaper to insure than a Honda or a Mitsubishi. This is due to the claims experience. Cars that are popular amongst younger male drivers tend to have a higher accident rate and thus will have a worst claims experience. Insurers will thus charge a higher cost for certain models and brands of car. If you want cheap car insurance, go for Toyota and Nissan. They are among the cheapest. Avoid Honda and Mitsubishi. If you are driving a sports car...Good Luck!


Read Related Postings:
Home Insurance
Top 10 Money Saving Tips
My Saving and Spending List
Drinking and Eating Your Way to Financial Freedom

Funeral Insurance 101

It just came to my realisation that certain countries do sell insurance to cover the cost of one's funeral expenses. This is usually a standalone insurance that offers a payout to tide the family through the funeral expenses which usually adds up to tens of thousands of dollars.

Some features of funeral insurance that I have seen includes:

1. Flexible coverage amounts
2. Fixed premiums with no increase in age
3. Guaranteed coverage with no medical examination for people of a certain age range
4. Fast payouts in 24 hours
5. Payouts that are at least more than or equal to the premiums paid
6. Professional grief counselling
7. Discounts that are applicable if it is a family plan

Of course, the above stated features  are just a sample of what is available in the market. So one will have to conduct the necessary due diligence to find the best funeral insurance that suits one's purposes.

In countries like Singapore, such insurance is also almost non-existent though it will be interesting to see whether there is a market for such a product.

I think this insurance is really niche but still fills a necessary gap since it will provide loved ones with almost immediate spare cash for funeral expenses when the need arises.

Tokio Marine Never Cuts Bonus: Participating Fund Update 2014 - Things We Can Learn From

Just received Tokio Marine's Participating Fund 2014 update from my whole life policy with them.  As expected, they are maintaining the bonus rate for their participating policies.

For info, Tokio Marine is one of the few companies that maintains its bonus rate for its whole life policies pretty consistently over the years.  In fact, the report states that they are the ONLY life insurer in Singapore to have honoured all their bonus rates for the last 66 years!

This is probably testament to their sound investing policy for their participating fund.  Even though they acknowledged the volatile investment climate of 2013, they are still maintaining the par fund bonus even though the returns came in lower than expectations.

Some interesting stats from their par fund:

Market Value (measured by total assets in $million)

• 2011:  $2,142
• 2012:  $2,677
• 2013:  $3,073

Asset Mix of Fund for 2013

• Equity : 37%
• Fixed Income: 52%
• Cash: 7%
• Property: 3%
• Others: 1%

Breakdown of Fixed Income S$1,589million

• Singapore Government Securities = S$288million (18%)
• Quasi-Govt/Investment Grade Bonds = S$857 million (54%)
• Other Bonds = S$444 million (28%)

Top 10 Equity Holdings (the most interesting part to me...) S$1,126 million

• Tokio Marine Fund - Far East Equity Portfolio
• TMA Umbrella Fund - TMAI Asian Equity Fund
• SingTel
• DBS 
• UOB
• OCBC
• Keppel Corp Ltd
• Singapore Press Holdings (SPH)
• StarHub
• Singapore Technologies Engineering

Disclaimer:  I am not a Tokio Marine insurance agent and am not making any recommendations whatsoever about Tokio Marine and its insurance or investment products.

Holidays and Travel Insurance

The first two months of 2014 are already past.  And it seems like the school March holidays are almost here again.  How fast a term flies!  Most people are probably gearing up for short holidays here and there before the June holidays.

However, the haze is back in Indonesia and Malaysia.  Who knows when it might hit Singapore (another good reason to start planning a holiday especially if the haze situation worsens).  Most people are avoiding Bangkok due to the ongoing political unrest there.  So that leaves quite few options for those who just want a short getaway.

On a related note, I realised that I have been very inconsistent in the purchasing of travel insurance.  There are times when I purchase travel insurance when I go for holidays and there are also times when I do not.

So I would like to hear your thoughts:

• Given the current situation (haze, political unrest, etc) in neighbouring countries, where is good place to go travelling (not too far away from Singapore)?
• Do you usually buy travel insurance?  If so which is the best plan around?

How to Check if I Have Medishield

To check if you are covered under Medishield, it is really quite simple.  There are basically 3 ways:

1. Look at your yearly CPF Statement of Account (the yearly statement will also tell you whether you are paying for a dependent)
2. Log in to my cpf online services and go to My Messages (this is located at the menu on the left hand bar).  Under Insurance, you should be able to see your medishield coverage
3. Call CPF Board at 1800-227-1188 to check.

The CPF FAQ also states it quite clearly as follows:

Your yearly CPF Statement of Account and “My Messages” (under "my cpf Online Services ", which you have to log in to with your CPF Account Number and SingPass) will indicate the status of your/your dependant(s)’ coverage. Alternatively, you can also call CPF Board at 1800-227 1188 to check.

Three Great Ideas to Spend Your Annual Bonus

It did not seem too long ago that I was writing about what I should do with my annual bonus.  Most people will be getting their annual bonus in December and I thought that it will be timely to look at a few great ideas on how to spend one's annual bonus.

1.  Insurance

Most people are under-insured.  But one should also be careful not to be over-insured or to be overpaying for insurance.  Some time back, I wrote about one of the cheaper if not cheapest insurance plan in town.  It is NTUC's i-term insurance.  I don't work for NTUC so I can't vouch for this plan.  Neither do I own this insurance plan.  But looking at the rates, it definitely looks like one of the cheaper insurance options around.

Another cheap insurance plan one could consider (if you are a national serviceman or woman) is the SAF Group Term Insurance plan.  Just recently, Aviva has increased the maximum coverage from $600,000 to $1million.  Another thing I like about this group term plan is that it gives rebates.  I am currently covered under this plan and am considering whether to increase my coverage.

I also wrote about whether one is ready to take charge of one's healthcare costs and you might want to consider reading it especially if you are a Singaporean.

Of course, before you dive in and go out shopping for an insurance policy, I must caveat that everyone has to do their due diligence.  In fact, during one of the polls conducted on this blog,  the poll results indicated that many people considered insurance products as toxic investments.  Of course, there is nothing scientific in the way I conducted the poll and it is just the opinion of readers.  I also recommend the following articles on insurance:

• Can You Trust Your Financial Planner?
• Surrendering Insurance Policies?
• AIA Insurance Agent Scam
• Beware of this Insurance Agent

2.  Invest

Of course, besides saving up your annual bonus, one could also chose to invest it in instruments that could potentially give you a higher return than the interests rates offered by banks (can someone remind me again what is the interest rates banks are offering again?) 

Most readers should know that I invest mainly for income with capital gains as a secondary goal.  To understand a little more about income investing, I would refer you to some of the previous articles that I have written:

• High Dividend Yield Stocks
• Real Estate Investment Trusts (REITs)
• Canadian Royalty Trusts (Canroys) - do note that this article was written before the tax changes kicked in.
• Rental Property
• Investing in Bonds

For myself, I am looking at a few stocks that pay good dividends.  On my current watchlist are Sabana REIT, Saizen REIT, Ascott REIT, Far East Hospitality Trust, Lippo Malls Indonesian Retail Trust, SingTel, Capitaland, United Engineers.

3.  Pay off Your Debts

This is self-explanatory.  If you have credit card debt, you should be paying that off before even thinking of investing.  The interest rates on any outstanding credit card bills is just too high to justify you not paying off that debt first.  

For others, you might want to consider making pre-payments or full redemptions of other outstanding loans (e.g. auto loan, mortgages).  

SAF Group Term Life Insurance Gives Rebates

Just received a letter not long ago from Aviva.  It is basically a cash rebate of over $120 for my term insurance coverage under the SAF Group Term Life Plan.  I really do enjoy getting this rebates as it reminds me again that this is probably one of the cheapest term insurance plans available to most Singaporeans.

Considering that my monthly premium is around $50, it means that I have gotten almost 2 months of free coverage!  Insurance is a cost at the end of the day and where possible, it is always best to keep the cost as low as possible.

Are You Ready to Take Charge of Your Healthcare Costs?

I wrote about CPF's "Are You Ready" campaign recently and also did a quick check in my previous posting about "Are You Ready to Manage Your Cashflow".  Anyway, there is a contest also ongoing on the Are You Ready site and there are MacBook Airs and shopping vouchers to be won just by sharing your stories.  So do visit the site here and share your stories.

Anyway, thought I will do a continuation of what I did in the previous post and check my own readiness in terms of taking charge of my healthcare costs.  I went through the list of questions in the checklist and here are my answers (as honest as can be):

I Make/Receive Monthly Medisave Contributions

Yes.  My CPF contributions go towards the Medisave Account.  Thus far, my Medisave account has only been used to pay a certain part of the hospital bills when my first child was born.  I guess this question is really aimed at those who are self-employed and who ought to make contributions to their medisave account.

I Am Aware of the Importance of Medisave, Medishield and Eldershield

Wow, this is a pretty tricky question.  I guess I generally know these 3 terms mean thought I must admit that there might be some inaccuracy in my understanding.  But here it goes:

Medisave - An account held under CPF that can be used to pay off hospital bills (if certain criteria are met).
Medishield - A basic hospitalisation insurance plan.
Eldershield - A severe disability insurance scheme.  Especially useful if you require long term care in the future. It provides a monthly cash payout and is available when you are of age 40.

And the importance of them all, I think I can say I know the importance of them all even though I am too young to be covered under Eldershield now.

I am Insured by Medishield and/or an Integrated Shield Plan

Yes, I upgraded my coverage to an Integrated Shield Plan offered by Aviva.  I have covered my entire family with it.

I Exercise At Least 3 Times A Week

Errrr.........Okay, no.  I hardly exercise at all these days.  Have been making too many excuses not to exercise and this is a timely reminder that I should really be exercising more.  Maybe for a start, I will try to exercise once a week?

I Keep A Balanced and Healthy Diet

Well, generally, I would like to think that I eat rather healthily.  At least I do not have any health problems.  But I certainly think I could eat healthier (i.e. more vegetables, more fruits and less meat).  I am certain that I have room for improvement in this department.  Interestingly, somebody once did a guest post on this blog regarding the linkage between financial health and obesity so you might want to check out the article.

Conclusion

So done.  I have checked off the checklist and I think that while I am financially prepared to take charge of my healthcare costs, there is definitely room for improvement in terms of keeping myself healthy (by exercising) as well as eating right.  A good and timely reminder indeed.

Are You Ready to Manage Your Cashflow?

Well, the IMSavvy site has recently launched an "Are You Ready" activity/movement/campaign.  And I was really glad that such a topic was actually chosen as it is a timely reminder for people to make sure that they are READY in terms of their personal finance.  It basically covers the 4 topics of:

•                      Managing Your Cash Flow

•                      Buying A House Within Your Means

•                      Taking Charge of Your Healthcare Costs

•                      Securing Your Retirement

Just thought that I would share some thoughts about my own personal experience regarding the first topic of managing my cashflow.  Based on the checklist provided at the IMSavvy site (http://www.cpf.gov.sg/imsavvy/ayr_list.asp?catid=1), there were a few questions and I hope to answer these questions as honestly as I can.  So here I go:

I Spend Less Than What I Earn Monthly

Yes, I do spend less than what I earn monthly most of the time.  The only times that I ever spent more than I earn was when I was either going on a holiday or spending on my wedding preparations/home renovations.  Otherwise, as a whole, I would like to think that for a typical month, I make a pretty conscious effort to spend less than what I earn monthly.  This discipline I guess was instilled in me since young - you never want to spend your pocket money before the week is over.  So likewise, when you are working, your monthly cash outflows should not exceed your monthly cash inflows unless for very good reasons (e.g. once-off big ticket items).

I Save At Least 10% of My Income

Generally, I would like to think that this is a YES for me too.  It really depends what is the definition of saving.  My definition of saving is basically income that is not spent on consumption.  So saving to me includes putting money in the bank, putting it in a regular savings plan or investing in stocks.  Well, some people will include their CPF contributions as part of their savings (and that isn't entirely wrong).  So different people probably have very different ideas about what actually constitutes savings.  For me, I do save >10% of my income over and above my CPF contributions.

Again, I must qualify that there are some months when I am a little less disciplined and splurge a little.  But with a regular savings plan that I have set up through an ILP bought years ago, more than 10% of my income does go into saving (at least based on my own definition).

I Have At Least 6 Months Worth of My Income as Emergency Funds

A big YES to this question too!  This was really something that I put off in the past and it was advice that I did not heed which I regret.  During then, I was young and rash.  I decided that the bank was paying me too little interest and decided to invest the majority of my money in stocks.  I had less than 6 months worth of my income in emergency funds even though I originally had set aside that sum of money.  Then came the time when I had to pay for some big ticket items and I was left with little choice but to liquidate some of my investments at a loss.  So if this is not good enough warning for you, please do set aside 6 months of your income as emergency funds first before you even start investing.  The last thing you want to do is to be liquidating your investments at a loss when a certain crisis (e.g. job loss) hits you.

I Pay My Credit Card Bills and Other Debt Obligations, in Full and On Time Each Month

Generally yes.  All my debt obligations are paid through GIRO so I do not lapse on it.  I do pay my credit card bills in full at the end of each month though not always on time.  This is simply because I forget to pay them or miss the due date as the credit card bill was lost in my stack of letters.  I usually call up the bank to waive the late charges since it is basically an oversight. I must have done that more than 5 times but they have always been more than willing to waive it.

I Have Adequate Financial Protection

Well, this is perhaps the toughest question to answer.  And my answer to this is probably a "MAYBE".  I know that I ought to be insured to certain levels (e.g. 10 times my annual pay for death coverage).  But all these are really rule of thumb calculations.  My protection level is slightly below those levels.  I would like to think that I am adequately insured with coverage for death, TPD, critical illness, hospitalisation and personal accident.

This is perhaps a good time for me to dust off the dust on my insurance plans and see whether it is time to review the insurance coverage for myself as well as my family members.

So how did you fare in answering these questions?  Any action you need to take if you have answered a "No" to any of the questions above?  Are you ready to manage your cashflow?

Self employed? You need income protection!

If you’re self employed, you’ll be very aware of what your dollars can do. You’ll also be extremely conscious of the possibilities of your income drying up on you if you’re unable to do the work. That does happen, and it’s something you can cover with income protection insurance.

The risks

Even a minor situation can put you out of the loop for contracts and new jobs. That’s the nightmare, and it’s no joke for anyone who’s self employed. Something as simple as a minor injury can take you out of your income stream quite easily. If you’re a graphic artist who’s broken something, you can be stuck with sitting around waiting for things to heal, while your bills come in regardless.

This can hit cashflow in all the wrong ways. If you don’t have any cash on hand, or more likely if your cash is tied up in your business, the lack of cashflow is potentially destructive. Equally important, your clients may be “on hold”, waiting for work while you recover. That situation can often be fixed by subcontracting or outsourcing things you’d normally do yourself- If you have the cash to do it.

Not having the cash is likely to be the sticking point in any version of these scenarios. That’s also not including the domestic expenses, which can also be caught out in the sudden drying up of the income stream. Power bills, rates, you name it, they add up to a situation where plenty of money can be going out and none coming in.

Dodging the financial bullets

These situations are all quite avoidable. A good income protection policy can cover you for your expenses and in many cases even your medical needs. That’s useful cover when you need it, and it’s also a very good way of staying clear of those interesting “surprises” when you find out how much you have to pay for these things.

The cost of the income protection cover isn’t particularly expensive. You can get something like 75% of your income covered upfront, for a small, bearable outlay. You can also get packages that include serious full coverage for things like disability and related benefits.

Important: It’s a good idea to apply directly for quotes from the insurers, and get into a dialog about your needs. There may be a range of options available to you to lock in some good cover for your issues, and this extra effort can pay off very well in terms of providing comprehensive cover when you need it most.

Take the time to really think about this:

What are the risks of suddenly losing your income stream? These things include loss of business, too, so you need to consider a worst case scenario, to fully assess the situation.

What can you afford as an outlay for insurance? Cash outlays can be a little complex for self employed people, particularly if you’re just starting out, so try to pin down a good level of cover, relative to a viable outlay that you can live with.

When you’ve figured out what you need, talking to your insurer will provide a range of options. You can get it all done in a few minutes, and have some added peace of mind.

[The above is a guest post. If you are interested in contributing a guest post to this blog, please email sgfinancialfreedom@gmail.com with your proposed article. The topic of the article should be related to personal finance.]

Insurance as asset protection- Things you need to know

Insurance covers a range of given dollar values. That’s the first thing you need to know about insurance. You can get specified coverage for practically anything, when you need it. Home insurance is a good working model to see what insurance can do to protect your assets.

Home insurance basics

Home insurance provides cover for events and provides upfront payout values. These values are your best guide to self defence for your assets and will show your costs upfront as well. The top new insurers are offering a range of flexible policies that can be managed online, including premiums.

Home insurance is a truly efficient way of covering a range of issues, including legal liabilities, which can be horrendously expensive. If a person has an accident on your property, they may have to sue to recover their costs of medical treatment, lost income, etc.

This isn’t the sort of thing you want to approach lightly. Your cover is your defence against potentially heavy costs. You need to do your homework, compare deals and do some serious thinking about how you want to manage liabilities. This really is “risk management”, in the most literal sense, so please understand now that good cover can save you a lot of grief.

Fire insurance is a particular element of home insurance that needs a special mention at this point. Make absolutely sure to get this cover and make sure it’s a good dollar value range of cover. Even minor fire damage can cause horrific costs in repairs, and serious damage is much worse.

It’s good practice to get some professional advice if you’re not sure about what you need to cover, particularly if you’re not sure about how much cover you need. The insurers don’t just sell insurance, they also have a vested interest in making sure their policyholders get good information about their products. You’ll get useful advice, so if you’re not sure, ask.

Contents insurance basics

Contents insurance isn’t as simple as it looks, either, but it’s equally important, and sometimes critical when you need to replace lost or stolen goods. You can get contents insurance which can be tailored to a large degree and altered to suit your needs when required, too.

There are some considerations here:

A lot of your contents may appreciate in value as you acquire new systems and other contents. If you upgrade your home electronics, you’re likely to need to fine tune your contents policy, particularly if it’s a replacement policy, to cover values. Make certain on a regular basis, particularly if you’re looking at upgrading in the future, that your insurance represents appropriate cover values.

Things like antiques and fine art are usually not covered by contents policies. They’re not designed to do that. You may be able to get a dollar value cover, but not necessarily at the market value, just a general sort of cover for loss. You’ll probably need special insurance for these things, and probably valuations to establish a cost bandwidth. Your insurer will be able to tell you how to approach these issues.

Shop around online, check out the options, and you’ll find you can get excellent cover. Just make sure your cover can do what you want it to do.

[The above article is a Guest Post]

AIA Agent's Insurance Scam

Another scam has hit the market. This time in the insurance industry again. It is like...AGAIN??


It is not surprising that in my first post in IMSavvy, I decided to write about whether one can trust your financial planner. I wrote that post because I cracked my head hard to think of a posting that would truly be timeless in a certain way. And I have been proven right in a certain sense. There are definitely conflicts of interests in the financial advisory business where the salary model is that of a sales business (i.e. commission based). A lot of unethical people lurk in the insurance business where the entry into business is easy and the rewards are high.

No matter how hard you try to argue that there is no conflict of interest, this conflict of interest will exist.

But I guess in the AIA agent's case, this has been brought to a whole new level. Selling non-existent insurance products! Who is to blame? Surely not AIA. Which insurance company can actually stop its agent from selling non-existent products? This is just an outright scam and the agent involve just lacks the ethics. It could literally happen anywhere and it is just unfortunate that this happened in the insurance industry AGAIN.

So what can the consumer do?

Simple. Just make sure that whatever contract you sign is really legal and is from the insurance company. Letter heads can be faked and so can many other things if the agent is out to cheat your money.

Another way is to not pass hard cash and when in doubt, call the customer service for info (yes, please get the customer service number from the website and not from your "trusted" agent)

Finexis and AXA FutureProtector

Many of you should recall the saga between AXA and Finexis over the sale of the FutureProtector term insurance which was literally given away free by Finexis. AXA ended up demanding to claw back money from Finexis due to the high lapse rate of the product.

Just the other day, I received a letter dated 1st Oct 2010 from Finexis. Its contents are as follows:

================

Attention: Mr/Ms./Mdm XXXX

FUTUREPROTECTOR PLAN

Dear Mr/Ms./Mdm XXXX,

Thank you for being a client of Finexis Advisory Pte Ltd.

As you would know, insurance provides peace of mind for you and your family, and an appropriate amount of term insurance coverage is the foundation of proper financial planning. These term insurance rates tend to increase with age and your decision in getting such coverage early is extremely prudent. The AXA Futureprotector is such a term plan, which offers you the following benefits:

• Financial protection against death and terminal illness
• Guaranteed renewability
• Guaranteed premiums for the coverage term

We noted that you have purchased the AXA Futureprotector last year during our promotion. However, you may have overlooked the renewal and thus, your Futureprotector is no longer inforce.

To allow you to renew your Futureprotector plan, which has lapsed on 17 April 2010, we have arranged for designated personnel(s), to contact you soon to follow up on our letter and to complete the Health Declaration form. The reinstatement will be at AXA's absolute discretion and this letter is valid till 15 January 2011.

Yours sincerely,

Signed off by Warren Lim

=====================

I think Mr Warren Lim is mistaken in a few ways by sending me this letter:

Firstly, I did not purchase AXA Futureprotector. It was given to me free-of-charge as part of their promotion. I was told to just pay for it first with a full reimbursement to come later.

Secondly, I did not overlook the renewal. I was reminded by the agent to cancel it and he even sent me a Giro cancellation form which I did not use at the end of the day as I simply called up the bank.

Thirdly, once you get something for free, it is very seldom that you will want to pay for it. Why pay for something when you had it for free the last time?

Beware of this Insurance Agent

There are many insurance agents that we ought to be afraid of. After all, the typical insurance agent has a glib tongue that can probably out talk most of us. But the worst kind of insurance agent isn't the talkative one. It is the one who masquerades as a financial planner and yet is always trying to get client's to cancel their old policies to buy a new policy from them.

This is an especially common situation in Singapore where insurance agents change companies the way they change shoes. Because of buyout clauses, failure to hit sales quota, or some other kind of reason, insurance agents often change from one company to another over the years. This is nothing common and we should not blame them. After all, who really sticks with one company for more than 5 years in today's job market? Where people are encouraged to gain as much job experience in as wide a variety of roles possible, it is not surprising that people change companies.

But what happens when an insurance agent changes to another insurance company is probably the worst thing that can happen to his clients. It might be better if the insurance agent had left the industry altogether. For the insurance agent who changes company will soon try to convince his existing clients to switch over their policies to his new company. It is not a new trick. It is an old trick that has happened time and time again.

True. There are instances when an apple to apple comparison is done, the consumer can clearly see the benefits of a certain policy over another policy. However, the worst kind of comparison is the kind that tries to compare an apple to an egg. With this kind of insurance agent, one must beware.

This insurance agent will take a whole life policy and compare it with an ILP. And from there he will show you all the benefits the ILP has over your whole life policy.

If you have an ILP, he will take a term insurance and compare it to your ILP!!

If you have a term insurance, he will take an ILP or Whole life policy and show you the benefits of it over your term insurance!!!!!

With this kind of apple to egg comparison, it is impossible to refuse the "benefits" that are proposed by the agent.

Rule of thumb: Always do an apple to apple comparison. When you try to compare an apple to egg, it is impossible.

Don't say you have not been warned.

AXA FutureProtector High Lapse Rate

It was reported in the Straits Times today that AXA, an insurance company, is trying to claw back $7 million from local financial advisory firm Finexis.

Last year, Finexis had a promotion where they were giving away free 1 year term insurance to its customers and potential customers. This free 1 year term insurance was AXA's FutureProtector policy. Most probably unknown to AXA, Finexis gave away all these insurance policies without asking customers to pay a single cent.

This was my personal experience:

Financial Planner from Finexis: "I got free insurance to give you. Just sign it here and after 1 year cancel it. Free, why not just take it. $200K coverage."

Me: "Okay lor"

I readily signed up for the free insurance from Finexis with the mindset to cancel the policy after 1 year. Afterall, that was what I was told to do. In fact, just this year, the agent sent me a giro cancellation form so that I could cancel off the policy as agreed upon. But I had no use for the form as I had already informed the bank beforehand to cancel off the giro agreement at the start of the year.

So now we know the repercussions of giving away free insurance. I am pretty certain that many of those who took up the free insurance just lapsed their policies as they saw no need for that protection at all in the first place. The only reason they took it up was because it was given totally free of charge without them having to purchase any other policy at all. We Singaporeans love free stuff =)

Surrendering Insurance Policies?

I read the news article a few weeks back about insurance agents/financial planner shifting around the various companies in Singapore with handsome buyout clauses and stuff. These insurance agents get paid lots of money just to jump ship from one insurance company to another company.

While that might be a concern to most people, it is important to note that if your insurance agent has switched companies, he or she is not supposed to induce you to lapse or surrender your existing insurance policies and buy a new policy from them. This unethical agents are just out to earn extra commission as they no longer earn the trailer commissions that they would have earned if they had stayed with the same company. When they join a new insurance company, they start from ground zero all again and have to start building up their client base all over again. The fastest and easiest way that they go about doing this is to ask their previous clients to take up new policies with them, often citing the benefits of doing so.

Some of them might even suggest that they can continue to "take care" of you. That is not the case as the insurance policy contract that one purchases and owns is an agreement between the insurance company and you. The insurance agent is just a distributor and does not own the clients in a legal sense. When your insurance agent leaves the industry or leaves the company, the insurance company will get another insurance agent to "service" you. If all else fails, just call the customer service hotline. That is the usual way I find out information and it is much faster than going through your insurance agent.

In the insurance industry, this malpractice of replacing old policies with new policies has led to agents being caught and fired. Many have also been disillusioned by the unethical conduct and have left the industry or lamblasted the industry. However, the practice is still very widespread. I have met with many insurance agents before and all of them have at certain points in time asked me to surrender one of my existing policy to buy a "better and newer" policy from them. This happens even when I have met IFAs.

This point has been elaborated by Mr Tan KL before at his blog. In most cases, surrendering your insurance policy does not make sense. This is especially so if you are asked to buy a similar insurance policy to replace the policy that you have surrendered or lapsed.

From a monetary point of view, it is very difficult to justify surrendering a policy for another policy. Always remember to get a 2nd or 3rd opinion when in doubt so that you can make a more informed decision. Better still, ask people like me who are not in the industry and you will probably get a more informed and independent opinion. Of course, you will have to buy me coffee =) .........Just kidding..

Poll Results: Which is the most toxic investment product

In a poll that I recently conducted on this blog, I asked the simple question to readers:

Which is the most toxic investment product?

All investments are subjective are their investors believe that they will rise in value and thus invest in them. Toxic investments or assets are simply things that lose their value such that there is no way to liquidate them for any money. Whether investment products are toxic........we can only tell based on hindsight I guess. On hindsight, we are now certain that subprime mortgages are toxic assets. But whether other investment products are toxic or not, we can only wait and see.

Poll Results - A total of 22 votes were cast

1. Land Banking (54%)

2. Insurance Products (18%)

3. Wine Investment (27%)

4. Shares (0%)

Analysis of Results

The poll showed that more than half felt that Land Banking was a toxic investment product. Wine Investment was next followed by insurance products. Nobody felt that shares is a toxic investment.

The reason why Land Banking got so many votes is perhaps due to the recent Straits Times article on it being unregulated. Mr Tan Kin Lian has also highlighted the pitfalls of investing in land banking on his blog. The low liquidity of this investment product coupled with the risk involved makes this a fairly risky product to a certain extent.

Interestingly, noone rated shares as toxic or risky even though there have been cases or debacles of shares becoming worthless overnight. Just think of China Print and Dye, etc. These shares just lost value overnight and became totally without value. Isn't that toxic?

Independent Financial Advisers?

I read in the Straits Times the letter to the forum by Larry Haverkamp titled : "Onus on insurers to boost transparency".

In it, he referred to another recent article which mentioned that financial advisers should not call themselves "independent" if an insurance company pays them a bonus for hitting sales targets. Mr Haverkamp goes on to suggest that dropping the term "independent" is a good idea but might not be a big deal as advisers will still continue to push the products that pay them the most.

MAS actually has guidelines on whether a financial adviser is "independent". And at times, it can be pretty grey as certain product providers do provide incentives that might make them bias in favour of a particular investment product.

Haverkamp is also correct to point out that playing with the word "independent" is actually just a small step forward. The ideal reform would be to empower consumers and let them make decisions based on a complete knowledge of the various products namely:

1. DIY method (Buy Term Invest the Rest)

2. ILP

3. Endowment

4. Whole Life Plans

Can You Trust Your Financial Planner?

Below is the first article that I contributed to CPF's IM$avvy. It discusses the current state of the financial planning industry in Singapore. I hope readers find this useful.

Being too trusting of others can sometimes work against us in financial planning. Too often, we are not skeptical enough when it comes to financial advice offered by others. Can you trust your financial planner? Is he really providing independent and unbiased advice or is he just trying to close a sale?

Advisory Business or Sales Business?

When the Financial Advisers Act was first introduced in Singapore, many thought that the financial planning industry would come up with a new breed of financial advisors who were independent and unbiased. While the fee based or fee-only model of financial advice is slowly taking off, most people in Singapore are still unwilling to pay a financial planner for the time and energy he takes to craft a financial plan. As long as the market is not ready, financial planners will continue to be compensated based on commissions.

A thin line separates the financial advisory business and the sales business. A sales person is one who derives his income from commissions. On the other hand, the financial advisory business is supposed to provide independent and unbiased advice to clients. It is important to realize that potential conflict of interests arise when financial planners earn commissions from the sale of financial products.

If your financial planner is earning a commission from you, can you trust that he will make the best financial decision for you? If a financial planner is selling you a product that you know very little about, how can you trust that the product is suitable for you?

Financial Products and Imperfect Information

I just read a book and it talked about a wallet auction.

Imagine that I pull out my wallet from my pocket and placed it on the desk in front of me. How much will you offer for the money in it? Whatever the case, any buyer of my wallet will be certainly worse off as I will only accept offers that they should not be making. I know what I am selling but the buyer does not know exactly what he or she is buying. It all boils down to information asymmetry or imperfect information.

The same theory applies to financial products. Imperfect information exists and the buyer has to overcome his lack of knowledge of the situation or of the seller. Market economies often deal with this problem through the mechanisms of advertising and reputation. As a consumer of financial products, your perception of a certain company’s reputation might influence you to purchase the product or invest in certain instruments. Or perhaps you have seen some advertisements that offer yields and gains that are too tempting to resist. Or perhaps, your friend had recommended a “reputable” financial planner that you can trust.

The reason why buyers rely on reputation and advertising is that they are not willing to spend the time to overcome the information asymmetry that exists. For example, a doctor gives me a prescription for a certain ailment. I trust his recommendation because of his reputation and credentials even though I am clueless about the medication that he has just offered me. In this case, it is unwise of me to spend 5-6 years of my time going to medical school just to breach the information asymmetry that exists between him and me.

But are financial products so complicated that we cannot take some of our own time and effort to breach this information asymmetry? Can you still trust that your financial planners will give you the best recommendations when there is a potential conflict of interests?

Trust Yourself: Financial Education

One simple way to overcome this information asymmetry would be for the consumer to become educated in financial matters such that they are better able to understand their own financial situation and make better financial decisions. This would help them better understand the financial products that they wish to purchase. For the beginner, the CPF IMSavvy website has a comprehensive list of articles that should serve as a good foundation for anyone interested in becoming more financially literate.

Are you willing to invest the time and energy to learn more about financial planning? Or do you still trust that a financial planner will do the best job for you?