Here is IFA Wilfred Ling’s take on why term insurance was banned in one insurance Agency >> Ban for Selling Term
The writer is not a certified financial advisor and his insurance philosophy is outlined in this brief. Do consult with a certified financial advisor to get a second opinion before making decisions.
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Yesterday I got a message from an old friend of mine. A friend approached him to introduce Great Eastern Prestige Harvest to him.
This product was introduced as a Single Premium Insurance policy.
- Premium is USD 90,000.
- Non-participating. This policy does not earn bonuses from a participating fund from the Insurance company.
- Denominated in USD. Which means that you are subjected to currency fluctuation risks.
- Interest Accrued Daily. I am not sure how this matters, but if compounding takes place daily then its definitely a good thing.
- Sales charge and expense charge. The sales and expense charge is 17.75% of single premium and 8% of single premium additions. The agent quoted that you will only break even at the 8th year.
- Monthly Insurance Charge. A monthly insurance charge will be deducted from the account value and will vary according to the Net Sum Assured (Sum Assured – Account Value) and Life Asured’s gender, smoker status, country of residency at inception, age next birthday at the policy anniversary prior to the deduction date at the beginning of each policy month.
- Guaranteed rate of 3% yield. The yield on this policy is guaranteed to be 3% + 1% per annum that varies.
Personally I really don’t have that much experience with Single Premium Policy. I think other more qualified bloggers or iFAs can advice.
Objective of this policy
My first question to my friend is what is the objective of this policy? Is it more to be meant as savings or insurance.
If its insurance, you will need to evaluate it against
- Whether Single Premium serves his needs or another insurance instrument is better.
- Other Single Premium Policies
- Other Insurance instrument (Limited Whole Life, Term Life Insurance)
If it is for saving money
That’s a lot of savings! Should you invest all your net worth on a Single Policy?
Firstly, I would like to applaud my friend. That’s a huge sum to invest or save up to. converted to Singapore dollars that is almost SGD 117,000 and a sum that I can hardly come close to.
Goes to show how most of my friends around me tend to be savers.
But the question is how much is this amount as part of his networth?
Would you be comfortable in dumping all your networth into one insurance policy?
Those are the questions only my friend can answer.
Personally, I will not. EVERY INVESTMENT VEHICLE has its upside and downsides.
Capital Guaranteed vs Inflation?
My friend likes this as it is a form of savings. My take is that 3% ain’t shabby at all.
Sure, my dividend stocks yield more than that (Folks can take a look at them at the side.) and on my Dividend Stock Tracker you can see all the prevalent yields of dividend stocks in Singapore.
But do note that if you like me spend some time muddling through and not making much initially, then 3% is really a good long term return without losing anything.
But the question comes into place is that what if inflation hits. Remember that current situation has some parallels to 1970 to 1982 inflationary times.
Back then the interest in your POSB bank is 7-8% alone.
Now imagine USD 90,000 tied up and you earn 3-4% when the bank is offering 7-8% on no risk deposits. You are losing a lot of future spending power!
This 3% is like a bond, which if you lock in for 30 years, means you earn 3% if you die die hold this for 30 years.
In this case, you will be committing to this policy for a long time as well.
A depreciating USD
My friend likes this a lot because the USD is at a low and there are opportunity for it to go up.
I leave this up to you guys who watches currency trends. I am no expert here. But my take is this:
The world is currently contains a lot of nations in debt and the best way to make debts worthless is to inflate the money.
Why pay such a high sales charge and monthly charges?
Ok how much is 17.75% of USD 90k? That’s almost USD16k! Ok I am not sure if this is all the distribution charges but that means when my friend puts in the money, the insurance agent and the company earns 16k within the first few years.
That’s pretty darn good product if you ask me from Great Eastern point of view.
On top off that, there are monthly charges as well.
I do not know the inner workings, but the 3% is on the total premiums paid? if that is the case still ok but if its 3% on (90k – 16k) then this is really a lemon.
Alternative 1: SGS Bonds
This latest yield table is taken from Fundsupermart.com, which you can buy Singapore Government bonds with as little as SGD 1,000 investments.
The considerations of this compared to that Single Premiums are:
- Capital Guaranteed (provided Singapore don’t collapse) if you hold it for the duration of Years to Maturity.
- Low cost!The nominal cost you pay for SGS bonds is minute compare to the layered cost of this Single Premium Policy.
- Still subjected to inflation risks. You are still subjected to inflation for this period. So if you buy one that is 16.15 years to maturity, you are effectively locked in to the yield of 3.11% for this 16.15 years
- You earn more than break even with the same risk! The single premium breaks even at 8 years. But for SGS Bonds if you put this SGD 117,000 into it for 8 years, at 2.46% for a bond maturing at 8 years, your SGD 117,000 will be SGD 142,000.
- No insurance component.
Alternative 2: Blue Chip Dividend Stocks or US Dividend Aristocrat
The other alternative I can think of is to invest in a blue chip dividend play like Keppel Corp or Singtel. I written much about investing in Telco stocks here at Investment Moats.
This is not really a strong alternative, since it involves risks
- Not Capital Guaranteed. Unlike the low risk for SGS bonds, stock prices fluctuate and you have to believe in long term sustainability of a company like Singtel. But then again, Great Eastern can collapse as well. Although the government have mandated mandatory funds from insurance companies to prevent that catastrophe.
- Potential of Capital Appreciation. A stake in blue chips is believing in the economic growth of Singapore’s biggest companies.
- A potential growing dividend yield. Currently Singtel yields 4.6%. At a lower sales cost you stand to make much more than the policy. And there is a possibility that dividend will grow with time. Singtel have hike up div by 10% this year. Also note that dividend can be trimmed down as well.
- Lower cost compared to Single Premium policy.
Alternative to this is that, if he wants to make a play for USD, why not a Dividend Aristocrat that have been increasing dividend for 48 years like Pepsi?
I got to get to work. But my general feel is that savings need not be through an insurance policy. most of the time it is for the ill informed. If my friend reads up on his own I am sure he can achieve great as well.
As usual, not an advisor and hopefully readers can comment where they disagree with me.
Investment Moats is an investment weblog focusing on dividend investing, growing passive income and personal finance. Learn how to easily budget with my envelope budgeting strategy to save money and not overspend.
Sometimes I cannot stand these kind of personal finance shows, and probably because of that I didn’t watch a lot of them.
But I watched these shows upon the recommendation on Mr Tan Kin Lian.
I have voiced my opinion on term life insurance vs whole life insurance in my insurance philosophy.
But these 2 personal finance guru is much more negative then me. It looks like they are on a campaign to kill off Whole Life Insurance.
It pays to know more about Term Life Insurance and Whole Life Insurance. At Investment Moats we try to link you to as much of these as possible.
Dave Ramsey – Worst Insurance product ever
Suze Orman – Cash Value of life insurance
Suze Orman – No true friend will recommend whole life insurance
Dave Ramsey – Is Term Life Insurance bad insurance advice ?
Insuring so that your dependents not able to pay huge financial burden can be cheaper than you realise
As a working adult aged 20-35, some of the hardest financial risks you are likely to face is:What if you are not around leaving your wife and kids to pay for the biggest financial burden, your mortgage.
One can argue that there are other big ticket credits that you can take up such as
- Student Loans
- Credit Card Loans
- Car Loans
But with home prices fluctuating around 400k, a single bread winner will be severely tested.
The solution known to many
The common solution, which is likely to be sold by most financial advisors you will meet is to take a whole life insurance.
The problem with that is to insure against a 300k mortgage payment, you will require a whole life plan of at least SGD 400 per month.
Folks who do not earn that much or have competing financial priorities will feel pressurized by that figure.
How can a decreasing term life insurance help?
A Decreasing Term Life insurance is a unique life insurance that provides a lump sum payment should the person is hit with death, TPD and in certain cases Critical Illness.
You will need to pay a fixed rate of premium payment for the limited duration that you and the insurer decide to insure against.
The unique thing about a decreasing term compare to a level term is that the sum that you are insured for decreases over time.
Your premium that you paid are uniformed and in this example the premium for 5 years is consistent at $-575.00.
Decreasing term works well here because the risk that you are trying to insure here decreases like the sum assured.
How is the premium like?
Premiums for decreasing term insurance tends to be lower than that of a level term, which in itself is drastically lower than that of a whole life insurance with cash value.
For a rough estimation take a look at the figures compiled by Mr Tan Kin Lian here:
For example, a male aged 30 can insure for $300,000 for 25 years by paying an annual premium of (say) $400 per month for a whole life plan.
If this person buys a decreasing term insurance, the annual premium can be drastically lower @ almost SGD$28 per month. (Note: the actual premium is likely to be lower, if you ask for competitive quotes from several companies).
A note that even if you don’t get a decreasing term (which is 35% to 60% that of a level term), buying a level term for 30 years will come up to SGD$76 per month. That’s not too high as well.
But a decreasing term will not have any cash value!
You have to be clear about the objective of a decreasing term life insurance. It is to ensure your family is able to pay off a mortgage or business for example.
If your objectives is to save for retirement or other purposes, then I would suggest you save on your own or have a separate portfolio of investments or insurance for that.
At the end of the day, we are looking for a low cost and if you compare the premiums paid, for the same amount of coverage, I believe the valued decision is with a decreasing term life insurance.
A Note on HPS (Home Protection Scheme)
If you purchase a HDB flat, either from HDB, or from resale market, you could purchase HPS (Home Protection Scheme) from CPF board by using your CPF. You could purchase from private insurance companies as well.
It is compulsory for HDB owners if you are planning to use any part of CPF
So how much should you be insured under HPS? Your share of the HPS cover should at least match the proportion of the monthly housing installment which is payable with your CPF savings and/or cash.
If you are the only person paying the monthly housing installments, you should be insured for 100% of the loan.
If you are paying 80% of the monthly housing installments, and your co-owner the remaining 20%, you should be insured for 80% of the loan and your co-owner, 20%.
Monthly housing instalment = $ 1,500. You are using $1,000 from your CPF and $200 cash, while your co-owner is paying $300 from her CPF to service the loan.
Your share of the cover should be at least:
$1,200 / $1,500 x 100% = 80%
Your co-owner’s share of the cover should be at least:
$300 / $1,500 x 100% = 20%
Note: The total share of the cover per household should add up to at least 100%.
The premium is calculated based on the following factors:
– Outstanding housing loan on the flat
– Loan repayment period
– Type of loan (concessionary or market rate)
– Sex and age of the member
Premiums are generally higher for loans of larger amounts or longer repayment periods. The premiums would be lower for younger persons and females.
It would come as a surprise to many that the cost to insure against huge risk like mortgage loans and the like is actually pretty small.
These are the plans that your advisor seldom talk to you about and it pays to be a well informed consumer.