Saturday, June 13, 2015

Summary: Investment Linked Plan/ Endowment Plan / Whole Life Insurance

After writing 3 articles about ILP, Endowment Plan and Whole Life Insurance in one day, it seems like many people are still confused about the three products. Hence, I shall draw summaries and key takeaways for these 3 products.

 Investment-Linked Plan (ILP)
Investment-Linked Plan performance is purely based on your selected funds. You can buy Singapore Growth fund, Asia Growth fund etc. You can also split your monthly payment, 50% into Emerging Country fund or 50% into China fund. So, your fund performance is solely depends on the funds you have picked. The projected 5%, 9% returns of course are non guaranteed portion. That is just an illustration if your fund yields a 5% return or 9% return. That is why there WILL NOT be any guarantee portion. How can an insurance company guarantees such guarantee returns regardless of the funds you have chosen? It does not make sense.
Endowment Plan

As for Endowment Plan, there is no fund for you to choose from. You just buy and wait for the performance of the investment of the insurance company. Of course, they also take your monies and invest but you have no control, they have. Therefore, they do have guarantee portion for Endowment plan and as well as non guarantee portion. Usually, with endowment plan, the insurance company tends to be more conservative in investing because they need to make sure they are able to pay the guarantee portion. They will not bet your monies into high risk products or buying volatile stock like Genting share. Usually, people are buying Endowment plan for the purpose of discipline saving for certain purpose, for example, kid education fund, or even save money to have a certain lump sum pay out at certain age. This is the lowest insurance coverage plan, people will not buy Endowment plan for the insurance coverage as their objective.

 Whole Life Insurance

As for whole life insurance, I do not understand why people are extremely sceptical about the performance of Tokio Marine by hitting the projected bonuses every single time. Well, maybe it just sounds too good to be true. There are some voices saying, if that is true, why they have this non-guarantee portion too. Well, we are in Singapore, every single product is regulated in the same manner/format. I would believe this is the regulation of MAS, I don’t know. This is the norm for every single insurance company to declare in such format, guarantee and non guarantee. Please don't ask me why, ask PAP. If you check carefully, Tokio Marine seems to give conservative non guarantee pay out compared to the rest of the insurance companies, simply because, I believe, they want to achieve that non guarantee pay out every single year as their trademark of the product. So they can’t just put a handsome number and then not hitting the mark at the end, just like many other insurances companies. Well, even for the marketing material advertised at the Straits Times, it has to be a true fact. If you doubt that, you can always check the figures yourself or even ask any insurance agents, they are all trained and they know all the truth and figures. Just ask a simple question, why the other insurance companies don't advertise in that manner? The answer is simple. They didn't meet the projected bonuses every single year. If they did, you think they don't want to advertise that too? Of course, other insurance companies will tell you the list of pros and cons for every single companies. Anyway, for whole life insurance, there is no funds for you to choose too. Insurance companies will take your monies and invest somewhere as well. They cannot place your monies in the bank and give you guarantee and non guarantee pay out, right? It is common sense that all insurance plans required certain type of investment to generate incomes.

Besides these 3 insurance products, there are other insurance plan namely, term insurance, hospitalization & Surgical insurance(H&S) and travel insurance. They are all the same “categories”.
Continue to pay money and no surrender value, zero value.
You just keep paying for the insurance coverage. That’s it. We all know many people prefer term insurance, because the premium is cheap or much cheaper than whole life insurance and the coverage is much bigger.
They will tell you the cost differences and the extra monies can be handled by themselves to do investment and generate better returns. That is one way of course. I do other investment myself too but I don’t like term insurance simply because I do NOT like the idea of ZERO value.

Thursday, June 11, 2015

Whole Life Insurance

I am excited to talk about whole life insurance as that is something I have planted a huge confident seed in this product, especially it is from Tokio Marine. Here we go!
I have signed up a whole life insurance plan from Asia Life in year 2006 and now Asia Life was bought over by Tokio Marine. The payment term is only 20 years. I have since heard many cases from the olden time that they have to keep paying for the whole life insurance, this is extremely bad. You do not want to keep paying while you are retired. So, 20 years payment term is pretty reasonable.
Again, I have changed my monthly payment into annual payment of S$3,243. With this change, I have a saving of S$124.20 per year, that’s a lot, isn’t it? Take note, S$585 are actually paid for the rider, to cover the critical illness. Sum assured both are at S$150,000.
I have sing the song many times about Tokio Marine that their whole life insurance is the best in the market that they NEVER EVER fail to meet the projected value. Is this really the case?
I have checked my surrender value today and it is S$24,386.97. With 9 years of payment, the projected Surrender value (guaranteed + non-guaranteed) is S$20,958. Wow. It outperforms by S$3,428.97. This is what I am talking about!
You know what, you don’t surrender whole life insurance.
This is my personal philosophy. So, for curiosity, how much I have put in so far?
S$3,243 x 9 years = S$29,187 and yet if I surrender now, I still can get S$24,386.97. That's a lot of money still!
Hey, seriously, honestly, this is too good to be true. This is pure whole life insurance! Unlike term insurance, you get ZERO, of course with the same amount, you can get much larger insurance coverage, I know.
So, what’s my next strategy?
I have shared many times and do not mind to repeat again.
Whole life insurance is for the next generation. Only if I fall into an extreme dire situation, then, I will force to choose to surrender (also at very later age), maybe say age 65. BUT, under normal circumstances, I will let my kid to surrender the whole life insurance for me and you know what I am talking about and that return will be the greatest of all.
And now I am happy, at least for the whole life insurance policy from Tokio Marine.

Endowment Plan

Besides ILP, I also have an Endowment Plan called, Target Saver, issued from HSBC bank.
In my early years, my thought was to have all three “insurance” as early as possible and to fully diversify into ILP, Endowment Plan and also whole life insurance. I cannot imagine at the end of the day, I was actually forking out almost close to 30% of my monthly income into these plans during my early years of employment in Singapore.
So, this endowment plan has a term of 21 years. Interest coupon is 2.5%. I started at age 26 (year 2005, after a year of work in Singapore). Hence, the expiry age will be age 47. By the time, my kid is 15 years old, maybe this can be his university education cost? I used to pay monthly GIRO of S$211.13. But I have since changed the payment mode to annual payment of S$2,483.88. That is an instant saving of S$49.68 per year.

You should do annual payment for such endowment plan or whole life insurance plan as it does not change “anything”. But it is highly NOT recommend doing so for ILP as you want to contribute in monthly basis to get rid of the market volatility. This is crystal clear. So, this Target Saver has only sum assured of S$28,000 and same amount for the Critical Illness. Buying Endowment plan is not so much for the insurance coverage, it is more or less for the pure saving purpose in order to beat the low interest rate in the saving account or fix deposit account. Is this really the case? I hope so.
Endowment plan has GUARANTEED surrender values as well as non-guaranteed surrender value.
To give the true case scenario, I checked my endowment plan value as for today, it is S$23,532.44. Do we beat the projected returns? Based on the table, end of policy year of 10, the total surrender value is projected to be S$25,386. It seems to have a short fall of S$1,853.56.
So, how much return after paying 10 years of endowment plan?
 S$2,483.88 x 10 years = S$24,838.80 (Take note this  is annual payment, if you continue to choose the monthly payment, you actually put even more into the endowment plan).
So, there is still a short fall of S$24,838.80 – S$23,532.44 = S$1,306.36. So, after paying 10 years of Endowment plan, I still loss S$1,306.36?
What is going on here? Again, bulk of the payment goes to their management fees? This is very discouraging.
My ILP paying 11 years is still in loss, not earning a single cent.
Even my Endowment plan paying 10 years is also in loss, not earning a single cent.
Something must be really wrong somewhere. What is the point to have all these policies in the market? I definitely will not need this pathetic insurance coverage of S$28,000 from the endowment plan, unlike ILP has the coverage up to S$100,000, which is a consolidation prize.
What should I do? I will continue to pay and observe the policy value in yearly manner to make sure it is close enough to the projected surrender value. Hopefully, yeah, a big fat hope, that the surrender value will hit the projected surrender value by the age 47. I only can tell you 12 years later from now.
You know what, many people are just like me and you, we constantly receiving annual letter from the insurance agency, happy announcing to you that no matter how volatile is the market, we still keep our promises, giving you the interest coupon as declared, hitting the mark, etc. But again, if you sit down, and crunch in the value that you have put into the insurance policies so far and check the policy surrender value as for today date, then, you will know if all these are true. They might be correct that they fulfil their promises, projected return, but again, there are just way too many other hidden charges behind. 
That is why you now should appreciate why government emphasizes so much on the CPF top up, planning well within the CPF account. If you always think you can beat the CPF interest rate, go ahead and make sure you do your math right. It is not the case all the time. At least my two cases fail badly. Okay, I know it has insurance coverage, but still it is not worth the effort after all. I think I will make a visit with the insurance agent and ask them to explain why. I am keen to know what is their reply.
Now topic shall be Whole Life Insurance. No more surprises, please.

Investment-Linked-Plan (ILP)

Let’s talk about ILP. I had signed up one ILP right after I got my first job in Singapore. It is from AIA, 100% into AIA Acorns of Asia Fund, with a monthly cost of S$203.26. I can choose to continue to pay this ILP up to 77 years (I will be age 101 by then), that is why I say ILP payment is forever and ever. Of course, you can choose to surrender anytime you want and I am going to do it at around age 65 while it is at BULL market, this is very important. If I see a super bull market at age 60, I will also consider surrendering the policy too. I give myself a time horizon of at least 35 years. It has to be, at least, like the BULL market in year 2007. Let’s put it that way, by then, STI shall be way above 5,000 points. Don’t you think so?

So, this ILP comes with S$100,000 life insurance, S$100,000 critical illness benefit as well as S$90,000 TPD (Total Permanent Disability). Take note, S$203.26 monthly with S$100,000 sum assured if you sign up the package at age 23. If you sign up the package at the later age, the sum assured will get lesser as well, vice versa. ILP is just like stocks or I would say ETF, they take your money and invest in equities and you can check the fund sheet and annual report to know the top 20 companies they have invested. So, it makes perfect sense to do a monthly purchase to average out the market volatility, you do not want to make a yearly premium in this case as you might be really unlucky to purchase during the “bull market” always.
ILP has no GUARANTEE payout. In worst case scenario, you might even loss money due to the poor fund performance. You will also incur losses if you surrender the policy too early. The market term of breakeven is always 7 years. How does my ILP fund perform so far after 11 years? It is simply BORING.
The fund house is required to project the return based on 5% and 9% during my time. I think the projected return percentage was revised lower by MAS lately.

I just checked my fund surrender value today; it is S$26,135.43.  Do I meet the projected return?

Well, after 11 years of payment, their projected 5% is S$25,000 and 9% is S$31,800. It seems like my fund performance hit the high 5%. It sounds OK but is this really the case?
The true amount I put it in is S$203.26 x 12 months x 11 years = S$26,830.32. Where is the 5% gain here? If I sold it today and get back S$26,135.43. I will still incur a loss of S$694.89 after 11 years.

Okay, this is the problem. Not all the monies, S$203.26, goes into the funds, it has administration charges as well. As for my total cost per month is S$203.26 and I expect GAIN, not breakeven after considering all the fee charges. So, what should I do now?
Here is the plan. The number will become great if you surrender at the BULL market; see the number at age 30 (above illustration table). The projected 9% is S$15,100 and the surrender value is even higher at S$17,018 (sound like a 10% gain for me). But again, is this really hitting 9% P.A. gain, you should work out the number precisely when you consider surrendering the policy.
So, what should I do next? I won’t surrender this ILP simply because I got it “cheap” at age 23 with sum assured of S$100,000. At least I have additional S$100,000 insurance coverage here beside my other health insurance. As I said, I am looking at 35 years horizon time and I need to search/wait/catch a really cool BULL market and it shall and it will happen. By then, hopefully, I will have some meaningful gain; I would not know how many % (P.A.). It won’t be great, so the only extra thing you have here is the extra S$100,000 insurance coverage, that’s it.
Of course, if you really time the market correctly with the right fund, for example, buying China fund last year and the current value is almost 100% gain, but with ILP monthly purchase, you won’t see crazy profits here too simply because your monthly payment has average out all the volatility.
So, will my AIA Acorns of Asia fund doing great in the next 25 years? You bet.
Will I get crazily good profits out of it? No.
(Next I will talk about Endowment plan)