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Wednesday, October 19, 2005

Basic of Life Insurance (1) - Traditional Plans

The overall understanding of financial planning in Singapore has risen in recent years. However there's still many people who are still clueless. In the report in Sunday Times dated 31st July, a survey done in March this year among 2,032 Singaporeans age between 18 to 60, as a part of MoneySENSE national financial education programme launched in October 2003. For instance, 90 per cent of Singapore save, however, very few are well-versed on the key features of common financial products such as life insurance and unit trusts.

Well, in this article, I would like to explain and explore the basics of insurance to clear the air of many people who are clueless about how it works.

THE BASICS OF LFE INSURANCE
Life insurance is a necessity for everyone. The poor, average and rich needs it. A lot of people buy life insurance without really understand how it works. That's why we always hear that they bought the wrong product. When the basic of insurance is fully understood, it is a programme which can be 're-engineered' and not a product. In addition, one can also take control of your programme.

Two components of insurance

Insurance plans consists of 2 components > Mortality Charge(costs) and Compounded Interest/Investment(returns).

A) Mortality Charge(Costs)
This is the cost for the insurance company for taking the risk to insure lifes. This cost is actually the experience(probability) of every age group to meet with death. This is calculated by professional actuaries and is tabulated into a table called "Mortality Table". All insurance companies in Singapore uses the same mortality table.

For example(for simplicity sake) :
There are 1000 people buying a insurance plan which cost $1 and this makes a pool of money. For instance, thhe cost to insure a man is $1000. When a claim is made, $1000 will be paid with the pool of money.

B) Compounded Interest/Investment(Returns)
Another part of money will be invested by the insurance company. Profit gained would given back into the plans as bonus/dividend minus admin charges and shareholders part.

In the old days, insurance plans consist of only term protection coverage. Meaning you pay certain amount of money for certain amount of premium every year/month for a period of time. There are no returns at the end of the plan's term. Many people felt that this doesn't make sense, especially in Asia, because they get nothing back when nothing happens to them, ie death, disability and critical illness, after a huge sum of money over the term. Most people here are "pantang"(malay word for believing that bad things would happen) be it Malay, Chinese or Indian. They say, "Don't buy nothing will happen. Buy sure claim."

Therefore, insurance company came out with plans which gives their customer returns. Instead of paying $1, you pay $5 which $1 goes to the cost and $4 gives you return. So, why are there different life insurance plans such as Whole Life, Endowment, Term, Whole Life Limited Pay and etc? It's actually a variation of the different proportion of money that u put into the cost and returns. For the same amount of money, the more money you put into cost the higher protection you get and lower returns you get.

For example:

$5 >>>>>> a) $3 for cost and $2 for returns = higher protection, lower returns (Whole Life)

compare with

b) $1 for cost and $4 for returns = lower protection, higher returns (Endowment)

I hope that this short explaination gives a better understanding to you about life insurance.

Any enquiries about insurance, do contact me @ teeming@gmail.com.

Monday, October 17, 2005

CPF - Investment Scheme

Taken from CPF:


"No one can guarantee that investments under the CPF Investment Scheme will always be profitable. CPF members have to decide for themselves how to invest their savings, and what risks to accept, and exercise prudence and care in investing their CPF savings to ensure their financial well-being after retirement. If they are not confident of investing on their own, they should leave their money in their CPF account which earns interest and is risk-free."
Look at the above bold words before you proceed.

Remember that high returns means higher risk. As I mentioned earlier CPF articles, you can invest with both Ordinary or Special Account saving. The difference is the types of investment you can do, please refer to the table here. As you can see if you are using Special Account for investment, it is limited to some investments most likely low risk as I mentioned earlier.

Now to investment. What you need to know is why you are doing it. Ask yourself, why you want to invest. Most probably you will say you want to be richer than now but do you really ready for it? In order to invest you need spare cash to secure your life and maintain the liquidity of your asset. Think also how much risk can you take because you are spending your "coffin fund" (as Chinese saying) into the investment pool. Below is list of questions to ask yourself:

Question 1: Why you want to invest? Fast multiplying cash? Get some extra cash? How much richer you want to get?

Question 2: Have you secure your life? If your investment failed, how much it will affects your life?

Question 3: What is your risk tolerance? Do you have investment know-how?

Answers: If you want to fast multiplying cash you need to take higher risk and vice-versa. Getting burnt with your CPF funds may not affect your life now but for long-term compound interest you might need to think. If you are near to your retirement, you might need to plan short term investment plan to avoid "tied" by your investment. (resulting you to sell your investments at unattractive price)

After you have decided to invest, you can go to next step. Next step, know types of investment (risk and returns). See you in next article.

Tuesday, October 11, 2005

Breakaway From the Loop

Have you ever think, your money is not enough? It is a stupid question because no one will say enough. And then you start to calculate,

Salary (per month): $2,000
Annual Salary (13th month): $26,000
Increment of 2.5% per year, after 30 years the total amount is $1,070,000.

Sounds great but think again your house, car, wife, children, parents and etc, you will find yourself left nothing. I haven't put inflation rate into the calculation.

Think again 30 years work of hardship you gain almost nothing and you only have 30 years to work. There are two changing variables in this calculation, namely time and rate (money in). I mentioned you have limited time and the salary won't be increasing a lot after you reaches a certain rate. So, you are going to be a poor man.

Let's take a look of changing the way of calculation. You can try to get higher paid job or work longer time. High pay job needs qualification and experience. I can't always work Overtime when you reached certain age. How to break away from this loop?

Working two jobs will burn you out and you can't control your money in too (if you are working for someone). Let's don't talk about starting business because it does involve risk too. The only way is to create what people call "Passive Income".

After explaining so much, I just want to say "Start your Passive Income!".

What is passive income? It is income received without any additional efforts done, it doesn't mean no effort. For example, even when you sleep, the money still gets into your pocket. How does it works? People need to start with great effort to create Passive Income such as investing needs capital, rental comes from the property that you bought and royalties from the books you wrote.

That's why we are advised to start saving earlier to accumulate first capital. When you have this first capital, you will able to invest and start your Passive Income. I will write more about examples of creating such passive income in the future but for today I write introduce a way to create a capital-less passive income.

Capital-less Passive Income

The way is not easy but you need very little money (sometimes you need zero dollar to do that). You need to have a certain expertise on one area for example, story-writing, drawing, make-up techniques, overclocking computers etc. I believe everyone would have one, don't believe me? Even window-shopping is recognized as an expertise here, so don't worry, search for one yourself.

If you write a book on your expertise, you need to find a publisher and they need to review your book before they invest on you. There is a way called Online Publishing, which is very famous nowadays. Most of the blogs are online publishing and you can get more readers by writing special things that people like to read. The best example is this website. If you like to read then my online publishing is already half-way to success.

I have another online publishing website that teach you how to publish online to get revenues. It is as simple as writing a diary if you are writing your expertise articles. If not, you need to read a lot like me. Just start early and gain as much articles as you could so in the end it would become a passive income or half-passive-income. Remember! It is hard to start but after it started you will get dollars even if you are sleeping. Don't believe me? Guess how much I got from selling banners on this site? Visit here now!

Thursday, October 06, 2005

CPF - Special Account

Last week I wrote about CPF minimum sum and in the end introduced two main accounts namely Ordinary Account and Special Account. Besides that, there is another accounts - Medisave Account.

Remember in our previous issue, I wrote the interest rate for these account. Special account (4.0% p.a) has higher interest rate than ordinary account (2.5% p.a) and why does this happens? (The interest rate is correct on the date this article is written). Special account is more on long term investment (retirement) and high interest gives good saving in the long term. This also applies to Medisave Account which important for health/medical services, therefore it is easier for us to build up Medisave if the interest is higher. (Medical fees is very high in Singapore)

The saving in Ordinary Account can be transfered to Special Account in order for more interest rate but there is a limit you can do it which is the Minimum Sum in that year. For example $90,000 is the minimum sum on 2005, if you have $100,000 in your Ordinary Account. You can only transfers $90,000 into Special Account. Note that this transfer is irreversible!

The question is where do you want to save your money into? Do you need to transfer up to the Special Account maximum? Below is the function of each account:
  1. Ordinary Account - the savings can be used to buy a home, pay for CPF insurance, investment and education.
  2. Special Account - for old age, contingency purposes and investment in retirement-related financial products.
  3. Medisave Account - the savings can be used for hospitalisation expenses and approved medical insurance.
If you see, transferring fund into Special Account is something like putting your money into another small safe in a safe. You can't use it so easily compared to Ordinary Account. Even if CPF Investment Scheme, you can only invest on limited investment plans. As a trade off, you get more 1.5% p.a interest. How does this 1.5% p.a interest gives impact to your retirement? Below is calculation of compound interest with Future Value:

Let say your starting salary is $2,000 with full CPF contribution (20%+13%) and 2.5%p.a. You have an increment of 5% each year for 30 years. The total saving is about $355,000. For 4.0%p.a, your total saving is about $460,000 which is about $105,000 higher. (I actually didn't consider the maximum amount in Special Account in this calculation.)

For local Singaporean, buying HDB is something you can't escape from so you can't put everything into your Special Account. Besides, you need to support your children's education through EduSave. So you need a certain amount of Ordinary Account fund.

But for foreigners, is transferring to Special Account is better? I shall say if you are a risk taker, your saving will not be so "fluid" in Special Account which means transfer lesser the better. But if you want to play save, getting 1.5% more per year is better since you can also invest using Special Account. For most foreign workers I would recommend max the Special Account since you will be taking back all your money when you are retired to your hometown. Consider the exchange rate SingDollar to Malaysia Ringgit, you will be millionaire once you go back home.

Even if you are recommended to save for retirement, you still need to maximize your Special Account gradually and make sure you have a good ratio between Ordinary Account to Special Account. You can invest using both accounts and I will write more on CPF Investment Scheme in next article. Until then, thanks for supporting us.
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