Most of us are often not trained to provide financial advice or understand financial planning from the on start. That is why we turn to a financial advisor to provide us so that we can gain clarity to make better financial decisions.

While I often do not hear of financial advisors falling into debts and not coming out of it, or financial advisors going bankrupt, I am not sure if poor financial decisions takes place even among those we least expect from happening.

Here is an article I cam across in the New York Times where a financial planner and author shares his deep shit story of how he lost his house. From this article, we can learn a few things:

1. The ramification of bad financial decisions can be very lasting, and affects the well being of your family, yourself physically and mentally.
2. If you make a bunch of bad decisions, came to terms with them, make sense of them, you can go on and write a book about them.
3. Some financial advisors get into the industry not knowing much about financial planning and through the system teaches them about selling more than anything.
4. Having a nice income makes you fall into the zone where you think you can afford a lot of things.
5. When the crowd is doing a prevailing thing such as making dangerous financial decisions, you tend to irrationally follow the crowd, because it is safer to be with the crowd.
6. Borrowing 100% and not thinking about the terms of the loan and what are the pitfalls.
7. Borrowing against the house to finance their lifestyle.
8. Their lifestyle exploded and on the hindsight, he thinks a lot of that lifestyle can be foregone.
9. Projecting current price growth as the long term average growth.
10. Risk is an arbitrary concept, until you experience it.
11. Evaluate more the consequences of a decision you make rather than the probability of it happening.

I embed the article here for all. I am probably not the guy with the most financial planner friends but have you guys hear similar stories of bad financial decisions made by people that really are in the business of providing these advices?

How a Financial Pro Lost His House

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This week’s The Edge Magazine Personal Wealth discusses that in a 2011 AIA Singapore Nationwide Protection Survey, it highlighted that only one in 10 Singaporeans is deemed to be adequately insured while nearly one in 4 perceived insurance is too costly.

The article interviewed Christopher Tan from Providend, who is a proponent of term insurance. (For a detail understanding of whole life versus term insurance read here.)

Agents have an incentive to sell costly products but not cheap and viable ones

I tend to agree with that. I talked to my friends and this is my conclusion.

I am only adequately insured to the maximum amount I can spared for my insurance agents.

A lot of the folks on the streets have limited understanding on insurance and financial planning. As long as you present a tight story with few loopholes, chances are their limited understanding will work towards the agent and against the prospective clients.

They get taken advantage of when the only products presented are whole life, limited whole life, endowment and ILPs. Only when a client that heard of term insurance highlights this, then the insurance agent tells the client why term insurance is bad.

The insurance agent does 2 things here

1. A good viable alternative was not presented against what the agent tries to sell. Those likely earn a much higher commission.
2. The agent sells the bad points of a good product and does not sell why it is good about it, which is affordability, effective and supplementation.

How can you buy something cheap and useful when it isn’t presenting to you in the first place?

How can an agent sit on a Million Dollar Round Table just by selling cheap budget policies?

We are underinsured because cost of living is going up, but also that the insurance advisory system’s main objective is geared towards filling in insurance agent’s wallet and secondly to make sure the client’s needs are fulfilled.

Limited budget yet cheap alternatives are not illustrated well to clients

So in the article they have a table showing

• AXA Term Protector with TPD benefit for 30 years $500k coverage costing $980 annually, $81 monthly.
• Manulife ManuTerm with TPD benefit for 30 years $500k coverage costing $984 annually, $82 monthly.
• Aviva My Protector with TPD benefit for 30 years $500k coverage costing $1000 annually, $83 monthly.

Now that’s not a good comparison since most limited whole life or whole life bundles with critical illness coverage. Taking my 30 year Asia Life Term Insurance bought while I was 28 years old, a 100k Death, TPD and Critical Illness coverage cost me $50 per month.

Extrapolation of premium doesn’t always work but here if we multiply by 5, a monthly coverage for 500k works out to $250 per month, $3000 per year.

I have a 50k Asia Life Limited whole life that I will pay for 20 years. This cost me $95.00 which is roughly double that of the 100k term life insurance.

Multiply it by 10 and the monthly premiums is $950, $11,400 annually.

Few things here. We are comparing apples to oranges here, but if we talk about fulfilling the objective or providing adequate coverage, the client have to fork out $3000 versus $11,400.

If your job is to make sure that people gain the best coverage with their limited budget the choice is simple. Cheap alternatives are seldom well illustrated to clients.

The president of LIA wants to help by selling Investment Linked Policies!

Here is probably the root of the problem. Even the top dog in insurance companies think that the solution are costly products!

Investment Linked Policies is a product that is a black box construct, not letting you see the inner workings, yet so many way to milk your money.

“As part of AIA Singapore’s key focus to help Singapore Families bridge their underinsurance gap, the AIA Family First series of plans was launched in July 2011 to provide customers with the flexibility of choosing a plan to focus on protection, investment or a tailored combination of both, depending on the individual needs.” says Tan Hak Leh, senior vice-president and CEO of AIA Singapore who is also president of LIA

So the solution to the problem is to sell the family a black box that we do not know the cost, is able to enable the insurance company to milk more recurring costs over products that are easily understood?

If the client have only $5000, selling them a complex product that does many things will still leave them underinsured.

I wonder why they cannot see the light of things.

Will you sell a product to your clients but at the same time dissuade your close friends from buying it?

I always like to finish this discussion that my friend brought it up to me.

He have numerous friends in the insurance advisory business and that they have dissuade him from buying these endowment products, investment linked products.

Now sometimes we need to make a living that’s why we do the things we do, but we always want to keep the loved ones and those we care about from harms way.

People familiar with the air-con industry who are selling air-con themselves fitted their home with Panasonics’ air-con. These are the people dealing with things in and out and they would be able to discern the good from the bullshit.

If insurance advisor is advising their closed ones not to buy such grey products then what does it say about them?

I got a call at work today from my first insurance agent. He thinks it’s a good time to do an annual review of Drizzt’s insurance and investment portfolio.

For those who are new to my blog, you might want to read my insurance philosophy, why I don’t like endowment plans.

Now let me just say that it is absolutely necessary to do this kind of review. Your life, goals, risks and dependents changes so you might need these policies.

My agent knew from past experience that I do my own investments and believe very much in using term life insurance to hedge my risk.

My agent, unlike many new agents (he is experienced with 13 years in the industry) doesn’t believe in ILPs. This is especially so after the great financial crisis in 2007. Many folks who have bought ILPs have seen deep drawdowns in the value put in not to mention high distribution costs.

What he thinks I am missing for my needs

He have been advising me for 2 years and this will be the third year. He finds that it is such a waste for me paying all those premiums and not getting any money back.

He would advise that I purchase either a G10 or G15. Now folks who are not familiar with G10 or G15, I would explain that they are limited whole life plans where you pay 10 to 15 years and then you can stop servicing the policy and would be able to own the coverage.

This is not the first time recommended to me and you can read all about it here where I complain my difficulty in calculating these limited whole life policies.

Now If you are going to convince Drizzt to buy a limited whole life its not going to be that easy since Drizzt is not your normal  gullible client who will likely agree with most points you have presented.

So here are some of the points he highlighted to me why I need these policy.

1. Unlike your investments, when you get bankrupt, you still have your insurance policy to fall back on

What he explained is that, many rich and affluent clients of his still buys endowment policies from him. The main reason is that should they get sued or undergo some form of litigation and get bankrupt, they will still have their insurance policy to fall back on.

I think rather than fall back on, it either means

1. their dependents don’t have to suffer just because their parents faced setbacks
2. that endowments cannot be liquidated to pay for the litigation and the insure will have this to fall back on.

Number 2 is entirely new to me, and I hope other insurance advisor to say this is otherwise.

I think this is very powerful. When you have a client that is savvy, reference to people that you have successfully sold to, are successful and where your client aspires to be at.

Explaining that their “role models” are doing this makes it all the more reason to buy this despite your initial misgivings

2. Leverage on your insurance to do more

Savvy people are always thinking what more they can do to put their money into good use. And the rich loves to leverage.

Say for example the rich wants to divide a sum of 6 million dollars among 5 sons for 1 million each. Dividing it up by giving each son 1 million will result in only 1 million left for the rich man.

With insurance, the rich man can use a portion of his wealth to purchase an insurance that will provide a sum assured divided equally upon death to his sons.

3. Use insurance to prevent your cash from getting depleted

People like Drizzt tend to count their pennies quite a fair bit and usually this argument works best as well with term life insurance versus whole life insurance.

It might be true that you will have a networth of 100k-400k cash. Cancer is one of the big killers in Singapore and if you suffer from it, your 300k coverage might look a lot but you will have to think that should you deploy half of it for treatment and you survived, you cannot work at 100% capacity.

Because of that your income falls or you might need to stop working for some time. Should there be a relapse, you will not have another CI policy to fall back upon.

Possibly this will work on Drizzt since you are playing on his fear of seeing his hard earned assets plunge to nothing.

But Drizzt pose this questions

1. At how much would it be enough to insure against this scenario? how much is really enough?
2. Given that this amount in (1) to be substantial, do we think Limited Whole Life would be able to cover that big of an amount for a average earning family?

4. Diversify because you do not know what life will throw to you

Life is great for a lot of reasons but at some point it will throw a nasty spanner at you. Even if you have a good job now and have a good buffer you really do not know what will happen down the road.

While you will lost a lot of your wealth with an insurance policy it becomes the last line of defense.

So his advice to at least save 10% of your disposable income for this.

I find this argument abit weak:

1. If life were to throw a different spanner at you, you may lose this life insurance policy. At the end of the day, we can argue all day long and still a series of unfortunate will just killed your policy.
2. If 10% of your disposable income comes up to $400, you will only be able to purchase a limited amount for insurance.
3. Saving a very little amount in Limited Whole Life insurance for me do not make much sense when u already have that amount in cash already.

Conclusion

I think the crux of this article is not to teach an insurance agent how to sell it to increase sales, but to think through whether persuasive arguments make sense to you.

At the end of the day, Drizzt is not really savvy in insurance. He just know a little bit more than the average folks in the street. I do take what my insurance agent presented and evaluate at night.

I still find that

1. Limited whole life should not be part of the majority of your insurance due to cost constraint.
2. Cost is a big consideration when choosing which Limited whole life to purchase.

What do you guys think? 4 valid arguments?

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For more write-ups on insurance do take a look at the insurance section.

Yesterday I got a message from an old friend of mine. A friend approached him to introduce Great Eastern Prestige Harvest to him.

This product was introduced as a Single Premium Insurance policy.

Considerations:

1. Premium is USD 90,000.
2. Non-participating. This policy does not earn bonuses from a participating fund from the Insurance company.
3. Denominated in USD. Which means that you are subjected to currency fluctuation risks.
4. Interest Accrued Daily. I am not sure how this matters, but if compounding takes place daily then its definitely a good thing.
5. Sales charge and expense charge. The sales and expense charge is 17.75% of single premium and 8% of single premium additions. The agent quoted that you will only break even at the 8th year.
6. Monthly Insurance Charge. A monthly insurance charge will be deducted from the account value and will vary according to the Net Sum Assured (Sum Assured  – Account Value) and Life Asured’s gender, smoker status, country of residency at inception, age next birthday at the policy anniversary prior to the deduction date at the beginning of each policy month.
7. Guaranteed rate of 3% yield. The yield on this policy is guaranteed to be 3% + 1% per annum that varies.

Drizzt’s opinion:

Personally I really don’t have that much experience with Single Premium Policy. I think other more qualified bloggers or iFAs can advice.

Objective of this policy

My first question to my friend is what is the objective of this policy? Is it more to be meant as savings or insurance.

If its insurance, you will need to evaluate it against

1. Whether Single Premium serves his needs or another insurance instrument is better.
2. Other Single Premium Policies
3. Other Insurance instrument (Limited Whole Life, Term Life Insurance)

If it is for saving money

That’s a lot of savings! Should you invest all  your net worth on a Single Policy?

Firstly, I would like to applaud my friend. That’s a huge sum to invest or save up to. converted to Singapore dollars that is almost SGD 117,000 and a sum that I can hardly come close to.

Goes to show how most of my friends around me tend to be savers.

But the question is how much is this amount as part of his networth?

Would you be comfortable in dumping all your networth into one insurance policy?

Those are the questions only my friend can answer.

Personally, I will not. EVERY INVESTMENT VEHICLE has its upside and downsides.

Capital Guaranteed vs Inflation?

My friend likes this as it is a form of savings. My take is that 3% ain’t shabby at all.

Sure, my dividend stocks yield more than that (Folks can take a look at them at the side.) and on my Dividend Stock Tracker you can see all the prevalent yields of dividend stocks in Singapore.

But do note that if you like me spend some time muddling through and not making much initially, then 3% is really a good long term return without losing anything.

But the question comes into place is that what if inflation hits. Remember that current situation has some parallels to 1970 to 1982 inflationary times.

Back then the interest in your POSB bank is 7-8% alone.

Now imagine USD 90,000 tied up and you earn 3-4% when the bank is offering 7-8% on no risk deposits. You are losing a lot of future spending power!

This 3% is like a bond, which if you lock in for 30 years, means you earn 3% if you die die hold this for 30 years.

In this case, you will be committing to this policy for a long time as well.

A depreciating USD

My friend likes this a lot because the USD is at a low and there are opportunity for it to go up.

I leave this up to you guys who watches currency trends. I am no expert here. But my take is this:

The world is currently contains a lot of nations in debt and the best way to make debts worthless is to inflate the money.

Why pay such a high sales charge and monthly charges?

Ok how much is 17.75% of USD 90k? That’s almost USD16k! Ok I am not sure if this is all the distribution charges but that means when my friend puts in the money, the insurance agent and the company earns 16k within the first few years.

That’s pretty darn good product if you ask me from Great Eastern point of view.

On top off that, there are monthly charges as well.

I do not know the inner workings, but the 3% is on the total premiums paid? if that is the case still ok but if its 3% on (90k – 16k) then this is really a lemon.

Alternative 1: SGS Bonds

This latest yield table is taken from Fundsupermart.com, which you can buy Singapore Government bonds with as little as SGD 1,000 investments.

The considerations of this compared to that Single Premiums are:

1. Capital Guaranteed (provided Singapore don’t collapse) if you hold it for the duration of Years to Maturity.
2. Low cost!The nominal cost you pay for SGS bonds is minute compare to the layered cost of this Single Premium Policy.
3. Still subjected to inflation risks. You are still subjected to inflation for this period. So if you buy one that is 16.15 years to maturity, you are effectively locked in to the yield of 3.11% for this 16.15 years
4. You earn more than break even with the same risk! The single premium breaks even at 8 years. But for SGS Bonds if you put this SGD 117,000 into it for 8 years, at 2.46% for a bond maturing at 8 years, your SGD 117,000 will be SGD 142,000.
5. No insurance component.

Alternative 2: Blue Chip Dividend Stocks or US Dividend Aristocrat

The other alternative I can think of is to invest in a blue chip dividend play like Keppel Corp or Singtel. I written much about investing in Telco stocks here at Investment Moats.

This is not really a strong alternative, since it involves risks

1. Not Capital Guaranteed. Unlike the low risk for SGS bonds, stock prices fluctuate and you have to believe in long term sustainability of a company like Singtel. But then again, Great Eastern can collapse as well. Although the government have mandated mandatory funds from insurance companies to prevent that catastrophe.
2. Potential of Capital Appreciation. A stake in blue chips is believing in the economic growth of Singapore’s biggest companies.
3. A potential growing dividend yield. Currently Singtel yields 4.6%. At a lower sales cost you stand to make much more than the policy. And there is a possibility that dividend will grow with time. Singtel have hike up div by 10% this year. Also note that dividend can be trimmed down as well.
4. Lower cost compared to Single Premium policy.

Alternative to this is that, if he wants to make a play for USD, why not a Dividend Aristocrat that have been increasing dividend for 48 years like Pepsi?

Conclusion

I got to get to work. But my general feel is that savings need not be through an insurance policy. most of the time it is for the ill informed. If my friend reads up on his own I am sure he can achieve great as well.

As usual, not an advisor and hopefully readers can comment where they disagree with me.

Investment Moats is an investment weblog focusing on dividend investing, growing passive income and personal finance. Learn how to easily budget with my envelope budgeting strategy to save money and not overspend.

But I watched these shows upon the recommendation on Mr Tan Kin Lian.

I have voiced my opinion on term life insurance vs whole life insurance in my insurance philosophy.

But these 2 personal finance guru is much more negative then me. It looks like they are on a campaign to kill off Whole Life Insurance.

It pays to know more about Term Life Insurance and Whole Life Insurance. At Investment Moats we try to link you to as much of these as possible.

Dave Ramsey – Worst Insurance product ever

Suze Orman – Cash Value of life insurance

Suze Orman – No true friend will recommend whole life insurance

Dave Ramsey – Is Term Life Insurance bad insurance advice ?

The best person to explain this is possibly Mr Tan Kin Lian.

If I may add a word, a lot of agents mask this saying that they have your best interest at heart and a careful evaluation shows that the policy that they recommend makes sense. Think carefully before making your final decision.

Better yet, ask them if they are churning (which is pretty much useless because they will say they aren’t but its just to make the know that you have an understanding what churning is about)

Hear his explanation @ Mr Tan Kin Lian’s blog >>

If you are an insurance agent would you be enticed by these perks?

Aug 18, 2010

AIA pulls out all stops to plug manpower leak

Hit by staff exodus, insurer goes on ‘retaliation’ drive

By Lorna Tan, Senior Correspondent

INSURER AIA is countering poaching raids by rivals by paying huge bonuses to retain top agents while offering recruits up to 135 per cent of their previous year’s income as a sign-on sweetener paid upfront.

The AIA ‘retaliation’ programme is in response to an exodus of its agents to other insurers. Some experts estimate the company has lost about 700 agents from last year.

The initiatives are aimed at bolstering existing staff numbers while providing incentives for other firms’ agents to jump ship.

The ’sign on’ provision of up to 135 per cent of the previous year’s income is the most dramatic and easily trumps the 30 per cent upfront sign-on bonus offered by some insurers. At most, such insurers cap their incentive handouts at double an agent’s previous annual income.

AIA will also offer an additional benefit of up to 125 per cent of the previous annual income to be paid over the following three years, subject to conditions.
This could mean a recruit gets a total benefit of up to 260 per cent of his previous annual income.

So if an agent earned $300,000 in his previous job, he could stand to collect $780,000 over three years at AIA. But if sales quotas are missed or the agent leaves prematurely, AIA will claw back the benefit. The sign-on incentives are on top of the usual AIA commissions an agent earns from sales.

AIA also aims to stem the exodus of its own agents with a retention package – or ‘golden handcuffs’ – for top performers. A source told The Straits Times that AIA has already paid millions to its top producers to ensure that they stay.

In response, the Monetary Authority of Singapore (MAS) noted that aggressive or excessive poaching of agents by insurers is not a healthy practice.

’This could lead to undesirable consequences such as improper switching of policies and pressure selling by poached agents to fulfil the conditions of their migration,’ said a MAS spokesman.

It urged insurers to get together to exercise self-regulation as they have done in the past.

Improper switching occurs when clients are misled into surrendering a policy, resulting in a financial loss, so the proceeds can be used to buy a new plan with another firm.

The other weapon in AIA’s arsenal is a bonus plan under which agents can earn a $2,000 fee if they successfully refer another agent to the company.

If the recruited agent stays for a year, the agency manager can earn $10,000 over 12 months, subject to sales conditions being met.

AIA declined to provide the exact size of its agency force yesterday but it is believed that the firm now has about 3,300 agents, down from 4,000 last year. Prudential has 3,800 agents and Great Eastern 2,800.

Mr Kenneth Juneau, executive vice-president and senior regional executive and chief executive of AIA Singapore, recently said that it expects to recruit 1,000 agents this year.

Industry observers believe AIA’s strategy is an aggressive initiative designed to beef up its agency force before its initial public offering expected at the end of the year.

In the life insurance industry, big is seen as better as a larger force is expected to bring in higher sales.

The insurers’ aggressive tactics hit the headlines last November when The Straits Times reported that some companies were paying a lump sum upfront, with the total amount capped at the average of an agent’s last two years of income.
But the sign-on offers have shot up since, sparking massive poaching.

MAS added that it expects insurers to have proper recruitment standards to ensure that the agents they appoint are fit and proper. In addition, all insurers are required to have in place policies and procedures to monitor and detect improper switching activities.

’We will not hesitate to take supervisory action against insurers whose agents engage in inappropriate behaviour stemming from aggressive poaching activities,’ said MAS.

It emphasised that the charging of such recruitment and retention packages should be borne by the shareholders’ fund, and not the insurance or participating (par) fund which is accumulated from policyholders’ premiums.
This is because insurers are required under the Insurance Act to ensure that assets of an insurance fund are applied to meet the insurers’ liabilities and expenses only where they are attributable to the fund.

Still, Singapore Insurance Institute president Stanley Jeremiah called for clear regulations to protect the par policyholders from excessive sales incentives, recruitment and retention cost being charged to the par fund.
lorna@sph.com.sg

PERKS FOR RECRUITS

# Sign-on provision of up to 135 per cent of previous year’s income
# Up to 125 per cent of previous year’s income paid over three years

KEEPING TOP AGENTS

# ‘Golden handcuffs’ of millions of dollars paid out as bonuses to top agents to ensure they stay

REFERRAL BONUS

# Agents get $2,000 for successfully introducing new agent to firm $10,000 to agency manager if new agent stays for a year and performs well

As a working adult aged 20-35, some of the hardest financial risks you are likely to face is:What if you are not around leaving your wife and kids to pay for the biggest financial burden, your mortgage.

One can argue that there are other big ticket credits that you can take up such as

1. Student Loans
2. Credit Card Loans
3. Car Loans

But with home prices fluctuating around 400k, a single bread winner will be severely  tested.

The solution known to many

The common solution, which is likely to be sold by most financial advisors you will meet is to take a whole life insurance.

The problem with that is to insure against a 300k mortgage payment, you will require a whole life plan of at least SGD 400 per month.

Folks who do not earn that much or have competing financial priorities will feel pressurized by that figure.

How can a decreasing term life insurance help?

A Decreasing Term Life insurance is a unique life insurance that provides a lump sum payment should the person is hit with death, TPD and in certain cases Critical Illness.

You will need to pay a fixed rate of premium payment for the limited duration that you and the insurer decide to insure against.

The unique thing about a decreasing term compare to a level term is that the sum that you are insured for decreases over time.

Your premium that you paid are uniformed and in this example the premium for 5 years is consistent at $-575.00.

Decreasing term works well here because the risk that you are trying to insure here decreases like the sum assured.

How is the premium like?

Premiums for decreasing term insurance tends to be lower than that of a level term, which in itself is drastically lower than that of a whole life insurance with cash value.

For a rough estimation take a look at the figures compiled by Mr Tan Kin Lian here:

For example, a male aged 30 can insure for $300,000 for 25 years by paying an annual premium of (say) $400 per month for a whole life plan.

If this person buys a decreasing term insurance, the annual premium can be drastically lower @ almost SGD$28 per month. (Note: the actual premium is likely to be lower, if you ask for competitive quotes from several companies).

A note that even if you don’t get a decreasing term (which is 35% to 60% that of a level term), buying a level term for 30 years will come up to SGD$76 per month. That’s not too high as well.

But a decreasing term will not have any cash value!

You have to be clear about the objective of a decreasing term life insurance. It is to ensure your family is able to pay off a mortgage or business for example.

If your objectives is to save for retirement or other purposes, then I would suggest you save on your own or have a separate portfolio of investments or insurance for that.

At the end of the day, we are looking for a low cost and if you compare the premiums paid, for the same amount of coverage, I believe the valued decision is with a decreasing term life insurance.

A Note on HPS (Home Protection Scheme)

If you purchase a HDB flat, either from HDB, or from resale market, you could purchase HPS (Home Protection Scheme) from CPF board by using your CPF. You could purchase from private insurance companies as well.

It is compulsory for HDB owners if you are planning to use any part of CPF

So how much should you be insured under HPS? Your share of the HPS cover should at least match the proportion of the monthly housing installment which is payable with your CPF savings and/or cash.

If you are the only person paying the monthly housing installments, you should be insured for 100% of the loan.

If you are paying 80% of the monthly housing installments, and your co-owner the remaining 20%, you should be insured for 80% of the loan and your co-owner, 20%.

Example:
Monthly housing instalment = $ 1,500. You are using $1,000 from your CPF and $200 cash, while your co-owner is paying $300 from her CPF to service the loan.
Your share of the cover should be at least:

$1,200 / $1,500 x 100% = 80%

Your co-owner’s share of the cover should be at least:

$300 / $1,500 x 100% = 20%

Note: The total share of the cover per household should add up to at least 100%.

The premium is calculated based on the following factors:
- Outstanding housing loan on the flat
- Loan repayment period
- Type of loan (concessionary or market rate)
- Sex and age of the member

Premiums are generally higher for loans of larger amounts or longer repayment periods. The premiums would be lower for younger persons and females.

Summary

It would come as a surprise to many that the cost to insure against huge risk like mortgage loans and the like is actually pretty small.

These are the plans that your advisor seldom talk to you about and it pays to be a well informed consumer.

That is usually bought during NS time to insure for something, that something you are not sure off since you are 18 and you really don’t know much about insurance.

Now come late adult hood, i hear alot of forumers and friends who wants to cancel this policy.

The recent move by Aviva to upgrade those existing policy holders who have not insured up to SGD 200,000 seems to increase the confusion.

I was insured under this plan for SGD 62,000 paying SGD 6.40 per month for the premiums.

What does it cover actually?

In short this is your typical Death, TPD (NO CRITICAL ILLNESS COVERAGE) + Personal Accident Plan

The most basic of this plan covers the following:

1. Death due to illness for the sum assured you paid for
2. Total Permanent Disablement (TPD) for 120% of the sum assured you paid for
3. Death due to non-SAF related accident for sum assured you paid for + SGD25,000
4. Extra Death Benefit of up to SGD100,000 more for Death Directly due to SAF training or during SAF occupational activities including Ops Ready In-camp Training for sum assured plus extra 100% of sum assured
5. TPD due to accident for 120% of sum assured plus SGD 25,000
6. Accidental Total and Permanent Dismemberment

This policy covers till 65 or if you push it 70 years old. That is normally retirement age. What this policy does is to insure that should you pass away or be dismembered during your working life when your dependents most depended on you, they can take this sum assured and continue with their lives.

In summary, if you pass away from illness, or gets permanent dismembered due to illness you get to claim. Note that permanent dismembered normally means you are incapacitated until quite bad, so don’t get the impression you can claim easily. Personal accident due to accident outside SAF is covered and during NS also covered. Lets be sensible here, this is after all termed SAF Group insurance.

How probable does these things happen?

I don’t have statistics here, but with the advancement of medical science, the life span of humans have increase a fair bit.

The likelihood that both of these cases happening is there, but its not high if you take a sample group of people of the same age.

Why is the premiums so cheap compare to what my insurance agent sells?

One of the main reasons it is so cheap is because it does not cover critical illness (CI). We have to do an apple to apple comparison.

I have a 100k Term from Asia Life Costing me SGD49.00 per month covering Death, TPD and Critical illness.

In contrast to the 100k SAF Group Insurance here  it will cost me SGD12.80 per month.

The difference is SGD 36.20. That is perhaps the cost of the Critical illness coverage alone.The Critical illness covers major illnesses that we are FAR MORE likely to get before the age of 65 years old yet might not kill us.

So the probability of critical illness happening is much higher, thus it is more expensive because it is likely the insurer pays out more of this than death and TPD.

A note to all is that alot of ILPs sold by insurance agents are typically without CI and they sell it as if its a plan that is cheap yet you can focus on your investments. Always ask if CI is included.

If you compare the same plan against Whole Life and Limited Whole Life, this one seems even cheaper.

By my estimation, my Asia Life 20 year Limited Whole Life for 100k would have come up to SGD 180 dollars per month.This amount is 4 times that of my Asia Life Term plan that covers the same thing. We don’t even need to compare it to the SAF term plan because you can be insured up to almost 18 times (read 1.8 mil) for the same amount paid.

Do note that Whole Life insurance has cash value so you are essentially getting something back. For more analysis and my views of Whole Life vs Term insurance take a look at my Insurance Philosophy here.

Why do Aviva wants us to upgrade?

There can be alot of reasons:

1. The coverage of these people are too low. With the standard of living it is advisable to upgrade so that the dependency really won’t be left in a lurch when something happens.
2. Operational move. The lowest plan now for SAF Group insurance is SGD100,000. So alot of us is on like SGD50,000
3. Greed. They see this as a move to get more of us to increase their cash base.
4. Strategic. They changed the terms and conditions of some of these categories, so they want us to resign and screw us over.

For number 4, do take a look at the terms and conditions carefully. The shitty situation for most of us is that we do not have the original one! that is like 10 years ago!

For the optimistic people, i believe it should be no 1 that is the main reason but with capitalism i got a feeling its No 3.

What is the difference between group insurance and normal ones?

To put it simply here is the definition of group insurance from wiki:

Group insurance is a health care coverage plan in which individual employees or members are included under one ‘master policy’ owned by their employers. Because the group insurance plan has so many contributors, the policy often provides coverage for more services at a much lower cost per participant. Group insurance may be provided by other organizations besides for-profit companies. Labor unions, churches and other service groups can also obtain group insurance for recognized members and possibly their dependents.

The main thing is that since the terms are negotiated as a collective, premiums tend to be cheaper. However the most important thing to note is that should you leave the collective, you cannot be covered under it.

Is this upgrade going to be more expensive?

Well its hard to say. I can only calculate based on how much i paid.

So for 1k of my existing coverage, it cost SGD 6.40 / 62k = $0.103 per 1k coverage.

With the new coverage and premiums, it will cost SGD 25.80 / 200k = $0.129 per 1k coverage.

I think i am paying more. The initial premiums on my 62k coverage was $8. And on that premium this upgrade is cheaper.

So in summary i am paying more. But i feel its more worth it if i don’t have to go through additional underwriting.

If i have pre-existing condition will I need to get underwritten again?

What Aviva states is that you should not need to underwrite for any new illness. However, all pre-existing conditions during your initial policy that is excluded will still be in force. You must fall within the eligible age limit and still be an NS men. If you were rejected from this policy in the past, i’m afraid there is no good news for you here.

If you are suffering from something after getting the initial policy and there is no need to underwrite again then its worthwhile to get this upgrade for greater coverage.

The SAF Insurance Rebate

Every year should the payout by aviva be less than that of the premiums paid, Aviva can choose to return the premiums to the customer.

The SAF Group Term Life (GTL) Insurance Scheme is a term life and personal accident scheme that provides enhanced protection for you and your family. IT provides 24 hours coverage world wide against unfortunate incidents that may happen whether you are performing your military duties or at leisure (and out of camp). Besides insurance coverage at afforable rates, insured member can look forward to premium rebate in good years.

We are pleased to announce that current rebate will cover the 18 moth period from Apr to Sep 07 (6 month period) and from Oct 07 to Sep 08 (full policy year). The total rebate amount stated below will be credited to your bank account end May 09

$17.78 (Rebate Percentage = 14.25%)

They have been returning steadily to me so my actual insurance cost is not SGD 6.40 per month but lower than that.

This kicker should enable your premium paid to be even lower than other private term plans covering the same coverage.

Conclusion

All in all, i think this is a like for like upgrade. The possibility of you claiming it is low, but the rebate and perhaps upgrade without underwriting is the advantage there.