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".