TAKING AN INSURANCE POLICY

Introduction

I am reminded of my first job as a house officer in Malacca when I was earning RM 650 per month with no knowledge of taking an insurance policy. A very good insurance agent talked me into getting into the saving habit and I landed up buying an endowment policy that caused me to part with about 5 % of my meagre income with inadequate coverage. It is common for insurance agents to continue with the same line of encouraging advice that by putting some money away through purchase of insurance you are forcing yourself to save and it would come in handy later in life. This is true but to a certain extent.

I came across an article in the Personal Money Magazine (2011) and I thought it was a well written article that needs to be shared.

Types of Life Insurance Policy

Basically when we talk of life insurance policies (often term products) there are three:

1.       Term Insurance

2.       Whole –life Plan

3.       Endowment Plan

Term Insurance

The ‘term plan’ basically provides coverage for whatever sum you elect for with no other advantages like the other two, in other words , you would not be expecting to get any return after the period of say 5, 10, 15 or any number of years the insurance coverage is needed for.  It does not ‘cash value’. It is by far the cheapest of the insurance products as the premiums paid are low and affordable. The advantage is a higher insurance coverage is provided for a smaller premium compared to the others mentioned.

A word of advice is to consider if this is the best product you would want at that stage of your career especially when your earning capacity is not high and yet you feel there is a need for a reasonable insurance protection. The premiums tend to increase as age creeps in, obviously! Unfortunately trying to get insurance protection after your 60s becomes near impossible with many insurance companies (at least of those I know of!). As we grow older medical problems are inevitable and this often affects our eligibility or there would be additional sum of money to pay.

Should the young executive be able to plan his career and would expect to move up the salary scale the term insurance could be a better plan so as to provide protection in the interim period till he elects for other insurance products when his income permits him to keep a larger sum of money to pay for premiums which invite surrender value (cash value).

Whole Life Plan

The Whole-Life Plan, as the term implies provides for lifetime coverage hence doubling up as both savings and protection. Riders are often included customised to your needs to provide additional coverage for illness and personal accident. These policies can also be used as collaterals for taking loans from the insurance companies. Again the premiums have to be paid on time (fixed premiums) to enjoy protection.

Endowment Plan

This is a savings plan and the premiums are much higher. The coverage may not be high because of the nature of the plan. They have a fixed maturity date and may be useful if you are saving for a future event like providing for children’s education after, say some 15 years. Some have also worked out the period of coverage so as to be able to redeem the sum with interests to be useful for retirement. It looks attractive as you may be lured to take a RM 30 000 policy so that you could draw say RM 55 000 at the end of X number of years. Some criticism is that inflationary factor may not make this sum attractive after the policy period! All the same you need to decide why you want an endowment policy, most times it is because it forces you to save and you have a commitment like children entering tertiary education at the end of the policy term.

Investment Linked Insurance Products

This is essentially an investment product that the insurance company offers with some insurance protection. As in all investment products one needs to contend with the unwritten transaction and fund manager’s fees. Life insurance coverage is related to the investment, say you put in RM 50000/= and the insurance coverage may be 110% of the premium paid. This is payable in the event the policy holder dies prematurely. The insurance company may stipulate the terms and conditions. Some may want you to place the fixed sum of money for fixed period of time (say RM 2 K for 5 years) to enjoy the returns. One needs to be aware that the unit price will fluctuate with market forces, so you may want to hunt for ‘guaranteed ‘products if you do not want to take risks. Others argue that you would rather use other means of generating profits than take such investment linked insurance products. The decision is to be made by you considering the purpose you want to take ILIP.

Commission

Insurance agents work on commissions as whole life; endowment and ILIP derive the most commission compared to term insurance. Kelvin Tan, the writer of an article ‘Go for term insurance’ claims that whole life policies generate commissions of 35-50% of the first premium while term insurance policy generates a commission of 10-20% (quoted for Singapore). One must be aware that the latter does not qualify for cash value and if you are the type of person who feels that a surrender value is a must, then you would opt for any of the other products. It all depends on the purpose of taking out an insurance policy. Good insurance agents would be able to give excellent advice on the best policy for your age and purpose.

Conclusion

Taking up an insurance policy would be a means of providing protection for yourself and dependents. While term insurance plans do not give cash returns, the premium is much lower for a larger insurance coverage. Whole life plan and endowment have cash returns. There are hidden costs in ILIP and market forces dictate returns. One needs to consider if the small insurance coverage that comes with ILIP is worth the returns one gets or should you get a higher protection with term insurance and invest the rest of the money in another investment instrument?

Sivalingam Nalliah

22 Nov 2011

Further Reading
Kelvin Tan, Go for Term Insurance. Personal Money Oct 2011

INVESTING IN GOLD

Introduction

The habit of saving should be inculcated from young. Our parents have always taught us to be frugal, not to be stingy. The saving habits will lead to good financial planning. On earning out first salary we may have several options as to how to spend it apart from having to settle bills, mortgages and rental. If one tries hard and manages to keep about 20% of the salary then we can build up an ‘emergency fund’ which may come in times of need. Financial planners often have this magic figure of five times your salary to be kept in the emergency fund.

Placing money in a savings account does not earn interest of more than 3.0 -3.73 % annually in the current financial climate. This meagre sum is less than inflationary rates. Hence we think of better means of earning ‘passive income’. One such option is to invest in gold.

The Good of Gold

Gold is a popular investment in Malaysia and most buy it as jewellery. Pure gold is sold as bullions and may be purchased at a few banks in Malaysia ( Maybank, CIMB, Public Bank, Kuwait Finance and recently at UOB). Often this is marketed in terms of grams or ounce of gold.

Gold sold as jewellery is another popular means of investment but the purity of gold varies depending on the amount of pure gold in it. Hence one may use to terms like 9 carat and 22 carat (916) gold, the latter having more gold than the former. When gold is bought as jewellery one tend to lose quite a bit when sold back to the jeweller and is probably not the best way of investment unless it is needed for cosmetic purpose.

Gold jewellery is very popular in India, the Middle East and China. Hence, I feel the demand for gold will continue in view of the huge population in both China and India despite what the financial pundits say. Trading in gold is more meaningful if one uses gold investment accounts instead of buying pure gold bars when there is a problem of storing the gold bar in a safe place.

Gold Investment Accounts

The five banks mentioned above facilitate gold investment accounts. Gold prices have skyrocketed over the last few years and are now trading at about RM 5800 an ounce (about 32 gm). That is about 30 % increase over the last one and half years. One gram of gold is being sold at about RM 178 a gram and is being bought back by the banks about RM5-7 higher. The spread of the difference between buying and selling is different in different banks. When one wants to convert the ‘virtual gold’ into gold bars to buy back the rates are very different.

Why buy gold at all? Some consider it a means of diversifying their investment. As gold prize changes over a period of time depending on market forces and factors affected currency and financial instability (as is now the scenario in Europe and USA) one needs to be cautious of how the commodity is trading. The financial pundits say that the price of gold is set to rise further, being a safe haven when equities and share markets fall! Again the prudent investor needs to do his homework when trading in gold accounts. If the price of gold falls you would stand to lose!

Gold Trading

As I said in Malaysia trading in gold is either by purchasing gold bars (near pure) of by opening a gold account passbook. Different banks stipulate the quantum of gold to be purchased. Enquire about the conditions of opening an account, the fees charged should you desire to convert withdrawal into physical gold and the minimum tradable gold.  Remember that Gold Trading accounts do not earn interest like fixed deposits and are not protected by PIDM (Govt. Deposit Insurance Scheme).

Advice

Financial reports give mixed views about the long term price of gold. Many feel the bull market for gold will continue for sometime, but this is anybody’s guess. The strong demand for gold from Indian and China would be plus factors for the time being.

Conclusion

There are many investment strategies and one needs to be aware of the various strategies. The common advice is not to put all your money in one basket. Perhaps gold may the lowest in your priority list when you begin investing as profits are only made when you trade in gold.. No interest is paid for the account you hold in gold and profits are only based on the rising price of gold. Gold bars are near pure gold but if one buys physical gold there is a problem of storage. Gold trading accounts differ in different banks and the term and conditions need to be studied before opening an account.

Sivalingam Nalliah

21 Nov 2011

INTRODUCTION

When I read in an article that the best asset parents can leave to children is how to manage their financial affairs, it dawned on me that with blogging and twitting such advice can be captured and retained for not only our children but for all others. Times were hard in my younger days and attempting to get food on the table and roof over our heads were about the only financial planning our parents did. Life has changed and children of today do not have such  problems, at least  among the middle income groups. However complacency would set in and if we do not plan our financial affairs early in life; we do not want to regret later in life.

I read a leaflet lying around when I went to the bank recently advising on planning for retirement. The economist who wrote the article was being pragmatic in having drawn a life-graph  depicting the time from being a professional to having a family through to peak period when wealth is accumulated maximally to a steady income phase before retiring at 58 years of age. The corresponding expenditure chart and the inflationary effect on savings makes us uncomfortable what will happen to us after retiring as the life span of men and women is now beyond 70 years. Factor in the cost of living and the impending health costs that come with living in the golden years! The savings we had or what we had planned may not be adequate to cover all and sundry.

Parents are now teaching children from a young age to be prudent in their spending, to be frugal and to uphold the philosophy of the three ‘R’s – reuse, recycle and reduce.  What strategies do we have to beat inflation, should we grow our own vegetables to avoid paying the high cost of greens in a tropical country like ours, should we learn to change the motor oil by ourselves so as to be fleeced by the motor mechanic in doing repairs or changing parts that don’t have to be done? Look around us and you will see the opportunities we have to save for the rainy day. Is there a need to run out to get two items from the  sundry stall two kilometres away if we had planned our shopping in advance once a week?

Parents have to be role models for frugality and being consummate in our spending. The advertisers know more psychology than parents and we tend to fall in like ‘shot down ducks'; when a sale goes on that is shouting about 70% cut down in prices. The strategies are similar, only that they are directed to different individuals from toddler to the old. Fast food joints have toys to be collected for dining with them, the pregnant mother is drawn to special brain food for the unborn and the aged have special formula milk and nutrients for memory loss and invigoration!

I shall approach the subsequent chapters talking about various subjects on financial planning though I am a novice in the subject. If I don’t sound right then I am not getting across my message. The main objective to share with you as young graduates and professionals some rudiments of financial planning as my daughter tells me she does not understand anything about wealth management  except to keep her meagre  savings in a bank for safe-keeping!

Sivalingam Nalliah

20 Nov 2011