Disability Income Plan versus Term Plan

It has come to my attention that there is some talk regarding the "Family Income Plan", and more specifically, that it is a better substitute for term plan. So I've decided to do my own comparison and to see whether if it is a better deal or not.

The "Family Income Plan" is a type of insurance plan that pays a monthly income to the family following the death of the life assured. So I looked around and a possible fit that I can find is the "Disability Income Plan" offered by one of the insurers. The "Disability Income Plan" pays a monthly income to the family when the breadwinner suffers a continuous "total disability" which renders the insured unable to work. And even so the definition of being unable to work is quite strict as you can see from the policy wordings:

Disability Benefit

(i) Total Disability Benefit
Total Disability Benefit is payable upon continuous disability beyond the Deferred Period.

During working periods:
"Total Disability" means a state of incapacity, resulting from illness or accident, which is such that the Life Assured is

(a) totally unable to perform the material duties of

i. his own occupation or profession for the first twenty four (24) months of any period of Total Disability; and

ii. any occupation or profession to which he is suited by reason of his training, education or experience after the first twenty four (24) months of any period of Total Disability; and

(b) not performing any work or engaged in any occupation or profession to earn or obtain any remuneration, whether declared or undeclared to the company.

The diagnosis of "Total Disability" must be confirmed by a Registered Medical Practitioner appointed by the insurer.

More interestingly, is the death benefit of this policy. Rather than continuing the monthly payout if the insured dies, the death benefit is only a lump-sum payout of $5,000. (And that is only payable if the insured is already on the monthly payout. If the insured dies outright before the disability kicks in, there will be no death benefit).

On top of this, the premiums for these plans are not cheap. The annual premium for this plan which covers specifically disability (resulting from illness or accident) is $2,419.50 for a $3,000 monthly payout. Meanwhile, with a similar amount of annual premiums ($2,480.00), the insured can get a $500,000 term plan that covers death, total and permanent disability and critical illnesses.

How is the disability income plan better than a term plan?

Short-Sighted Fools

One of my clients gave me hell today. The area of conflict is the commission that I get. Apparently she has this idea that if she goes directly to the insurer to get the policy, she could get the product at a cheaper price (as she thought she don't have to pay the commission since she by-passed me). I told her that it is not true. Even if she decides to DIY (Do-It-Yourself), she will still have to pay the same premiums. Worst still, in times of claim, she would have to DIY as well.

This incident reveals the naviety of consumers. So you think you go to a buffet, help yourself to the food (because the waiter/waitress do not serve you), and then they'll charge you cheaper? So you think that by going to Mac's and becoming the waiter/waitress yourself (because YOU serve yourself the food), you are going to get a discount? Haha. No. On the contrary, whatever the corporation saves from the intermediary, they keep it for themselves. So you think that I***A really pass you the savings by having you put the furniture together yourself? Don't you think I**A should PAY you instead for being the delivery-cum-installation man? How much is his effort worth? Since you are taking his job, why aren't you paid for it? So don't think that one can do everything yourself. Why don't you try to cook for yourself? Is it edible? How about make a shirt? Is it wearable? The best would be if you can built the house yourself. Then you can by-pass the property developers and save yourself a million dollars.

So this is the problem. People think that by buying their own insurance they can save the money. This is only the short-sighted perspective. Insurance consist of 2 parts - the buying and the claim. Maybe you can DIY the purchasing part. But to DIY the claims part? That's sheer insanity. Imagine yourself lying on the hospital bed, and you have to call up the insurer, get the claim forms, make sense of it, fill it in, send it to them and wait for them to mail you the cheque. If there are any disputes you have to settle it. Fantastic. Well at least you are still able to do all that. Imagine a death claim. How do you suppose you are going to call up the insurer to process the claim when you are lying dead in the coffin? Maybe you can pay a visit to your relatives in a dream and tell them where you've buried your fortune. This is what the commission is partly for. We get paid to clear the mess and set everything in order when you are incapacitated and can't make that happen. If you insist on self-service then, sure. By all means. Literally.

Financial Advisor or Product Seller?

Over dinner tonight, my other half asked me a poignant question:

"So are you a financial advisor or a product seller?"

"I am both," I replied. "If not why would I become an independent financial advisor? The difference between me and a 'tied' advisor is that my advice can be independant of the product. I can give you the comparison of whole life plans in the market and you pick your choice. But my advice cannot be independant in itself. I cannot provide you with alternatives that run contrary to commonly-agreed notions. I cannot tell you how to spend your way to wealth. The notion of such independent advice is absurd. All advice are dependant on commonly-agreed notions of earning, savings and prudent investment. The 'tied' advisor will tell you this. I will tell you the same thing.

But the most important aspect of why I am a product seller is the fact that people are not that interested in holistic cures - they prefer to get products which they perceive they have precise use for. Take a look at the healthcare stores. So you need vitamin C? Take the Vitamin C tablets. You need calcium? There's the calcium pills. You don't go to a pharmacist and get a planned meun that prescribe the foods you can take to increase your vitamin C or calcium intake. You get specific pills - a product, not a holistic cure. Maybe a dietician is better, but then how many people go to a dietician when they feel that they lack Vitamic C?

A more thought provoking example would be cancer treatment. You go to the specialist, and he will prescribe chemotherapy. A cocktail of drugs to 'kill' the cancer cells. He wouldn't put you on the Gerson Therapy. He wouldn't ask you to change your lifestyle and be a vegan. You can go ahead and live the same way. The medication is independant of your lifestyle. That's the interesting thing about 'western' medication. The 'eastern' medication, such as Traditional Chinese Medicine (TCM) emphasised on holistic cures - the belief that food is medication and you are what you eat. But maybe it is way harder to change your entire lifestyle, than to swallow a cocktail of pills.

So its nonsense to say that I am not a product seller. Of course I am a product seller, because I serve the needs of product buyers - clients who come to me for the purpose to purchase a prescription. Some clients come to me for a total revamp - they want a holistic cure and they want to know how to balance their finanical diet but managing the different aspects of earning, spending, saving and investing at various life stage. For these clients I am a financial advisor.

When is the best time to get a Whole Life Plan?

I've often heard of this phrase - the earlier you get the whole life plan the better it is for you. Rather than taking the notion for granted, I decided to find out for myself what are the basis of this statement, and whether it is valid or not. So here comes "Harry", and let's follow his life-span to see at which point in time is it the best for him to get a whole life plan.

When Harry is a newly born infant (i.e. age 0), his parents will only have to pay $103.65 per month for a $100,000, 20-year-limited-pay, whole life plan. Now the advantage of this is: assuming that Harry was born a normal, healthy baby then there would be no problems with his health condition. His parents will be able to 'lock-in' his health status and to hedge against any possible changes that the child might have in the future. Also, as we shall see, this would be the only time when the premiums are that low. Never again will the premiums be that cheap.

So maybe his parents did not think it was necessary at that point in time to get a whole life plan then - when Harry reaches 5-years-old, the premiums would be $120.00 per month. At 10-years-old, the premium would have increased to $138.40, and at 15 years the premium would be at $162.90. When Harry is 20-years-old, the premiums will be $177.50. By this time now, Harry will be on the verge of adulthood and on his way to join in the workforce. The irony is that people are usually at the poorest when they first started work, and 25-year-old Harry would have other uses for his income, rather than to take advantage of the $201.50 premiums. When he is more settled down at 30-years-old and starts preparing for the future, he finally decides to get the whole life at $234.50 per month.

Now let's just do a simple analysis. If Harry's parents had bought the policy for him during infancy, then they just have to pay $23,923 for $100,000 coverage. In comparison, if Harry were have to get it at 30-year-old, he would have to pay $54,113 for the same coverage.

However, the good thing about Harry is that his health condition remains constant. But this might not hold true for all people. I know of people whose children were already born with some health conditions, such as a hole in the heart. If that is not the case, then along the way one or another condition crops up. The National Service is a great time to find out all the 'hidden' health conditions, for it is during that time the recruits will be subjected to of health screening. Some of my clients were diagnosed during that time.

So, in essence, the phrase the earlier you get the whole life the better it is for you has some validity to it - in terms of the cost as well as the health conditions.

Reflections on Life

First and foremost let me offer my deepest condolences to the family of Dr Marcus Lim . I wish that they'll have the strength and courage to overcome this devastating triple loss of a son, husband and father. Life will be different, but life will go on.

I saw the news today ("Eye specialist drowns while on diving trip", The Straits Times, 26/10/2009), and I was sadden by the sudden loss of such a promising person. There was so much to be accomplish in his life in terms of his career (he had recently been awarded a National Medical Research Council fellowship by the Health Ministry) and family (he has a 3-year-old son and his wife was expecting their second child). But all these goals will have to be completed by those he left behind.

The news made me reflection upon life, and these are some thoughts that surfaced:

1) Never underestimate the Uncertainty of Life.

People always think that if one is doing something repeatedly, then the risks involved will diminished. For example, if you swim regularly then you can be considered a good swimmer and the chances of you drowning will be lesser. However, 42-year-old Mr Lee Wee Sing, whom is said to be a good swimmer, died after he competed in the swim leg of the OSIM Singapore Triathlon ("42-year-old man dies after competing in triathlon", The Straits Times, 02/08/2009). Similarly, Dr Lim was a competent diver, having had 7 years of diving expereince.

2) Always plan adequately for your family. Never assume that you'll always have the chance to do so.

When one pass away, it is your depedents whom will bear the greatest impact of the loss. Who else is going to care for your aging parents, and to look after the spouse and children that you leave behind? What sort of lifestyle changes are your family going to face? Did you give your spouse the option to spend time with the children to help them overcome the grief, instead of worrying about getting a job fast so as to feed them?

3) Always know where to go for help. Never assume that you'll never need them. Maybe you don't, but someone else you know might.

This article couldn't have been more conicidental. Just 3 days ago there was an article about the Wicare support group, which is a voluntary organisation that serves to help widows and their children ("Lauded for mission sparked by grief", The Straits Times, 23/10/2009). It is important for people know what avenues they can seek help and support from. If Mrs Lim ever chance upon my writings, I would offer to accompany her to Wicare. I hope this helps.

Child Education: When to start and for how much

I was reading the papers today when I came across a very interesting article ("Should pre-schools be 'nationalised'?" The Straits Times, 10/10/2009, Pg A38). The poignant point which was raised in that piece was the glaring disparity of childcare cost in Singapore. The upmarket pre-school establishments command a fee of more than $1000 per month, while the mass market ones charges around $520 per month. That works out to be at least $36,000 ($1000 per month for 3 years)for the former and $18,720 ($520 per month for 3 years) for the latter. The 'investment' in human capital is heavy indeed.

This article brings to mind one aspect of child education that has been routinely ignored by financial planners when discussing about child education. Usually the focus goes straight to saving up for the university education, which is about 18-20 years down the road. But the expense that is that coming in 3 years' time - when the child is going onto pre-school - is not being addressed.

So when should parents start planning for your child's education? The answer is you should start when you already have an intention to have a child. For those parents whom were 'blessed' by an unexpected pregnancy, you should start as soon as the pregnancy is confirmed. Ask yourself what sort of education do you want for your child and plan accordingly. Would you like to set aside $36,000 for the posh pre-schools or just $18,720 for the mid-range? If you start only when your child is born, you'll have 3 years to save.

Of course, not everything is measured by money - there are some parents whom choose to DIY (Do-It-Yourself). While I was doing my honours thesis in NUS, I researched upon a group of parents who do 'homeschooling' ("Homeschooling in Singapore: Education Redefined", Lim, 2009). These parents educate their children at home, and so they need not fork out additional money for pre-school. However, these DIY education aren't necessarily free - it comes with hidden costs, which is at the expense of one of their income. what happens is that usually one of the parents will have to give up their job to be a stay-at-home educator, and if you consider the loss of income then this might be a costly endeavor.

Basic Medishield vs Private Shield Plan

Recently a friend of mine showed me an article regarding the Basic Medishield Plan. Apparently the author argued that "the insurance that offers the best value for money is the basic Medishield offered by the Central Provident Fund", and he asserted that there are 3 reasons for that:

1) A private shield plan gives you 50% more coverage at the expense of a premium which is 100% more costly.

2)When the Basic Medishield plan is unable to pay for your medical expenses at a private institute, you can always choose to 'top-up' your medical bills using your savings.

3) The risk of the above (point 2) occurring is "likely to be quite low."

This issue brings to mind a real-life example of how limited the Basic Medishield Plan can be. Ms Chew wrote to the Straits Times lamenting that the Basic Medishield Plan paid only $1,438 of $50,000 hospital bill ("MediShield paid $1,438 out of $50,000 hospital bill", The Straits Times, 28/11/2006). There are a few crucial points which can be gleaned from her experience:

1) When it comes to seeking medical treatment, not everyone will have the luxury to analyze the cost of treatment and then to seek the most 'cost-effective' treatment. This is due to 2 reasons:

a) The inception of means testing means that even if one wish to choose the class C and B2 wards, one might not qualify for the 80% subsidy.

b) Another reason is due to the emotional aspect of preserving life. There are two other examples to illustrate this point. The parents of 12-years-old Marjorie Soh spent $400,000 in medical bills for her cancer treatment ("Girl, 12, dies after battling cancer for 6 years", The New Paper, 22/07/2009). Also, 4-years-old Charmaine Lim needed USD$350,000 in order to seek cancer treatment in New York.

The point is, does anyone have the capacity to haggle over the cost of treatment? Do you know exactly how much your medical bills are? If you don't, then the private shield plans - with the 'as-charged' feature - will offer a better package than the basic MediShield plan with all the limitations such as paying only a mere $270 for a 7-day treament cycle of chemotherapy! (in comparison with the hefty bills of the above cases)

2) This brings us to the second point. How much savings do you intend to part with in order to top-up the difference? Are you willing to pay $48,000? $100,000? How about your entire retirement funds?

3)The risk of incurring these medical bills might be low simply because one is not in the shoes of the first-party. The point is such risk can happen to ANYBODY, and when such calamity befalls an individual or family, the impact is 100%.

So, be wary of being "penny wise and pound foolish".

Deconstructing the Investment Linked Policy

I've been helping a client check out an investment linked policy, and here are two interesting points to help people make sense of investment linked policies:

1) What is an Investment-Linked Policy (ILP)?

Basically an ILP is a policy that combines term insurance with investment. Essentially ILPs consist of 2 parts:

A) a term insurance portion which gives you the insurance coverage and
B) the investment portion which would give you the investment returns.

There are two important features of ILPs:

A) For the term insurance portion you usually get a smaller sum assured than a 'pure' term insurance. For instance, one particular ILP derived its sum assured based on 4-5 times of the annualized premium. So if you are paying an annual premium of $1,200, then the sum assured will only be $1,200 X 5 = $6,000. Now compare this to a 'pure' term insurance. The same amount of $1,200 per year can get you a 30 year term insurance of (now go ahead, make a guess):

1)$100,000
2)$200,000
3)$300,000
4)$400,000


Have you made your decision? Good, now scroll down. :)


Yes $400,000! I hope you got the right answer. :) So the question is: why pay the same amount to get a fraction - literally 1.5% - of the coverage?

B) Unlike other types of insurance like whole life and endowment, ILPs have two distinct characteristics:

i) High rates of projected returns.

ILPs have higher rate of projected returns that range from 5% - 9%, while the whole life and endowment usually projects between a range of 3.25% - 5.25%.

ii) Do not have any guaranteed return.

ILPs DO NOT have a guaranteed return. Usually the returns for the whole life and endowment policies are broken down into the guaranteed and non-guaranteed portions (for illustrations do refer to my previous post on the term plans). This means that the ILPs do not have any guaranteed returns.

So what are the implications?

The implication for this is that you may get the professed returns on one hand, but on the other hand you might not get anything back (not even the initial amount you put in).

2) How to make sense of the benefit illustration (B.I.)? What do all the columns of confusing figures mean?

You can refer to this useful guide which explains the various columns in details.

The True Cost of Whole Life Plans

In my previous post I've written about the true cost of terms plans, which evoked a discussion and gleamed some important points. This particular post is to address 'the other side' of the spectrum - the whole life plans - and hopefully balance the bias.

Using the previous case study of the 26 year old male, I shall expound on it and determine what is the true cost of the whole life plan to him. Now, in terms of the cost, there are actually two types:

1) The 'actual' cost of the policy (i.e. how much he has to PAY for it).
2) The 'opportunity' cost of the policy (i.e. the value of the next best alternative forgone as the result of making a decision. In this case it is usually assumed to be better investment returns).

Now, if the insured were to purchase a limited-payment whole life policy rather than a term plan, his 'actual' cost would be $2,394.15, which is the annual premium.

On the other hand, if the insured were to purchase a term policy, his 'actual' cost would be $312.70, which is the annual premium.

So essentially there is a yearly difference of: $2,394.15 - $312.70 = $2081.45

In other words, the insured would have an excess of $2081.45 per year if he had opted for the term instead of the whole life.

Once we ascertain the excess, this is where the second aspect of cost comes in - the opportunity cost. Here it simply means what better use could he have for the $2081.45 - like for instance investing. If the insured uses this amount of money to invest for 30 years (put in $2081.45 for a limited-payment of 20 years and let the the amount accumulate till 30th year) at a range of hypothetical rates of returns, he will get back the corresponding amounts:

Annual rate of returns - Amount at the end of 30 years:

0.00% - $41,629
3.25% - $78,997
4.00% - $91,748
5.00% - $112,109
5.25% - $117,888
6.00% - $137,120
7.00% - $167,857
8.00% - $205,640

So that's quite a lot of returns from 'buy-term-invest-the-rest' huh? Whole Life can't match this. No way. Right, so let's see where the whole life stands.

Surrender Value of Whole Life - Amount at the end of 30 years:

0.00% - $55,300 (i.e. just the guaranteed amount)
3.25% - $76,540 (i.e. guaranteed of $55,300 + non-guaranteed of $21,240)
5.25% - $91,987 (i.e. guaranteed of $55,300 + non-guaranteed of $36,687)

If he were to surrender the limited-premium whole life at the 30th year, he will get back $76,540 (assuming an investment returns of 3.25%). So the 'buy-term-invest-the-rest' wins by a margin of...$2,457. After all the consistent work. For 30 years. The efforts are worth $2,457. No wonder they say that making money is tough. Phew.

Hey but if he were to have an annual returns of 5.25%, then the 'buy-term-invest-the-rest' will exceed the whole life by $25,901! Not too bad huh? So the only way to make his efforts worth it is to ensure that his investment returns is greater than 3.25%. Maybe 5.25%. Or even 8%. The best is 20% like Buffett. But whether Mr Insured can attain that - well that's a different story. If Mr Insured isn't that great at investing, and he gets 0% returns...well he might be better off with a whole life because he'll get $13,671 more.

So the true cost of whole life is not just the premium he have to pay, but also the possible opportunity cost of losing out on investments (we are talking about positive returns here ok...no he wouldn't lose his capital). Alright. Now go. Take the money and invest. He just have to make sure that he earns enough returns for his needs and efforts (easy, surely he can do much better than 5.25%). Oh by the way, he's got to ensure that he have at least $100,000 after 30 years - which is the sum assured he forgo to do the investment.

The True Cost of Term Plans

In the course of my work, I've met clients who claimed that term plans are better than whole life plans because they are 'cheaper'. Indeed, on the surface the premium of a term plan is much lower than that of a whole life plan. However, when I did a comparison of a term plan versus a limited premium whole life plan, I discovered that there is a catch to it: the term plan is only cheaper for a LIMITED period of cover, and not for LONG TERM coverage (as shown in Table A).



To do a proper comparison, I have set certain constant variables:

1) Profile of Insured: Male, Non-Smoker, 26 years old.
2) Sum Assured: $100,000
3) For the term plan (inclusive of Critical Illnesses cover) the intended coverage is for 30 years.
(I derived this from an actual case study, whereby this particular client only insured for 30 years because he perceived insurance to be necessary to cover his productive years, and that he has no use for it in his golden years.)
4) For the limited-payment whole life plan (inclusive of Critical Illnesses cover) the coverage will continue on till 99 years old (assuming there is no lapse in the policy).
5) That the annual premiums quoted are based on the present, level rate (discounting the possibility that the premiums might increase over the long-run).
6) There is no issue of buying the plans due to health problems.

So in all, the total premiums paid for the term plan over the 30 years of protection will be:
$312.70 X 30 years = $9,381.00

Now compare this to the total premiums paid for the limited-payment whole life over the 20 years:
$2,394.25 X 20 years = $47,883

That appears to be a lot right? But consider this fact - the term plan only covers for 30 years, while the whole life plan covers till 99 years old, which equals to 73 years of coverage.

Now, to obtain a "fairer" comparison, we should look at the cost per year of protection:

For the the term plan the cost per year will be:
$9,381.00 / 30 years = $312.70

For the limited-payment whole life plan the cost per year will be:
$47,883 / 73 years = $655.93.

So now although the difference is narrowed, no doubt the term plan is still HALF the cost of the limited premium whole life. But that's where the advantage ends. If you decide to change your mind and want to extend your term plan, the problems sets in.

1) For the term plan, the most you can extent is till 79 years old. Comparing it to the limited-payment whole life, there is a "self-insure" gap of 20 years.

2) The premiums for the term plan increase sharply from $312.70 to $3,481.00. Thus the total premiums he had to pay will be:

$3,481.00 X 22 years (from 57 yrs to 79 yrs) = $76,582.00

Thus the average premium he pays for the term plan over 52 years will be:

($9,381.00 + $76,582.00) / 52 years = $1653.13.

Now compare this with the $655.93 of the limited premium whole life. What is the true cost?

Medical Benefits: Employer Bears the Burden

This is an update on the previous post "Medical Benefits: Who bears the burden?" The Senior Vice-President of Toast Box replied to Mr Lim and assured that the company will compensate his son for the 'work-related injury' ("Part-timers entitled to medical benefits", 04/06/09, Pg. A27). I do applaud Toast Box's responsible reply by offering to "compensate part-time employees if they suffer personal injury from an accident that arises out of, and in the course of, their work", and hope that this will set the standard for equitable treatment towards all employees.

However, that being said, one must be aware of the countless incidents that went unreported and therefore ignored. Thus it is important for people - especially the contract workers - to know what are their basic benefits as well as the appropriate alternatives to seek reasonable redress. Please do not go overboard, lest one gets naught ("Injured worker fails in bid for higher payout", 04/06/09, Pg. B5).

Medical Benefits: Who bears the burden?

I came across this sobering story ("Part-timers run equal risk but no medical benefits", 30/05/2009, Pg. A41) in the Straits Times Forum which set me thinking. This letter was written by a parent in response to his/her son's predicament when he was injured at work. Essentially, being a "part-time" worker, the son had to face a double jeopardy because:

1) He had to pay for ALL the expenses incurred (such as the taxi-fare to the hospital, the medical fees and the follow-up treatment) as the employer did not provide any medical benefits for 'part-timers'.

2) Although he was granted 10 days MC, that translates to a loss of 10 days worth of income as he is paid according to the hours he worked.

The central question that this incident raises is who should be the one that bears the burden of providing medical benefits? Is it the individual employee, or the employer? In fact, my opinion is that the party who faces the risk of greater loss should be the one who bears the burden. Put simply - you might risk losing your life and limb, while your employer risk losing...an employee? Out of a whole lot. And most probably someone not even remotely related to the boss. Get the picture?

Thus it is pointless to point the finger at employer due to the position involved. Part-timers or temporary worker simply do not have the bargaining power (unless ALL of them can band together and demand for more equitable benefits) simply because they are perceived to be easily replaceable, like cogs in the machine. However, even if the employer DOES provide medical benefits, these benefits might cease when one is no longer working there.

Thus, it is important for people 'privatize' their medical insurance, and to ensure that they have a personal medical coverage which is independent of the employers. This is so that you will not be at the mercy of others when the need arises. Some employers do provide a comprehensive cover, but that should be taken-with-thanks rather than taken-for-granted. If you can claim from your company good for you, but when you have no one to depend upon at least you can fall back on yourself - and not flat on the ground.

What is the Hospitalization and Surgical (H&S) Plan?

What is the Hospitalization and Surgical (H&S) Plan?

As the name suggest, H&S plans are insurance policies meant specifically to cover the medical costs of hospitalization. The point to look out for regarding these plans is that they only pay-out when you incur hospitalization and surgical bills.

In general, the format of the H&S plans usually come in two parts:

1) the 'basic' plan, which is payable using the Medisave
2) the 'rider' plan, which is payable using Cash and covers either:

a) the Deductible,
b) the Co-insurance,
c) or Both

What is the Deductible?

The deductible is the first-part of the bill - the initial $X amount - that the patient have to pay before they can claim the rest of the bill. The deductible range from $1,000 - $4,500 depending on the type of plan, ward or even the age. However do note that if the bill falls below the deductible (i.e. less than $X), the patient will have to pay the entire bill by themselves.

What is the Co-insurance?

The co-insurance is the second-part of the bill (after deducting the deductible) which the patient have to pay. The co-insurance is usually a percentage (10%) of the remaining bill.

How do you decide which H&S you need?

1) Preference of Medical Institutions:

Would you prefer to go to a private hospital or a public (i.e. government or restructured) hospital for treatment? If you prefer the private, do opt for the plan that is meant for the private hospital. The only point to note is this: sometimes the choice might not be available due to the need to seek specialist treatment (usually involving private doctors). Thus, to be on the safe side, is it usually better to choose a plan that allows you to opt for private hospitals.

2) Cost:

The cost of the H&S plans varies accordingly to the plan chosen, and whether you added on the rider or not. For the very-budget conscious, they usually opt for just the basic plan so that they do not have to pay any cash. However the catch is when the bill comes, they have to pay both the deductible and the co-insurance. For those that are value-conscious, they would opt for the rider - either covering the deductible or the co-insurance. For those that want to be 100% covered - they would opt for the rider that covers BOTH the deductible AND co-insurance. The cost for the latter is the highest, and the rider that covers both can cost nearly 3 times as much as the rider that covers only either one.

3) Benefits:

The benefits of the H&S plans are almost identical. For a comprehensive comparison you can refer to the benefit table here.

Terminal Illness versus Critical Illness

I came across a Forum letter in The Sunday Times (10/05/2009, pg. 30), whereby Mr Lim Kim Kok was sharing his claims experience in relation to his medical insurance. Apparently Mr Lim had a Great Eastern insurance policy which covers the 30 critical illness, but he was unable to make a claim when he opted for an agioplasty instead of a bypass (upon the recommendation of his cardiologist) simply because his "illness was not serious enough to warrant a claim (no bypass and dead heart tissue)".

This brings to mind one of my client's term policy, whereby he claimed that it was 'cheap and good'. So when I asked him why does he say that it is good, he says that it covers all the necessary aspects like death, total & permanent disability and other 'illnesses'. Then I asked him what illnesses does it cover, and he thinks that is it the 'usual' 30 critical illness but isn't sure. So I requested him to show me his policy, and then we uncovered a grave misunderstanding - the policy only covers 'terminal' illness.

What is "Terminal Illness"?

According to the policy schedule, "Terminal Illness" is defined as an "illness which in the opinion of the medical specialist and subject to the acceptance of our appointed Medical Officer that the advent of death is highly within 12 months. Terminal Illness in the presence of Human Immunodeficiency Virus (HIV) is excluded". (exact wording)

In short, it means that you have to have DIE of the illness (whatever it maybe, other than AIDS) within 12 months. If you die beyond the period (i.e. you died on the 366th day), then you cannot make the claim. However, the stark difference between this and the 30 critical illness is that for the latter you have the hope of recovering, but for terminal illness is it almost akin to making the death claim - albeit that you can make the claim BEFORE you die rather than AFTER you die.

So in short, when one purchase a policy, the DEFINITIONS given in the policy schedule is of the utmost importance. Apparently Mr Lim cannot claim simply because the clause he might be able to claim under is the "Coronary Artery By-pass Surgery", which is defined as

"The actual undergoing of open-chest surgery to correct the narrowing or blockage of one or more coronary arteries with bypass grafts. This diagnosis must be supported by angiographic evidence of significant coronary artery obstruction and the procedure must be considered medically necessary by a consultant cardiologist.

ANGIOPLASTY and all other intra arterial, catheter based techniques, 'keyhole' or laser procedures are excluded".

So it is the same for my client. When he gets an 'illness' and wants to claim, he might be sorely disappointed to discover that he will not be able to claim unless he dies of it in 12 months. If he gets any of the 30 critical illness, he will not be able to claim at all. So please be aware and beware.

Whole Life Versus Term Plans

When people decide to buy an insurance policy, a common question that arises is "should I buy whole life or term plans?" After going through the explanation with many of my clients, I think its appropriate to highlight some features that everyone should know in order to make an informed decision.

1) What is the difference between whole life and term insurance?

Basically the difference between whole life and term can be identified in terms of 3 aspects:

1) the duration of the coverage
2) the cost of the premiums and
3) whether there are any cash/surrender value

Whole life policies usually offer life-time coverage and the policies will start to accumulate cash/surrender value after the 3rd year, but the premiums, ceteris paribus, for these policies are higher. In comparison, term policies offer temporary coverage over a specific period of time (i.e. 10 years) and the policy does not have any cash/surrender value, but the premiums are much lower.

2) What are the pros and cons of whole life?

The pro of the whole life plan are that it allows you to lock in your insurability and premiums at the point of purchase; and it extends the coverage for life-time. Also, consumers have the option to cash out the plan (but at the expense of giving up the coverage). The cons are that for the traditional whole life plans, you will have to pay the premiums for life.

3) What are the pros and cons of term insurance?

The pros of term insurance are that being a 'pure-protection' policy, you can get a relatively high amount of sum assured at lower premiums. However, since term policies cover a limited period you run the risk of not having any coverage when you need it most. Also, if you should need to renew it upon expiry be prepared to pay higher premiums due to the age, or worst, be declined if your health had deteriorated.

4) Are there any alternatives to whole life and term insurance?

In fact there are some variants of whole life plans that integrate both features of a whole life plan and term plan - the limited-payment whole life combines a limited premium payment period worth a permanent life-long coverage. In short, consumers only need to pay for a certain period of time and then the policy will continue for life.

5) Should people get whole life or term insurance?

Basically it depends on the individual's perspective toward insurance as well as what the insurance is meant for. Generally there are two schools of thoughts: insurance as either an expense or investment. The former is epitomized by the phrase "buy term and invest the rest", while the latter perceive insurance to be an instrument to achieve higher returns. For the former, they would prefer to minimize the cost of insurance so that they can devote more resources to investment, while the latter would encompass people who treat the insurance itself as a form of investment in terms of the cash/surrender value.

Also, if the insurance is meant to cover medical expenses, then it would make sense to get a whole life plan because you might never know when an illness will strike. It might strike you tomorrow, it might come one month after you turn 65 - you never know. If the insurance is meant for a temporary increase in the coverage then it would be advisable to get a term plan. In my humble opinion the best would be a combination of both – for it will allow you to maneuver between the duration, coverage and cost. Essentially there are no bad plans, just a mismatch between the actual and expected benefits of the plans.

Motor Insurance

I was helping my client to get a private motor insurance. As a first time car owner, he was quite new to the world of private motor insurance, and in the process of helping him get his motor insurance I shared with him a few insights which I thought might be useful to people who wants to know more about motor insurance.

A) The Type of Coverage:

Generally speaking, motor insurance comes in three basic types:

1) Third-Party only
(covers Act Liability -which means death/bodily damage to third-parties and/or passengers - plus damage to third-party's property)

2) Third-Party, Fire and Theft
(Covers (1) and loss/damage to own vehicle due to fire or theft)

3) Comprehensive
(Covers (1) and (2) and damage to the insured's vehicle plus some other additional benefits like towing etc)


Strictly speaking, although the basic requirement in Singapore is the Third-Party only, clients usually get the comprehensive coverage because the coverage is the broadest and it is the only one that covers damage to the insured's own car.

B) Excess

It is a stipulated first part of any claim amount that the insurer will NOT pay. For instance if the excess is $500, then it means that the insurer will not pay for the initial $500 of the claim. If the excess is $1500, then the insurer will only pay if the claim is greater than $1500. The thing to note is the lower the excess, the higher the premium (i.e. for plans with $0 excess, the premiums are the highest)

Also, there is an excess for young drivers (i.e. drivers whose driving license/experience is less than 2 years old). My client received a quotation from another agent whom quoted him $1,100 based on a 3 years driving experience. When my client corrected it to 2 years, the quotation shot up to $1,800. Other than that, unnamed driver can also incur higher excess.

C) No Claim Discount (NDC)

The NDC is a financial incentive for the insured for not making any claims under the policy. So as a new driver my client is not entitled to the NCD in the 1st year. He will start accumulating the NCD after the 1st year (i.e. in the 2nd year) which he will get 10%. In the the 3rd year, the NCD will be 20% and in the 4th year 30% and so on till he hits 50% in the 6th year, which is the maximum.

So my client was asking how come the quotes he received are so high, and I explained that the reason is because he does not have any NCD. He will have to wait till the 3rd year onwards to get 20% off. But the thing is this, once he makes a claim the NDC will be reduced as well, unless he insured the NDC itself at an additional cost.

D) Driver Characteristics

These characteristics will affect the quotation:

1) Age and gender (young and older drivers will get higher permiums)
2) Driving experience (less than 2 years will have higher premiums or even be declined)
3) Occupation (certain occupations like reporters will be declined)
4) Claims experience (will be declined or charged a higher premium)

The most amazing thing I found out is when he showed me a quote from another agent. Apparently the agent gave him two different quotes based on his marital status! The quote for "married" is $1,300+ while the quote for "single" is $1,500. Perhaps 'singles' are more likely to get into a accident because they are more 'care-free' and therefore 'care-less'???




All in all, as I was helping my client source for quotations, he was also going to other agents to get quotes, so in the end he managed to get a variety of quotations to choose from. The important thing to note is that the premiums for motor insurance can vary vastly simply because there are so many possible permuations. For instance the permium can be lowered just by quoting a 'Third-Party' only coverage instead of the 'Comprehensive' coverage. The agents could also choose a higher excess so as to give a more competitive price. Lastly the policy might only allow the insured to go to the 'authorised' workshops for repairs rather than any workshop. So in esscence, price is NOT everything for motor insurance, you have to see what is the VALUE to the price.




Finally, be aware of dubious quotes. If it is too good to be true, then usually it IS too good to be true. If you are comparing between quotes always check that you are comparing between apples and apples. Lastly, resist any urge to manipulate the categories. Don't claim that you are married even when you are single just to get a lower premium. When in times of claim, any initial discrepany can render the policy void from inception.

Cord Blood Insurance

Before we touch on what cord blood insurance is, it is necessary to have some background understanding of what cord blood is.

What is Cord Blood?

According to the Singapore Cord Blood Bank, cord blood refers to

"the blood that circulates through the umbilical cord from the foetus to the placenta. A short time after delivery, the umbilical cord is clamped and cut, and the remaining cord and its associated placenta are usually thrown away. The umbilical cord that remains attached to the placenta, has blood cells within it which has been found to be rich in blood stem cells. These cord blood cells have the potential to save lives. Blood stem cells are the young or immature cells that can transform into other forms of essential blood cell types, such as red blood cells, white blood cells and platelets."

So there are two points to note:

1) cord blood is of great medical value as one can use it to treat a variety of diseases.
(refer to this list - http://www.stemcord.com/whybank_current.html)

2) Once there is another available alternative for treatment, it means that there is another area which requires medical insurance coverage.

What is Cord Blood Insurance?

This is how the cord blood insurance comes into picture. Cord blood insurance does not insure the cord blood per se, but it aims to provide medical coverage for a stem cell transplant using cord blood, should the child or immediate family require it. Currently, there is one insurer which provide this specialised insurance. (NB: NTUC INCOME used to have its own version of cordblood insurance known as Medicord, but it ceased in 2008.)

MANULIFE "Stemshield" (since 28/07/2008, for StemCord customers)

Is Cord Blood Insurance Necessary?

If you decide to bank your child's cord blood in the anticipation of any need, then this insurance would be appropriate because it will cover the medical costs of utilizing the cord blood for treatment. Moreover, the costs involved would be substantial as cord blood is used to treat serious illness such as cancers.

If you can afford the cost of storing the cord blood - which varies between S$1,280-S$1,400 for a one-time enrollment fee and subsequently charge an annual storage fee of S$250 - then the premiums for the cord blood insurance are comparatively affordable at S$50-S$180 per year. Therefore it would make sense to get this insurance to complement the package as a whole. Ultimately, what is the use of saving the blood if you cannot afford to use it?

The concept of Insurance

What is Insurance?

Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed small loss to prevent a large, possibly devastating loss.

What are the alternatives to insurance?

The only alternative to insurance is self-insurance. Either you absorb your own risk, or you pay somebody else to absorb the risk for you. If you choose to shoulder the risk yourself, then you should at least try to manage it.

How to save on insurance?

Here are a few suggestions on how you can cheat on insurance
(DISCLAIMER: follow this at your own risk. By the way, there is no insurance for cheating on insurance.)

1) Eat right, exercise regularly and maintain your health so you might not need health insurance.

2) Keep your eyes peel when crossing the road. Avoid accidents (as much as you can) to cut down on personal accident/total permanent disability insurance.

3) Don't die. (Or at least choose to die at a time when you have no dependents. If not, just heck the responsibility.)

4) Have LOTS of savings. At least if the worst-case scenario STILL happens, you can bail yourself out.

5) Talk to me. Maybe I can source out a few good deals for you.

The "Sandwich Generation"

In the course of my work I've met with people from various walks of life, and what draws my attention is this particular phenomenon of the "Sandwich Generation".

What is the "Sandwich Generation"?

It is "a generation of people who are caring for their aging parents while supporting their own children"(merriam-webster dictionary). What are the possible reasons behind this? Firstly, the longevity of people are increasing, which means that children will have to take care of their elderly parents well into their 80s or even 90s. Secondly, these children cannot wait too long to have their own kids - they need to start their own family say in their late 20s or early 30s. And there you have it, the perfect recipe for the "sandwich". Imagine the squeeze on the stuffing. Woah.


Why is financial planning important for the sandwich generation?

These people are in a financially precarious situation because the demand on financial resources on them are three-fold as they have to look after:

1) Themselves

2) Their children

3) Their aging parents

In fact, to put it simply, it'll just be two people taking care of - 8 people!
(Father, mother, father-in-law, mother-in-law, you, your spouse, your son, your daughter)

What are the pitfalls to look out for?

The pitfalls to look out for are:

1) Parental planning: if you find that you aren't spending much on your parents' maintenance now doesn't mean that you won't have to splurge on them in the future. The sobering fact is that the medical costs usually set in when they are getting older, and once it starts it can be VERY HEFTY. So to lighten your burden in the future, do ensure that all the necessary medical plans are in place. Eventually, can you afford to hire a helper to look after you parents when necessary, or are you going to DIY?


2) Children planning: you will find that spending a lot on your children is inevitable. But the point is this - if you do spend a lot, make sure that you are spending on the worthwhile things. One of the best thing you can buy for your child is his education fund. Unless you want to instill an entrepreneurial streak in Junior by having him/her work his/her way through University by flipping patties.

3) Self planning: Plan ahead for yourself so that you won't have to pass on the responsibility to the next generation. You'll rather them inherit money than debts right? Even if you don't want to leave them an inheritance - just don't deplete their savings. This can be a vicious cycle, so if you have the option to stop it, please do - and spare your child.

Is there ever a way to avoid this?

There are 4 possible ways I can think of:

1) Don't have a next generation.

2) Due to the filial piety clause this is being censored.

3) Share the responsibility of caring for the elderly parents among your siblings
(not applicable if you are an only child or prodigal son/daughter)

4) Chart your family course well so that you have kids when your parents are still young. Then you can focus more on you kids. When your kids are slightly grown up, then it'll be your parents turn to clamor for your attention.

What is "Retrenchment Insurance"?

This is the idea - you don't have to work to get money, you get money when you have no work. Ideal idea? Sure, that's why it doesn't exist in reality.
So what is "Retrenchment Insurance"?

What exist currently is a misnomer - it don't promise a payout to the retrenched per se - but it does promise to give them the flexibility to restructure their insurance policies in the event of retrenchment. They can either choose to maintain their policies or to surrender it and get a premium refund. This is known as the "unemployment benefit programme" or "premiums waiver benefit".


Who is it best suited for?

It is best suited for individuals who are retrenched and have not done ample planning on their finances. These people are the ones who do not have enough "emergency cash" to cover their essential expense during the period of unemployment and will face the pressure to let their insurance policies lapsed due to the non-payment of premiums.

What are the pitfalls to look out for?

There are generally 5 points to look out for:

1) whether the premiums are being waivered or deferred. The former means that the policy holders need not pay back the premiums that were waivered as part of the benefit, the the latter means that they still have to pay back the premiums sans the interest.

2) whether there is any waiting period - some insurers only allow policy holders to file a claim after they have been involuntarily unemployed for 3 months.

3) whether this benefit is only valid for policies incepted during a certain period as well as how many times you can utilised this benefit.

4) whether there is an option for a total refund or do you have to keep the policy.

5) the narrow definition of "retrenched". It can be as specific as referring to those "employees who have been made unemployed for reason of redundancy or retrenchment by the employer and excludes employment terminated by reason of voluntary redundancy or disciplinary action". In other words, if you resigned or get fired - the benefit will not be applicable.

What differentiates policies offered by various vendors?

The main difference is that for some insurers, such a benefit has been an integral part of the policy while for others it is a 'new' additional feature that was concocted to serve the current needs of the market. It means that for the latter, this feature might only be applicable for a limited period of time, like within the first policy year. If you should get retrenched after that, you might not be able to utilize the benefit.

Another difference is the duration of the premiums waiver and deferment - the former allow for a maximum of 6 months while the latter can extend up to 1 year.

How applicable is the "Retrenchment Insurance"?

Essentially the important thing to note is this: life insurance is meant to be a long-term commitment, while retrenchment is a short-term event. So with proper planning such an issue of not having enough money to fund the premiums can be avoided in the first place.

Welcome to Financial Literati!

First and foremost I welcome all to the inauguration address of Financial Literati. This blog is dedicated to those who yearn for financial literacy and to learn about the argot, jargons, lingo and mumbo jumbo of the financial universe. There are many ways to achieve financial knowledge, and in this era of financial turmoil it can be deadly not to know about what is going on. What is the about the financial meltdown? How did the world suddenly became broke (did the Martians rob our banks and zap away the money)? And why, after working fine all these while - did employees become redundant? Mostly importantly, why are some people still broke even when they've been working for ages and weren't cleaned out by robbers? For answers and more, stay stuck to the screen.