Choosing an adviser for your insurance needs

From ST, Invest

By Lorna Tan

In recent years, there has been a proliferation of consumer guides to help people make better choices when buying life insurance.

This shows that people are becoming increasingly aware that insurance is an essential aspect of money management.

It also shows that they need help to work their way through a maze of insurance jargon and legalese.

The latest and arguably most authoritative guide comes from the Life Insurance Association which recently published an improved version of its guide to life insurance.

Financial advisers and insurance agents have been handing out the new guide to clients since Oct 1.

Besides this, customers also get other documents, such as a reference checklist, a product summary and benefit illustration, when they are buying insurance.

One important new feature in the latest guide is an easy-to-follow flowchart that describes the 'Comprehensive Advisory Session' that should take place when a consumer meets a financial adviser to discuss life insurance options.

This underscores key changes in attitudes on how insurance should be sold. The sale of insurance is now part of a financial advisory process; it is not simply a product to be pushed so an agent can earn quick and fat commissions.

But a successful insurance industry needs both sides to work hard. Qualified advisers with integrity are vital, but so are informed consumers who know what to expect from advisers.

The main types of complaints from insurance customers are: getting misinformation on insurance and bad recommendations on what products to buy from advisers.

Take the experience of Mr Larry Ho, for example. In February 2004, at the age of 53, Mr Ho signed up for a regular premium investment-linked insurance plan with a death cover of $1 million.

This type of plan is a blend of an insurance policy and an investment; a portion of the premium is invested in stock markets, for instance.

After a few years of paying the premiums, he now realises that the plan was not what he really wanted.

He had wanted to invest his money for the long term and an investment-linked plan was not the best way to achieve that result given the changing proportion of funds invested.

'I had not been advised that as I get older, more of my premiums go into paying for assurance charges than for investments,' he said.

So how does a consumer pick a capable financial adviser from the wide selection on the market?

What to ask your adviser

MANY people buy life insurance from friends and relatives because it is convenient. Still, this may not necessarily be a good thing as the close ties sometimes make it difficult to ask pointed questions.

And there are hazards, too.

Mr Ben Fok, the chief executive of Grandtag Financial Consultancy, said that it is not a good sign if the adviser tries to push you into signing up as a client on the spot.

'This can be a bad sign. Refuse politely and continue asking questions. You are looking for an adviser, not a salesperson,' he said.

Here is a checklist of key questions to ask your potential adviser:

1. What services can you provide?

Find out if the adviser offers cost-effective solutions from multiple product providers or if the products he recommends are restricted to one source.

Some consumers feel safer with advisers and products from large, well-known institutions. Others may want to deal with advisers that offer a wider choice of products.

2. Who else could benefit from your recommendations?

An adviser who promotes insurance, unit trusts and stocks may have separate tie-ups with the firms that supply these products.

He may also have other business relationships that should be disclosed to you. This includes income he receives for referring you to an insurance agent, an accountant or a lawyer in relation to recommendations that he makes to you.

3. What are the risks and disclaimers?

Don't hesitate to ask the adviser to highlight any risks, potential downside or restrictions that may apply to the product he is recommending.

Ms Wendy Lee, 40, suffered a rude shock when she realised, after her divorce, that she was unable to change the person who would be a beneficiary of her life insurance policy.

She was not told at the point of sale that an 'irrevocable statutory trust' is created - under Section 73 of the Conveyancing & Law of Property Act - for the spouse and/or children when they are named as beneficiaries in a policy.

In simple terms, that means her ex-husband is entitled to the insurance proceeds because he was named as the beneficiary when the policy was taken out.

Even having a will does not change this situation.

4. How do I pay for your services?

Payment can take several forms.

• Commissions paid by a third party for the sale of products. These are usually a percentage of the amount you invest in a product.
  
• Fees based on a percentage of the assets you invest.
• A combination of fees and commissions. Fees are charged for the amount of work done to develop financial advisory recommendations and commissions are received from any products sold. Some planners may offset a portion of the fees you pay if they receive commissions when you buy products they recommend.
• A salary paid by the firm for which the adviser works. The adviser's employer receives a payment from you or others, either in the form of fees or commissions, in order to pay the planner's salary.

5. What commissions do you earn?

Don't be afraid to ask the exact commission amount that the adviser will earn from the sale. For instance, the commission for a regular premium investment-linked plan can be as high as 50 per cent in the first year, before dropping to 25 per cent in the second year, 10 per cent in the third year, and 5 per cent each in the fourth, fifth and sixth policy years. This means that if the annual premium is $50,000, the first-year commission earned by the adviser is a substantial $25,000.

For a single premium investment-linked plan, the one-time commission is typically a much smaller 2 per cent to 3 per cent.

In the case of hospitalisation Shield plans, some generate first-year and renewal commissions of up to 25 per cent and net premiums of 15 per cent for the adviser, as long as the plan stays in force.

6. What experience do you have?

You have a right to be nosy. Find out the adviser's experience and the number and types of firms which he has been associated with. Some experts advise consumers to choose an adviser with at least three years of experience in providing financial advice.

7. What qualifications do you have?

Ask the adviser what qualifies him to offer financial advice and whether he holds or has held any financial planning designation.

If the answer is yes, check on his background with the respective organisations.

8. Can I have it in writing?

Ask the adviser to put in writing the services he has provided and the recommendations he has made. Keep this document for future reference.

Necessary documentation

Finally, an adviser should give you the following documents when recommending a financial product, says IPP Financial Advisers. They include:

• A summary of your financial information such as investment objectives, current financial situation and personal needs.
• Recommendations made by the adviser and the basis for making these recommendations.
• A copy of the benefit illustration and product summary for insurance products.
• A copy of the prospectus for unit trusts.
• The name of the firm he represents and the type of advisory service he is licensed to provide.

If all this sounds like too much trouble, consider the problems faced by Mr Albert Soon simply because a critical illness policy was not explained properly when he bought it.

He thought he was properly covered for all serious illness when he bought the critical illness policy.

But the 52-year-old had a rude shock when his claim was rejected by his insurer early last year.

After feeling breathless and bloated in December 2005, he was diagnosed as being at a high risk of sudden cardiac death and had a pacemaker implanted.

The insurer threw out his claim, explaining that his medical condition did not fulfil the definition of any of the 26 major illnesses stipulated in the plan.

To make matters worse, he had not purchased a hospitalisation and surgical plan.

Thus it is always better to protect yourself by having an inquiring mind and being well-informed, as opposed to assuming that all advisers will automatically have your best interests at heart.

On the flip side

Much has been said about unprofessional advisers but many advisers have stories of encounters with 'unscrupulous' customers too.

Mr Patrick Lim, the associate director of financial advisory firm PromiseLand Independent, recalled a 'nasty client' who invited his entire family of five for dinner at an expensive Chinese restaurant, during their first meeting.

'He had already pre-ordered food and made me pay for dinner, which came up to over $500. After a few meetings and agreeing to buy a policy for himself and his wife, he finally cancelled the policies.

'He was the most nasty client in my 10 years of working as a financial adviser,' recalled Mr Lim.

Other advisers have also had their fair share of clients willing to play hard when it comes to getting the best deal.

They obtain advice and recommendations from one adviser and then proceed to shop around for cash rebates and negotiate for better terms.

3rd insurer unveils new ElderShield package

From ST, Singapore

Aviva's unique offers include payouts for those who recover slightly from disabilities, and for kids whose parent is disabled

By Salma Khalik

People 40 years and older have a wide range of schemes to choose from to protect themselves financially against severe disability, with the final insurer, Aviva, releasing its schemes yesterday.

Among its new offerings are monthly payouts for people with severe disabilities who are recovering and money for children under 21 when a parent is disabled.

Between them, the three insurers - Great Eastern (GE), NTUC Income and Aviva - offer combinations of longer coverage and higher payouts, up to a maximum of $3,500 a month for life.

ElderShield, the national severe disability insurance scheme, was revamped recently so that people who join from this month will get a payout of $400 a month for six years should they qualify - up from $300 a month for five years for people who joined earlier.

Once on the basic scheme, they can opt to buy one or more supplementary schemes from any insurer.

Premiums for the supplementary scheme can be paid with Medisave money - the portion in Central Provident Fund savings reserved for health care - up to a cap of $600 a year.

Health Minister Khaw Boon Wan was pleased at the buffet offered, but cautioned people to study the various schemes carefully before picking one that 'provides best value for money and within their affordability level'.

He told The Straits Times yesterday: 'The supplements cover a good range of payouts and should meet the diverse needs of most Singaporeans who want and can afford higher payouts than what the basic ElderShield provides.'

All three insurers have retained the basic criterion for payouts - when a person is unable to do three of the following without help: bathing, eating, going to the toilet, walking, dressing or getting out of bed or a chair.

Newcomer Aviva has tried to be creative with some unique offers.

These include giving a 50 per cent payout if the person recovers slightly, but still is unable to do two of the six activities of daily living. The basic scheme stops payment when this happens.

It also provides a $200 a month additional payment for three years if the policyholder has children younger than 21 years of age.

Policyholders also enjoy discounts at public hospitals in the National Healthcare Group for services such as health screening and podiatric treatment.

The last is especially useful to diabetics, who need such treatment at least once a year.

Like its rival NTUC Income, Aviva also offers lifetime payouts. Alternatively, policyholders can opt for a 12-year payout period.

The amount of coverage ranges from $600 a month to $3,500 a month, including the basic ElderShield payout.

It also gives the option of paying premiums till the age of 65, or for as long as one lives, at lower rates. Whichever is chosen, coverage is for life.

Its marketing head, Mr Paul Hughes, expects most people to choose a monthly payout of $800 to $1,000. He said premiums for such schemes for people up to 55 years old should be completely payable by Medisave. In fact, for most people, the premium can be paid for simply with interest earned on the Medisave accounts.

Like GE, it offers a lump sum payout of three months at the start of the claim, and a death benefit should the person die during the claim period.

Member of Parliament Lam Pin Min said the range of schemes is 'a good start', but he thinks the premiums could be lower and hopes that excess income would be returned.

He advised people to choose carefully: 'They should be realistic yet practical in their choice so that they do not over-insure themselves unnecessarily.'

But Madam Halimah Yacob, head of the Government Parliamentary Committee for Health, wanted the insurers to go further, for example, by providing payouts for people who need help but fail to qualify under the current scheme.

See Supplementary Cover: What the 3 companies recommend

Linear Income Versus Exponential Income Growth

By Adam Khoo

When you focus only on increasing your value per hour and the time you spend, your in-come increases in a linear fashion.

There is a limit to how much you can earn a month, since there is a limit to the number of productive hours you can work. You are literally just selling your time for money.

For example, even if you are a top lawyer who earns $300 per hour and you can only work a maximum of 180 hours a month, your maximum earnings would amount to only $54,000 a month or $648,000 a year.

Now you may say to me, 'Adam, that's not bad at all!' Sure, but why set a ceiling on your earning power?

However if the lawyer were to use the power of scalability by magnifying and multiplying his value (legal advice), then he could earn five to a hundred times more in that same twenty-four hour period.

Scalability is what separates the upper middle income earners and the rich from the truly super rich. Scalability explains why someone can make 100 times more money within
twenty-four hours than anybody else.

Many people have the perception that you can only achieve scalability when you are singer, movie star, sports star or a famous celebrity. Absolutely not!

You can achieve massive magnification or multiplication in any profession, whether you are a chef, garbage collector, lawyer, doctor, teacher or software programmer.

When you fully utilize the power of (value x time x scalability), your wealth will grow exponentially. Let me give you examples of people who have created massive wealth as a result of understanding the power of this formula.

I am sure you have all heard of Colonel Harland Sanders. He is the portly Southern American 'gentleman' the life-size statue fronting all Kentucky Fried Chicken outlets to greet patrons.

Of course Colonel Sanders is a multi-millionaire many times over but do you know that before KFC, Colonel Sanders had found himself at 65 years of age totally broke with nothing but a social security check for $105.

But in less than ten years, at age 73, he had become a self-made multi-millionaire and a household name! How did he achieve this? By being one of the first people in the world to understand the power of multiplication!

Colonel Sander's tremendous value came from his ability to innovate great tasting chicken that people love to eat. How?

By developing his secret blend of eleven herbs and spices and insisting that all his chicken be pressure cooked for hours, something that most other chefs were not willing to do.

In fact, Sanders was so insistent on the superiority of his recipe that he refused to sacrifice taste by cooking his chicken quicker.

Remember, when you do something out of passion (Millionaire Habit 4), do more than expected (Millionaire Habit 1) and think of the value you give to others, money will come naturally.

However, initially Colonel Sanders, though he worked day and night selling his great tasting chicken from his restaurant in Corby, Kentucky, never became wealthy. Why? He had the power of (value x time), but he lacked the scalability factor.

It was in fact a twist of fate that got the Colonel thinking of how he could massively scale his value.

One fateful day, the government built a highway that diverted all the hungry motorists away from his business. As a result, Sanders was forced to close the business down and that's how he found himself broke at age 65.

Instead of giving up, he came up with the fantastic idea of approaching restaurant owners all over the country to offer them his secret recipe for their use.

In return, he would get a percentage of the profits for every chicken they sold. Within a few years, restaurants all over the country were selling thousands of chicken everyday, using his recipe!

Through his franchising concept, he received thousands of dollars in checks every month. He multiplied his value a millionth fold as a result and at age 73 he could sell his business for $2 million.

Remember this was in 1963 and that was a huge sum of money (equivalent to over $10 million today).

You see, when you scale your value, your wealth and success will increase exponentially! Think of ways you can scale your value immediately!

Credit Cards As A Powerful Wealth Tool?

By Adam Khoo

In fact, when used properly, credit cards are a very powerful wealth-building tool! I use credit cards for every single possible purchase.

By using credit cards you get...

1. A two-months interest free loan. When you buy a product using your credit card, you will only be billed for it at the end of the month. You are then given another month to make payment. So, if you pay off your total bill, you would have effectively gotten a two-month interest free loan.
2. Bonus points and dollars. Each purchase you make on your credit card(s) will earn you bonus points which you can use to redeem for free products and services like extra flyer -miles and dining vouchers, saving you even more money.
3. A monthly statement that tracks and consolidates all your expenses. At the end of every month, the credit card company will tabulate for you the total expenses for the month, making it easy for you to track your total expenditure. So it becomes a free money management tool.

However, you MUST ALWAYS PAY THE OUTSTANDING BALANCE when you pay the full balance every month. This way, the bank does not earn a cent off you, but you get the three great wealth building services mentioned above. This is what I do and that is why my bankers hate me.

So why do banks go all out, giving freebies and spend millions of dollars in advertising to hook you on using their card? They know that there are many consumers out there who just pay the minimum sum every month (about 3% of the total debt you owe), because it is so tempting.

What's worse is that many credit card owners don't even pay their minimum sum on time because of a cash crunch or because they plain forgot.

The moment you pay only the minimum sum and allow your outstanding balance to roll, you become the bank's best friend. This is when they will make a killing off you! Why?

This is because banks charge a 2% per month interest on your outstanding sum. This may seem small, but again, that's 24% interest a year. Just how much interest does this add up to?

Let's do the sums...

Question: Imagine if you had an outstanding balance of $2,000 on your credit card statement, and you just pay the minimum sum of $60, how long will it take for you to pay off the while balance? (this is only assuming you do not charge a single dollar more).

The shocking answer: It will take you 4.5 years! You would have paid a total of $3,300, that's $1,300 in interest. In other words, you would pay an actual interest rate of 65% off your balance.

So when used properly credit cards can greatly assist you in creating wealth or it can destroy you if abused.

Steps to owning your dream home

1. Work out how much you can afford. Upfront costs include a minimum 5 % cash down payment, legal fees of 0.5 to 1 % of the loan amount, an agent's commission of 1 to 2 % of the purchase price and a stamp duty of up to about 3 % of the purchase price. Total monthly debt servicing should not exceed 35 per cent of your gross monthly income. Also take into account such ongoing expenses as property tax, fire insurance, mortgage insurance, and conservancy or maintenance tax.
2. Choose a suitable home loan and get in-principle approval from your banker on the loan amount. Decide based on your individual risk appetite and financial situations.
3. Search for your dream home. Check to see if approvals have been obtained for any additions or alterations done. Otherwise, the bank will only provide financing subject to the property being restored to its original condition.
4. Ascertain the market value of the property. The bank can provide an indicative value if you can provide some details of the property you want to buy.
5. Appoint a lawyer to coordinate your purchase. The lawyer will, among other things, conduct a bankruptcy search on the seller.
6. Make an offer on the property to the seller. You have to place an option fee of 1 to 10 per cent to make an offer.
7. Formally apply for the loan. Once it is approved, you will receive a letter of offer from the bank.
8. Meet your lawyer. Your lawyer will help you to exercise your option to buy and apply to the CPF Board for the use of funds for your purchase. Later on, he will go through the CPF, mortgage and other documents with you.
9. Arrange for the bank's valuers to carry out a formal valuation. They will submit their valuation report to the lawyer and the bank.
10. The lawyer will receive the funds from the bank and the CPF Board to complete the purchase. Stamp duty and legal fees are payable at this stage. Now you just need to collect the key to your dream home.

10 tips to achieve lifelong hassle-free health insurance

Get cover early

Get health insurance early, while you're still healthy. If a medical condition has developed, the insurer may charge a higher premium and/or exclude that condition. A critical illness like cancer may deem you 'uninsurable'.

Know your health plan

Does your existing plan offer specific features that may not be available in the new plan? For instance, the industry definitions for critical illness were tightened in July 2003, so if you change plans with a critical illness cover, you must accept the new stricter definitions.

Health status changes

If you already own a plan and your health changes, ask if the insurer wants to exclude or charge a higher premium on this new complaint.

When to surrender your existing health plan

If you have decided to switch plans, surrender the old policy only 30 to 90 days after the new one kicks in. This is because there is usually still a waiting period before certain medical claims are accepted.

No gain in buying more hospitalisation and surgical (H&S) plans

Health expenses like H&S plans are usually reimbursement plans, which means the total amount a policyholder can claim cannot exceed the actual hospital expense incurred. So there is nothing to gain from buying extra policies.

Choose an affordable and suitable plan

Different plan types cater to different levels of needs and preference. Those catering to Class A wards will cover more of a medical bill but premiums are also higher compared with plans catering for stays in lower class wards. Premiums are based on age so consumers must consider the higher costs they face when they reach an older age bracket. They are typically allowed to downgrade to a lower plan type if they can no longer afford the higher premiums without underwriting. But moving to a higher level plan will require a new health assessment.

Know a plan's deductibles and co-insurance limits

Most plans do not pay from the first dollar and come with deductibles and co-insurance. A deductible is the fixed initial claim amount not covered by the insurance. Co-insurance is the percentage of the total claimable amount, in excess of the deductible. It is also not covered by the health insurance. However, some firms offer riders that cover the deductible and co-insurance for a premium.

Look for other limits

Besides the lifetime benefit limit and annual benefit limit, there are also the sub-limits for reimbursement that depend on the plan type. Ensure that renewal of the policy is guaranteed.This means the insurer will continue to renew the policy annually regardless of your health and even after a claim has been made, as long as the lifetime benefit limit has not been exceeded. Premium increase will be based on the firm's policy schedule - usually according to five-year age brackets - across all policyholders. For plans that are not renewal-guaranteed, the insurer may raise premiums or refuse to insure you, particularly after a large claim.

Go for Medisave-approved private schemes

This is because premium payments for these can be made from the Central Provident Fund (CPF) Medisave account. You can also use Medisave to pay your family's premiums for such plans. But the maximum Medisave withdrawal is $800 per person a year.

10 Reasons You Should Never Get a Job

1. Income for dummies: Are you working for money or is money working for you?

2. Limited experience: Most of the time whatever experience you gain is limited to a very specific area.

3. Lifelong domestication: Are you a good pet?

4. Too many mouths to feed: The return you get from your job does not equal to the amount of value you create in your job, unless you are the owner or the investor.

5. Way too risky: You live in constant fear that you might be fired.

6. Having an evil bovine master.

7. Begging for money: Asking for a pay rise.

8. An inbred social life: No social life if you ONLY mixed with your colleagues.

9. Loss of freedom.

10. Becoming a coward.

Top ten geek business myths

Since I've started my new career as a venture capitalist I have become keenly aware of some of the classic mistakes that geeks make when trying to raise money for a new business. Instead of writing the same comments over and over again I thought I'd try to summarize some of the mistakes that people -- especially smart people -- make when they decide to try to turn their bright ideas into money. Here then is my top-ten list of geek business myths:

Myth #1: A brilliant idea will make you rich.

Myth #2: If you build it they will come.

Myth #3: Someone will steal your idea if you don't protect it.

Myth #4: What you think matters.

Myth #5: Financial models are bogus.

Myth #6: What you know matters more than who you know.

Myth #7: A Ph.D. means something.

Myth #8: I need $5 million to start my business

Myth #9: The idea is the most important part of my business plan.

Myth #10: Having no competition is a good thing.

Special bonus myth (free with your paid subscription): After the IPO I'll be happy.

If you don't enjoy the process of starting a business then you will probably not succeed. It's just too much work, and it will suck you dry if you're not having fun doing it. Even if you get filthy stinking rich you will just have more time to look back across the years you wasted being miserable and nursing your acid reflux. The charm of expensive cars and whatnot wears off quickly. There's only one kind of happiness that money can buy, and that is the opportunity to be on the other side of the table when some bright kid comes along with a brilliant idea for a business.

All these myths can be neatly summarized in a pithy slogan: it's the customer, stupid. Success in business is not about having a brilliant idea. Bright ideas are a dime a dozen. Business is about taking a bright idea and assembling a team that can turn that idea into a product and bring that product to customers who want to buy it. It's that simple. And that complicated.

Good luck.

Don't Spend Your Raise

1. Don't treat money as a taboo subject.
2. Don't fly first class just for the free drinks.
3. Don't rely on your relatives for financial aid.
4. Write down your money goals.
5. Don't allow events to get you off your plan.
6. Talk about money as much as possible.
7. Learn from your parents.
8. Money isn't everything.
9. Don't cure boredom by going to the mall.
10. Pay yourself first.
11. Pay the needs before the wants.
12. Never guess when filling out a budget.
13. Don't carry around loads of cash.
14. Never buy a new car.
15. Don't take a vacation in high season.
16. Never make a significant purchase on the first trip to the store.
17. Always pay your bills on time.
18. Resist temptation.
19. Free does not always mean free.
20. Don't try to keep up with the Joneses.
21. Be willing to give up the wants.
22. Don't spend more than you make.
23. Don't spend your raise.
24. Don't shop when you're hungry.
25. Don't spend windfalls with abandon.
26. Live below your means.
27. Get an advanced education.
28. Defer gratification.
29. Don't leave home too soon.
30. Keep personal staff to a minimum.
31. Never have more than two credit cards.
32. Know your debt level.
33. Check your credit report regularly.
34. When you pay with credit and are reimbursed with cash, run to the bank.
35. Never get a car loan for longer than three years.
36. Spend student loans only on school expenses.
37. Share your financial situation with your roommate.
38. Divorce should never be about money.
39. Check your future spouse's credit report.
40. Don't start your married life with excessive wedding debt.
41. Don't have children before you can afford them.
42. Always discuss major purchases with your spouse.
43. Don't hide purchases from your significant other.
44. Get married and stay married.
45. You can't buy love.
46. Have an emergency fund.
47. Never hide from the bill collector.
48. Never file for bankruptcy without considering all the options.
49. Balance your checkbook.
50. Don't wait to win the lottery.
51. If you have an overspending addiction, seek help.
52. Be prepared for worst-case scenarios.
53. Resist panic decisions when the market is down.

Balance different types of cover

If you suffer a serious heart attack, you can claim a lump sum from your critical illness policy. The money - the amount depends on how much you were insured for - can come in handy for purposes such as taking no-pay leave from work. So says Mr Leong Sze Hian, the vice-president of the Society of Financial Service Professionals.

If you did not have a critical illness policy but had a hospitalisation and surgical (H&S) policy instead, you would be able to claim the hospitalisation expenses only, which are likely to be small, he adds. Statistics show that the hospital bill for 90 per cent of heart-attack patients is less than $1,500 for a stay of between five and six days in B2 wards at restructured hospitals.

Mr W.K. Choo, 54, a retired senior management executive, wishes he had had a critical illness policy when he was struck by nose cancer in 2002. He was advised to go for a certain type of scan which was unavailable in Singapore then. He flew to Hong Kong for the procedure, which cost between $2,400 and $4,000, depending on the hospital he went to. Inclusive of travel expenses, each trip cost between $5,000 and $7,000. He made four trips within a year.

'I doubt any private H&S policies at that time would have covered the cost of the scans, not to mention the incidental expenses,' he says. 'If I had had a critical illness policy, the payout would have taken care of my expenses in Hong Kong.'

He is convinced that people should have both critical illness and H&S policies if they want to deal with the risks of minor and major illnesses. It is the major illnesses that one should be particularly wary of.

'Health statistics show that one in four of us will die from cancer alone. Hell, the odds are formidable!' Mr Choo says. He regrets that following his cancer episode, no insurer is willing to sell him a critical illness or H&S policy.

Mr Leong of the Society of Financial Service Professionals advocates the following approach to prioritise your purchase of medical insurance:

• First, use the Medisave savings in your CPF account to buy a policy that covers hospitalisation and surgery mainly for major illnesses. It provides cover of up to $5 million in your lifetime, compared with the $750,000 limit of an H&S policy paid for by cash. Buy this even if you work in a company that provides you with H&S cover. Chances are you will not work there until you retire and then when you want an H&S policy of your own, you could be rejected by insurers as your health may have become non-insurable.
• Next, buy a 'reimbursement policy' whose premiums are payable in cash to cover most of the expenses not covered by the CPF-paid policy. The latter does not cover the pre- and post-hospitalisation expenses incurred as a result of your illness. On top of that, the CPF-paid policy comes with a 'deductible' - that is, you have to pay a certain amount of the expenses out of your own pocket.
• Then, buy an H&S policy whose premiums are payable in cash. This will cover expenses incurred during day surgery, which are not covered by either the CPF policy or the reimbursement policy. Such a policy could cost four times as much as the CPF-paid policy.
• Finally, buy a critical illness policy to cover other expenses arising from a critical illness.

Says Mr Leong: 'If you have a limited budget, don't give up a critical illness policy for a H&S policy whose premiums are payable in cash. 'The key is balance - have a bit of each different type of cover, instead of betting your entire budget on one. Health care is not a casino.'

Outsmarting The Smart Money

1. Don't be the patsy. If you cannot invest with disciplined intelligence, the best way to own stocks is through an index fund that charges minimal fees. Those doing so will beat the net results (after fees and expenses) enjoyed by the great majority of investment professionals. As they say in poker, "If you've been in the game 30 minutes and you don't know who the patsy is, you're the patsy."
2. Operate as a business analyst. Do not pay attention to daily excitement in the market, macroeconomic forecasts, or securities movements. Concentrate on evaluating businesses.
3. Look for a big moat. The "moat" is a metaphor for a protective belt surrounding a business that will secure favorable long-term prospects, those whose earnings are virtually certain to be materially higher 5 and 10 years later.
4. Exploit Mr Market. Market prices gyrate around business value, much as a manic-depressive swings from euphoria to gloom when things are neither that good nor that bad. The market gives a price, which is what you pay, while the business gives value, and that is what you own. Take advantage of market mispricings, but don't let them take advantage of you.
5. Buy at a reasonable price. Bargain hunting can lead to purchases that don't give long-lasting value; buying at frenzied prices results in purchases that give no value. Still it is better to buy a great business at a fair price than a fair business at a great price.
6. Insist on a margin of safety. The difference between the price you pay and the value you get is the margin of safety. The thicker, the better.
7. Know your limits. Avoid investment targets that are outside your circle of competence. You don't have to be an expert on every company, or even many - only those within your circle of competence. A large circle is not necessarily better; knowing its boundaries, however, is vital.
8. Invest with "sons-in-law." Invest only with people you like, trust and admire - men you'd be happy to have your daughter marry, or women you'd be happy to have your son marry.
9. Only a few will meet these standards. When you see one, buy a meaningful amount of its stock. Don't worry so much about diversification among stock holdings, so long as your assets are diversified in other ways, as among home equity, bank savings, and other asset classes. If you find one outstanding business, that is better than a dozen mediocre ones.
10. Avoid gin-rummy behavior. This metaphor from the card game cautions against the short-term, quick-flipping strategy, akin to the action of picking and discarding cards each turn in the game. It is the opposite of possibly the most foolish of the Wall Street maxims: "You can't go broke taking a profit." Imagine as a stockholder that you own the business and hold the investment as you would if you owned and ran the whole thing. If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes.

Term policy: Low premiums mean surplus cash for investing

You want your loved ones to be taken care of in case anything untoward happens to you. But buying life insurance is not that simple. Expensive may not be better. Cheap may come with complications.

Does it make sense for you to pay nearly $1,900 a year in premiums for a life insurance policy when there is an alternative costing just $332 a year? Many insurance advisers want you to pay the higher sum for a whole life policy.

But Mr Christopher Tan, chairman and chief executive of financial advisory firm Providend, says: Don't buy it. Buy a term policy instead. His advice not only goes against the grain but surprises because he is a former Prudential Assurance agent who used to earn more than $200,000 a year in commissions from products such as whole life policies.

He started Providend last year, making it the first such Singapore firm to charge clients a flat fee for advice, instead of getting commissions for financial products it sells. If advisers earn commissions, he says, they are tempted to push products which yield higher commissions, as is the case with whole life policies.

That motivation has also been evident in unscrupulous practices highlighted in the media in recent months, such as insurance agents and financial planners persuading clients to sell unit trusts and switch to new ones for no good reason.

Comparing Policies

(Assume a 35-year-old man, non-smoker, and $100,000 cover for death and total and permanent disability)

Whole life (participating)
Annual Premium: $1,881
Returns at age 60: $57,485* (Cash value of policy)
Insurance payout in event of claim: $100,000 + bonus

Whole life (non-participating)
Annual Premium: $1,097
Returns at age 60: $34,493* (Cash value of policy)
Insurance payout in event of claim: $100,000

Term coverage until age 60
Annual Premium: $332
Returns at age 60: $77,626** (Return on investment)
Insurance payout in event of claim: $100,000

* Cash value of whole life policy if it is surrendered.
** Assumes return on investment at 5 per cent a year.

NOTE: According to industry sources, the first-year commission for agents for the above policies are around $1,700 and $300 respectively.

'By removing commissions from advice, I can really be free from temptations that may hurt my clients. I am thankful that I realised it early and that I have the courage to be honest with myself,' says Mr Tan, 34. The topic he has brought up - term versus whole life - is not new but he made many people sit up with his no-holds-barred views in a recent article in The Business Times. 'Let me confess to you the false teachings that I used to believe in,' he says.

To start at the beginning, you should know that both types of insurance policies have the same aim: to insure your life and ensure your loved ones get a lump sum if you die. Their premiums are vastly different because with a whole life policy part of your money gets invested, which is why you can get back a lump sum many years later.

In the case of a term policy, the premium is solely for insurance and you will not back get a single cent if the term ends without a death claim being made on the policy.

Another key difference: A whole life policy is meant to cover you for life while a term policy is for a specific number of years. In a whole life policy, you will get bonuses from the insurer if its investments using your money perform.

Mr Tan notes the following arguments for whole life plans:

• Whole life is a systematic way to save and gives you better returns than bank deposits.
• Because of the cash values accumulated in a whole life plan, when you cannot pay the premiums, the policy will not lapse.
• Don't buy term plans because if there are no claims, you get nothing.
• Don't buy term plans because they don't cover your entire life and you never know when you will be hit with an unfortunate event.

'Unfortunately, I have to say that these are all false teachings that will disadvantage you if you believe them,' says Mr Tan, who has a master's degree in business administration, a bachelor's degree in financial services and Certified Financial Planner accreditation. 'For a start, to use a whole life plan as an alternative to savings in the bank is to commit a fundamental error.'

'Bank deposits are short-term instruments that are liquid and flexible. Insurance is a long-term instrument that is not very liquid and flexible. If you need money suddenly, surrendering your policy usually means losing your capital.'

He says you can easily replicate the whole life plan by buying term plans for protection and investing the rest yourself. 'A recent study by Providend showed that in fact, it might be better doing just that.'

What if you are not a savvy investor? You can simply invest in a balanced fund, which is made up of bonds and stocks, or buy Singapore government bonds, Mr Tan says.

Assuming that the return on your investment is 5 per cent a year, the total 'sum assured' and 'surrender value' of the term plan is generally close to, and most of the time, better than that of whole life plans.

If the return on investment is 7 per cent, the total 'sum assured' and 'surrender value' of the term plan will beat those of whole life insurance throughout the period of cover.

Surrender value is the value of the investments at the point of their sale. For term plans, total sum assured is the value of the investments plus the $100,000 cover.

Mr Tan makes one other point to The Sunday Times on why term policies are the way to go. If you want to provide $3,000 per month for your family for 20 years in the event of your death, you will need about $600,000 cover.

If you are a 35-year-old male and non-smoker, you would have to pay $10,986 per year for a whole life (participating) policy, or $6,222 for a whole life (non-participating) one. In contrast, the premium is just $1,605 for a term policy.

In participating policies, you get bonuses from investment gains. That is not the case in non-participating policies. 'How many people can afford the kind of premiums charged in whole life policies? No wonder Singaporeans are under-insured! By using term, everyone can be covered effectively,' he says.

United States personal finance guru, Ms Suze Orman, strongly supports the idea of term insurance vis-a-vis whole life. In an interview last year with O, Oprah Winfrey's magazine, Ms Orman said: 'Keep it simple and buy term insurance; it's good only for a specific number of years and then expires.

'That's okay - life insurance wasn't meant to be permanent; it's there to protect your family before you've had a chance to accumulate enough funds through investments and
savings to do so.'

Servicing home loans: Will your finances hold up?

Property fever seems to be heading back, as reflected also by the crowds flocking to property launches in recent months. Against this backdrop, are you planning to buy a property or upgrade your home? If so, first ask yourself three important questions, say financial planners and real-estate agents:

• Given your present budget, how much of a jump in monthly mortgage repayments can you tolerate, given that interest rates are expected to rise in the months and years ahead?
• Do you know how a slew of Central Provident Fund (CPF) changes which are being phased in will shrink your funds available for servicing a mortgage?
• As economic cycles get shorter, are you likely to be able to service your mortgage in the next downturn?Chances are, you have not considered these matters, say real estate agents and financial planners.

Says Mr Eric Cheng, a group director of PropNex, the largest realtor in Singapore: 'I tell you, most people stretch themselves to the maximum.'

Rising interest rates

Mr Cheng ventures: 'In years to come, the interest rate will surely go up to 4 per cent from the present 1.2 per cent for the first year of a mortgage. Home buyers should set aside a buffer.'

In the 1990s, interest rates ranged largely between 5 and 6 per cent - levels which would cause many home owners' present budgets to come under great strain. Banks are giving out loans based on repayments of up to 40 per cent of one's net income.

'That's a lot,' says Mr Cheng. 'If a couple is earning $5,000 gross a month, after deducting CPF contribution, car maintenance and mortgage, there's nothing left. What if the interest rate goes up to 4 per cent?'

'I think Singaporeans should set aside only 20 per cent of their net income for property.'

To get an idea of the impact of a higher interest rate, consider a loan of $500,000 with an interest rate of 1 per cent a year. The monthly repayment is $1,884. If the interest rate is 5 per cent, the repayment shoots up to $2,922.

Says Mr William Cai, a director of Frontier Wealth Management: 'Some of my clients' finances are not going to be able to take a sharp rise in interest rates. They won't be able to meet their other financial objectives such as saving for their children's education.'

A couple, for example, earning $9,000 in gross income now pays about $3,000 in mortgage instalment for a $800,000 loan through their CPF savings. If interest rates go up to 6 per cent, the instalment rises to $4,668. It would be tough for them to achieve their goal of retiring by age 60 with $5,000 a month to spend in retirement, calculates Mr Cai.

Not only are many home buyers failing to factor in a higher interest rate in their budget, they are also counting on two incomes to service the mortgage, notes Mr Cheng. He cites the example of a client whom he ended up advising against buying a landed property. 'The wife was working on a contract basis and it expired in two years time. I asked: What if the contract is not renewed?'

Limit on CPF withdrawal

Most home buyers are not familiar with a rule introduced in 2002 by the CPF Board which limits the amount of CPF savings they can withdraw to service their mortgage. Last year, the limit was calculated as 150 per cent of the property's valuation or purchase price, whichever is lower.

For properties bought from Jan 1 this year, the CPF limit has gone down to 144 per cent. The limit declines by 6 percentage points every year until it hits 120 per cent in 2008. Once you have used up the pre-determined amount of CPF, you have to pay your monthly mortgage instalment entirely with cash.

Consider a tough scenario: Assuming an average interest rate of 7 per cent and a property valued at $500,000 bought in 2008, the CPF limit would be reached within 17 years, calculates chartered financial consultant Leong Sze Hian. That is just a little beyond the mid-point of a typical 30-year loan. Imagine having to pay your monthly mortgage instalment entirely with cash for the remaining 13 years.

Many people upgrade or downgrade their homes along the way. The new CPF limit prevailing in that year will also affect them. 'In fact, every time you refinance your mortgage, that year's limit will apply to you too,' warns Mr Leong.

A study done two years ago on the CPF changes by the National University of Singapore's Department of Real Estate concluded: It is necessary to boost home buyers' awareness of the risks they face, and people have to downscale their property aspirations.

There are yet other CPF changes that you must take into account when deciding on your budget for buying a home. Ms Gan Poh Neo, an associate lecturer in financial planning at two local institutes, points out that the CPF contribution ceiling is being reduced from $6,000 to $4,500 by January 2006. In a nutshell, your employer will be contributing less every month to your CPF account.

Secondly, the percentage contribution to your CPF Ordinary Account has shrunk since last year and, for older workers, will shrink some more in the next two years.

Thirdly, the minimum sum - the amount of money you must set aside for retirement spending in the CPF account - is being increased every year by $4,000. This will affect the CPF savings available for monthly withdrawal for many people. So check with your bank or the CPF Board first on how much is available for withdrawal.

Says Ms Gan: 'The bottom line is that people must not budget their mortgage repayments down to the last dollar. A safety margin is needed.'

Parking your dollars in endowment policies: Does it make sense?

At first brush, DBS Bank's 'durian' looked like an irresistible buy.

In late June, the bank launched its so-called G22 endowment policy, using the durian as its logo. Unlike durian sellers, the bank did not sit around and wait for customers to come by and sniff its goodies. Instead, among other things, its sales force hawked the 'durian' to passers-by and customers at many branches. As a result, more than $300 million worth of G22 policies were sold in about six weeks.

The customers probably considered the 'durian' attractive enough - especially when compared with fixed deposits - but they apparently did not realise that four other similar products are, well, tastier.

G22's return is 2.52 per cent a year compounded, which trails the return of between 3.4 per cent and 3.6 per cent offered by other plans offered by NTUC Income and some banks.

It works like a typical endowment policy: You put down a lump sum and you get life insurance cover as well over a defined period of time.

The key difference: your gains are guaranteed.

Here is a guide to evaluating such policies to help you locate the tastiest 'durian' next time:

Lock-in Period

Guaranteed endowment policies require you to stay invested for a long period. That is something you have to bear foremost in mind. For example, it is 10 years for the NTUC Income Capital Plus policy and eight years for DBS' G22 product. If you quit before the maturity period, you get lower returns. Worse, if you need the money back in the initial years, what you get back may be less than what you had put in.

Says business consultant Lim Koon Hock, 49: 'I really don't like the feeling of being stuck for 10 years. 'Anything could happen during that period. The world is changing too quickly and economic cycles may be getting shorter.'

Mr Simon Liew, an investment strategist with Frontier Wealth Management, says that if you have such a long investment horizon, you should consider instruments which are riskier but have the potential for juicier returns. With a longer time horizon, you are less likely to be under pressure to sell should the markets head down for a while. Says Mr Liew: 'We are in the early stage of an economic recovery. The trend is up and we have maybe another four or five good years. I think to get 8 per cent a year is not difficult. The downside is quite low for a long-term investor.' He recommends funds that invest in stocks in a spread of Asian markets.

Effective Return

Total return is one thing, the effective return on a per-year basis is another thing. The G22 durian guarantees a return of 22 per cent after eight years. Some policies guarantee a return of around 40 per cent after 10 years.

'When the return is presented as a 40 per cent gain, it sounds like a lot,' says Associate Professor Benedict Koh, a co-author of the book Personal Financial Planning. 'Most people don't know how to compute it, but on a yearly basis the rate is only around 3.4 per cent. This is slow growth.'

Product sellers would state the annual rate but it will be in smaller print in advertisements and brochures. If the returns look good now, they may not be so in future when other instruments offer better returns.

'Interest rates are expected to rise, I would not want to lock myself into present low rates,' says polytechnic lecturer Gerard Francis, 44.

Prof Koh, who teaches at the Singapore Management University, agrees: 'We will lag behind US rates but we will track the US rates and trend up.'

But exactly how high rates will rise and when, no one really knows.

Risk Appetite

There are people who won't take risks at all, and they are happy to lock up their money in fixed deposits for a year, two years, even three years, according to Ms Lisa Lee, head of financial advisory at Phillip Securities. For such people, guaranteed endowment policies will give a better return than fixed deposits without taking on extra risks. But generally, the number of such people is declining, compared to a few years ago when the economy and financial markets were uncertain or falling, says Ms Lee.

That is until a catchy and aggressive marketing campaign comes around.

For people who are looking for a regular stream of income, most guaranteed policies will not meet their needs since the payout comes only at the end of the maturity period.

An exception is the G22 policy which hands out some money at the end of years two, four, six and eight.

For Good Measure

In evaluating an investment possibility, you would do well to compare it with similar products. Compared with fixed deposits, guaranteed endowment policies come out looking attractive.

The endowment policy with the shortest tenure is an offering launched a few days ago by Overseas Assurance Corporation, a unit of OCBC Bank. The policy's return is 1.35 per cent a year compared to 0.875 per cent offered by banks for two-year fixed deposits of below $50,000. There are no eight-year or 10-year fixed deposit tenures to compare similarly long-dated endowment policies with.

For such tenures, Prof Koh would compare endowment policies with Singapore Government Securities, which can be bought by retail investors through Fundsupermart.com. These are bonds that come with various tenors, including 10 years.

At 3.4 per cent, the bonds' 10-year yields are comparable to 10-year endowment policies - and the interest payments and capital are guaranteed by the Government. The bonds also offer income tax savings if bought through your Special Retirement Scheme (SRS) account. Similarly, if you buy endowment policies through your SRS, the purchase amount - subject to a cap - will be deducted from your taxable income for the year, which means that you enjoy tax savings.

But unlike the endowment policies, Government bonds do not come with insurance protection. The payout is 150 per cent of your investment should you die or suffer total permanent disability.

Do not depend on your CPF

CPF, a uniquely "Singaporean" savings plan for use in our elderly years.

CPF is "useful" but its usage is complicated. It is getting more complicated due to recent changes:

• Minimum Sum Draw-Down Age (DDA) will be raised to 65 by the year 2018, meaning you can only withdraw your CPF money from age 65 onwards
• Compulsory purchase of longevity insurance, in other words, forced buying of a life annuity
• Medisave Minimum Sum (MMS) raised to $28,500
• CPF Minimum Sum (CMS) will be raised to $120,000 in 2013, meaning you can only withdraw the balance of your Ordinary Account (OA) and Special Account (SA) less CMS and MMS when you reach age 55.

CPF is mainly used for retirement when we have retired. It can also be used for housing and education loans. Because the use of CPF is subjected to rules, meaning you do not have much control over it, thus it is a good idea to "forget" about CPF when you are doing your investment and retirement planning. Take it that whatever CPF gives is a bonus.

To "forget" your CPF means that your actual take home pay (salary minus CPF contribution) every month is your actual salary (AS), so save and plan using this figure. For example, you need to set aside at least 20% of AS for your savings (you have your own private CPF!)

If you intend to purchase a house or use the money for education for your kids, set aside a bit more from AS to save up to buy a house or education. Do not depend on your CPF for housing and education.

However, do not completely ignore the money in your CPF. You still need to make the money in your OA and SA "work". Invest the balances in your OA and SA in investments which give higher returns than the default returns. That is, more than 2.5% for OA and more than 4.0% for SA.

Pay yourself first

To be able to have money to invest or do something you want, you must first have money.

So the most basic strategy is you must pay yourself first. When you get your monthly salary/wage, you MUST first pay yourself. Ignore the credit bills you have, the many utility bills, etc. You MUST pay yourself first. The idea is that if you do not pay yourself first, you most likely end up with not paying yourself at all at the end of the day.

How much to pay yourself? The basic guideline is 10% of your take home pay. If you are comfortable with it, you can increase this amount. Put this 10% into a separate bank account from your normal checking or take home pay account. Let's call this separate bank account your emergency cash account. You cannot mix your emergency cash account with your checking account. When you do this, your emergency cash account will grow every month.

To make the money work in your emergency account, find a bank account which pays a good interest rate. A good choice is the Cash Fund from Fundsupermart. It has an interest rate of roughly the SIBID (Singapore Interbank Bid Rate) less charges, which is roughly equivalent to the current fixed deposit rate. The Cash Fund from Fundsupermart is not exactly a bank account but it acts like one, though it takes 2-3 days for a withdrawal transaction to be completed.

Keep building your emergency cash account until you have enough to survive at least 6 months (or more, up to you, not less) without working. Then you can start building money on your investment account.

An example to illustrate:

Assuming you earn $2000 a month, your take home pay will be $1600 (80% of $2000 ). You need to pay yourself $160 (10% of $1600). Put this $160 into your emergency cash account every month.

Assuming your monthly expenses is the other 90%, which is $1440. You need $8640 ($1440 x 6) for your emergency cash account. You need to accumulate your emergency cash account until you have $8640 before you can start your investment account.

If you receive bonuses, AWS, etc, consider leaving some portion of them into your emergency cash account so that it can grow faster.

If you can reduce your expenses, you can increase your contribution, for example 15% or even 20%.

If you have credit debts to pay, you must still contribute at least 10% to your emergency cash account first. You can pay less towards your debts.

An important note, DO NOT EVER use your emergency cash account. Its role is to give you financial security and your mind some peace.