Our Insurance and Investment Plan for Baby Ong

TLDR

1. Must buy hospitalization insurance/integrated shield plan

2. BTIR (Buy Term, Invest the Rest)

3. Personally, I believe that CI/ECI riders are unnecessary

4. Forget about Endowment/ILP, use one of the robo-advisors or simply invest yourself

We wanted to get hospitalization insurance/integrated shield plan for Baby Ong as we deemed that to be the most important insurance one should get given the high cost of healthcare in Singapore.

The agent came with a bunch of other recommendations such as whole life, endowment and ILP. His rationale of getting a whole life is because it is the "cheapest" rate/premium one can get at age 0/1, pay 25 years get lifetime coverage, and cash value upon maturity. Endowment and ILP are to save up/invest for the baby education/university fees. I didn't buy it (both his recommendations and the policy). lol.

Let's just run through some numbers using the Aviva PI/product summary as a reference. The whole life insurance costs $1,408.50 and the early CI rider takes up the majority of the remaining premium at $732 per year. In my opinion, there's no need to get $300k ECI for the baby. CI is to cover the possible loss of income so that money will be the least of one's concern when one is recovering from it. Money is definitely not a problem for the baby. We would rather self-insure by saving the premium and investing them to grow our portfolio such that it will be big enough for us not to worry about money too.

These are the breakdown of the surrender/cash value for the whole life policy at different years before year 25 where the premium is no longer required.

Let's just assume using the best-case scenario of 4.75% investment return for the surrender/cash value of the policy. Compare the above with a BTIR (Buy Term, Invest the Rest) approach with a much higher coverage - $1 million.

The above is the premium breakdown for Tokio Marine $1 million term insurance with the various riders. Anyway, the one we got for Baby Ong is with TPD and a $100k CI rider because the system insisted that there must be a CI rider tied to it costs $385 per year.

A simple spreadsheet forecast will show the difference in the total premium paid (~$10k). If we were to invest the difference in premium (the remaining premium after 25 years for the term insurance will be paid out from the portfolio), our portfolio will grow to a sum larger than the surrender/cash value of the whole life policy with an assumption of 4.75%.

Take a look at the difference if we assume our investment will grow at 7% instead. Not forgetting if one were to surrender the whole life insurance to get the cash value, the coverage will cease while we can cash out anytime from the portfolio. It doesn't make sense to buy whole life insurance for the cash value. Play around with the spreadsheet and forecast them yourself - Whole Life vs Term + Invest (For Baby)

Had we simply purchase what was recommended by the agent, the difference in terms of total premium paid (100% more) and portfolio would have been much greater! Having said that, it is not an apple to apple comparison given that the whole life has CI and ECI coverage and that's why I only compared using the whole life premium. Anyway, do take a look at this long article written by Kyith from Investment Moat too - The True Reason to Choose Term Life Insurance Over Whole Life.

I will not recommend Endowment and ILP as a form of savings/investment for your baby's education fund. An endowment plan is simply too conservative for the baby with a long investment horizon (20+ years). ILP has extremely high fees. The worst part is both of them require you to commit for a long period of time. On the other hand, if you were to invest yourself or if you have no knowledge on how to invest, simply use any of the robo-advisors, you will have the flexibility to stop investing or cash out at any point in time without any penalty. I would say endowment was a popular choice for our parents' era where investing was much harder/challenging but it shouldn't be the case nowadays. There are much better alternatives.

Based on the above, we will be getting Baby Ong the $1 million term insurance and will be investing the difference of $100 per month into StashAway 36% risk index portfolio. Although it is the riskiest portfolio, we find it to be relatively safe across 20 years. It simply means there is a 1% chance at any given year that the portfolio might lose >=36% of the portfolio. You can read more about the risk index here.

There's a 50% chance the portfolio might grow to $101k in 20 years time, 75% chance it will be $70k or 95% chance it will be just $41k considering the capital is just $24k. Unfortunately, we will only know the actual performance 20 years later.

Our StashAway 22% Risk Index Cash Portfolio

My StashAway 36% Risk Index SRS Portfolio

Why StashAway? I really like their portfolio. It is performing pretty well (notice the XIRR for both portfolios are double-digits as compared to the conservative 7% I used in the forecast above) and relatively safe (lower volatility and the max dropdown are within the respective risk index). Having said that, I had my reservation previously when I first found out about the 40% estate tax issue if one is to invest in the US market - Estate Tax - The Issue Not Addressed By Some Robo Advisors. 

However, given that they have openly indicated that a joint account is in the pipeline, I feel more confident that our investment will not be taxed if anything happens to me once I can set up the joint account with CZM. With that, we are now more comfortable with investing more money through StashAway.

Our Insurance and Investment Plan for Baby Ong:

1. Great Eastern GREAT SupremeHealth P PLUS + GREAT TotalCare Elite-P

2. Tokio Marine $1 million Term Insurance with TPD and $100 CI

3. $100 per month investment to StashAway 36% Risk Index Portfolio

In my opinion, if you are spending too much money on various insurance be it for yourself or your children, you will not be able to invest for your retirement. Instead, you will be helping the agent to retire. lol.

Anyway, if you are interested in signing up for StashAway, do use our referral link - KPO and CZM Referral Link. You will get $10,000 free management fees for 6 months and we will get $16!

You might be interested in previous months update too:

- StashAway Withholding Tax Reimbursement FY 2019

- StashAway - December 2020 - $56,721.26

- StashAway - January 2021 - $59,991.38

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Our Bad Experience with Manulife ReadyMummy

Insurance is all about transferring risk to another party. Our recent experience tells us again that it is simply better to self insure...

In our previous posts - 1 Month as a Parent and Mount Alvernia Delivery & Phototherapy Charges, we mentioned that our baby had severe jaundice (290+ level) and had to be admitted for phototherapy 6 days after she was born. 

Long story short, we tried to claim the phototherapy treatment from the ReadyMummy policy but was rejected. To be honest, the amount that can be claimed was supposedly just $100 which is a relatively small amount considering the phototherapy treatment cost $967.92 while the ReadyMummy premium cost $798.00. What really pisses me off was the lack of transparency in the way Manulife promotes/markets ReadyMummy and the lack of product knowledge from this agent.

I checked with him on the day our baby got admitted for phototherapy. Sounds like an easy/straightforward claim right? 

I opted for express checkout (sounds like a hotel right. lol) so it took some time before I received the hospital bills. When it finally arrived, I sent it to him and all of a sudden, he is asking for a doctor's memo. He should have mentioned it earlier but regardless, I got the doctor's memo and sent it to him.

One fine day, I received the rejected claim letter. The agent is so cui (lousy) that he made no effort in communicating the result of the claim to me. I had to find out from the slow mail while he would have received an email. The reason for rejecting it was ridiculous! Apparently, it was not severe enough because Baby Ong was admitted for less than 3 days. Why would the severity be determined by the number of days admitted? Regardless, I went to their website, brochure and even the documents (e.g. product summary) my agent sent me previously but I did not find the minimum 3 days being stated/mentioned anywhere.

He responded that he will appeal only after I confronted him. Shouldn't the approach be him informing me that the claim has been rejected and proceeding to appeal for me?

Anyway, the appeal failed and this was the response I got. It was stated in the policy document which we had to download separately in another email from Manulife. Even the agent said that Manulife was being misleading by not indicating this clause in the product summary.

When we buy insurance, we do not want to find out how good the policy is or to make any claim. To be fair, the Manulife ReadyMummy plan has many other coverages too (on paper and maybe possibly other hidden T&Cs) and it is not right for us to say that it is a bad policy simply based on the above but it was really a bad experience we had to go through. Will we buy this policy if we were to have a second child or any Manulife policy? Definitely not. Is it fair to expect the agent to be well versed in the product he/she is selling? I certainly think so.

End of the day, is it agent cui or policy cui? ¯\_(ツ)_/¯

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Whole Life Insurance - Do We Really Need Them?

A few weeks ago, a friend approached me and asked for my advice on a whole life insurance plan that his agent tried to sell him. He is not finance/investment savvy so as much as I would like to tell him to "buy term insurance and invest the rest", it is definitely not something he is going to be comfortable with.

Another reason why he is more interested in whole life as compared to term insurance is that he wants the cash value that comes with it. Majority of the people want something back after paying all those premium for many years. Anyway, I got him to send me the policy/projection document.

The policy is Family3 by Great Eastern. My friend will have to pay a $6,000 annual premium for the next 15 years and the minimum sum assured (death benefit) is $87,745. Once the premium term ends, he will be getting a guaranteed payout (2% of the sum assured) for the rest of his life.

Death Benefit

Surrender Value

Illustrated Yield upon surrender based on non-guaranteed projection

Survival Benefits + Cash Bonus

Anyway, I copied the above tables in the policy document to a spreadsheet for easy reference and comparison. When I looked at the illustrated yield upon surrendering the policy, the return is simply poor. A random thought then came into my mind - can we use CPF SA as a substitute for whole life insurance?

We can answer this question by looking at the concerns whole life insurance can address:
- Leaving a sum of money behind for the family/dependants upon death
- Getting back some of the money/premium after X number of years (term insurance cannot fulfil)

Anyway, I went ahead and projected what my friend will be getting if he were to use the whole life insurance premium to top up his CPF SA instead. It is worth noting that I have excluded the tax savings one can get when topping up their CPF SA for ease of computation/comparison too. You can read this to find out more - CPF RSTU - Is It Worth It?

For the benefit of the doubt, I will also be using the higher non-guaranteed (4.35%) projection for all comparison too.

Upon Death

From the first year to year 12/13, the whole life insurance provides better coverage but after the crossover point (year 12/13), one can expect to leave behind more money simply by topping up their CPF SA. In my opinion, the risk can be easily mitigated by purchasing a term insurance at a fraction of the cost for similar/higher coverage and cancelling it after year 12/13 (totally optional) to ensure death coverage throughout. This particular insurance is also interesting because the insured person will receive an annual payout as part of his survival benefit (similarly, there are both guaranteed and non-guaranteed). However, even after adding all the survival benefit, CPF SA still provides a higher guaranteed return/coverage upon death.

If you have been influenced by fake news previously, thinking that one will never get back their CPF even upon death, read this - What happens to your CPF savings when you pass away?

Upon Surrendering Policy

Now if you plan to buy a whole life insurance with the intention of surrendering it eventually to get the cash value back, please don't. You will be losing money almost all the way because the comparison uses the "best" case non-guaranteed scenario.

This may/may not be true for the other whole life insurance but I am pretty sure the return will be higher with CPF. Having said that, don't take my words for it, go ahead and calculate/project it yourself. In the end, my friend decided not to get the whole life insurance too.

So what are your thoughts? Do we really need whole life insurance?

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Never Ever Buy Investment-Linked Policy (ILP)

What is an Investment-linked Insurance Policy (ILP)?

Investment-linked insurance policies (ILPs) have both life insurance and investment components. Your premiums are used to pay for units in investment–linked sub-fund(s) of your choice. Some of the units you buy are then sold to pay for insurance and other charges, while the rest remain invested.

The above definition is taken from MoneySense, you can find out more here. Interestingly, if you try to google "ILP", this will be the search result and I highly recommend that you read it - The Ugly Truths Behind Investment-Linked Policies by Dollars and Sense.

Unfortunately, CZM was a victim too. She purchased it when she was young and naive at the age of 19 introduced by the family "trusted" agent. Fast forward 7.5 years later, she finally saw her "investment" break even... I will not explain or go into the details why ILP is a scam bad (KPO cannot be so extreme) instead I will just show you the numbers (read the article by Dollars and Sense for the details/reasonings).

CZM started the policy in February 2010 with a monthly GIRO of $150. Till date, the total premium paid is $13,500 and the surrender value is $13,676.81.

Total number of payments: 13,500 / 150 = 90 months (7.5 years)

Investment gain/profit: 13,676.81 - 13,500 = $176.81

Simple interest on the gain/profit = 176.81 / 13,500 = 1.31%

However, using an investment calculator, one will be able to calculate the annual rate of return which is 0.351% in this case. If you are thinking "not too bad what, better interest than banks", people dun invest to beat bank interest and that is way lower than inflation (which means you become poorer over time)!

As you can see from the above graph on Singapore core inflation rate taken from TradingEconomics, the average rate of inflation has been between 1% - 2%. What could CZM have done to beat the above return?

1. CPF Ordinary Account (2.5%) or Singapore Savings Bonds (7 years - 2.42%)

Simple interest on the gain/profit = 1,315.69 / 13,500 = 9.75%
Difference = (1,315.69 - 176.81) / 176.81 = 644.13%

The interest she can get would be $1,315.69, easily 6 times! Topping up just the OA is not possible, that is why I have also included the Singapore Savings Bonds (SSB). However, SSB has its limitation as well - the minimum investment is $500 and the return varies every month. Investing in SSB monthly is pretty interesting as one will be building up a Bond Ladder to generate a consistent cash flow/passive income very conservatively.

2. CPF Special Account (4.0%)

Simple interest on the gain/profit = 2,169.80 / 13,500 = 16.07%
Difference = (2,169.80 - 176.81) / 176.81 = 1127.19%

The interest she can get would be $2,169.80, easily 11 times and did I mention tax relief too! Of course one may argue that the money is locked up and cannot be withdrawn. That is true to a certain extent but the money is still yours at the end of the day for retirement. Besides, I am just trying to show how bad the ILP returns are.

3. Invest in STI ETF (Dollar Cost Averaging)

Backtesting was quite tedious. I first downloaded all the historical data from Yahoo Finance and research for the most cost-effective regular savings plan. I was choosing between POSB and Maybank (lowest sales charge @ 1% which is the cheapest for investment amount less than $500) but settle for POSB because their FAQs was clearer when I was looking for answers to the fees and breakdown of the investment (no fractional units). You can refer to this article - Which Monthly Investment Plan Is Suitable For You? by Dollars and Sense for more information.

You can refer to my Google Spreadsheet for the results of the backtesting - STI ETF Monthly Regular Savings Backtesting. CZM would be holding 4,315 units of SPDR STI ETF with a total value of $14,325.80 assuming the price of STI ETF is $3.32 and collected a total dividend of $1,939.10.

Simple interest on the gain/profit = 2,764.91 / 13,500 = 20.48%
Difference = (2,764.91 - 176.81) / 176.81 = 1463.77%

The annual rate of return is about 4.995% as compared to the miserable 0.351% >.< In my backtesting, I did not reinvest the dividends. Otherwise, the return would have been easily higher than 5%!

Update on 2017-08-04: A reader has pointed out that one can only invest in NIKKO STI ETF using POSB RSP which I have missed! I have updated the spreadsheet to show the backtesting results for both STI ETF.

Simple interest on the gain/profit = 2,497.78 / 13,500 = 18.50%
Difference = (2,497.78 - 176.81) / 176.81 = 1312.69%

One would have 4,285 units of NIKKO STI ETF and collected a total dividend of $1,343.08. The annual rate of return is about 4.553%.

4. Active Investing in Stocks

Not a good idea if you have no/little knowledge. KPO not going to backtest this as I have no idea how to do it. Imagine if you pick one of the STI components back in 2010 - Noble Group Limited! GG!

Why is the ILP return so low? There are a couple of reasons, first look at what is the underlying "investment" being made:

Notice how large/wide the spread of the bid and offer price is? You buy at $1.627 but sell at $1.572. The moment you buy, you already lost 3.38% ((1.627 - 1.572) / 1.627) of your capital.

Next, we look at what are the "investments" made by the fund - AIM 2035 Fund.

OMG! Do you see what I am seeing?! Not the sales charge and management charge! Look at the top 10 holdings! They are all funds!!! This is a fund of funds and you simply keep getting charge here and there! How to make money?

Last but not least, do you see the car your agent drive? You paid for it partially. lol. Just kidding (partially). I do have friends that are in this industry and not all agents are evil. My definition of evil is recommending you ILP immediately without finding more about your needs. I encountered and scolded one before - he was supposed to be a family "trusted" agent. I called to ask about a life insurance my grandmother purchased for us and he was trying to sell ILP to me -.-" KPO is very defensive when it comes to $$$.

Another of our friend recommended us ILP when CZM was trying to purchase only a hospitalization plan. I asked him to be honest about the commission and he said he would be getting the commission for the next 7 years.

Taken from $1Million Personal Financial Diary

I did a quick search online and found this article by $1Million Personal Financial Diary - Commission Structure of Insurance Agents REVEALED. His article was written in 2010 (could be outdated) but this should be a good enough gauge/estimate. Do you see the low hanging fruit there for all the agents? 45% commission based on the first year premium!

Morals of the story:
1. Insurance and investment should always be separated! You can never get the best of both worlds, separate your wife and girlfriend(s). lol. I am really kidding this time round.
2. Buy term insurance and invest the rest! Dollar cost averaging STI ETF is always a good starting point especially if one has no time to read up and research on stocks.
3. Never ever buy ILP!