The Life Insurance Conundrum

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Life insurance is such a conundrum! Is that really the case? It could certainly be so given that life insurance policies come in many different variations, benefits, riders, payment and policy term etc, and you may end up not even knowing what you have bought except that you are now protected with a life insurance. To keep things simple, I will look at Life insurance at the most basic level and essentially it can be categorized into three main type of plans – Whole Life, Term Life or Investment-linked Life. Each plan has its own features and merits, so the age-old debate about Whole Life vs Term Life or that Investment-linked Life is a time bomb will not be discussed in this article. I have summarised the key features of each plan in the table below.

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I hope you have a better understanding now of the different life insurance policies. There is really no best policy out of the three plans; all three will serve to protect you against death, disability and diseases. It is almost akin to buying a property. Do you want a freehold, leasehold or just a rental unit? All three will provide you with a roof over your head, but you have to ask yourself what are your objective and preference. Hence, the type of plan you should choose will be dependent on your financial and personal profile and preferences. I would personally opine that the more important question to ask first is what are your protection needs and are you adequately covered!?

Do You Know #02 – Changes in CPF Interest Rate after 2015!

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Up-or-Down-game-Week-8-QB-Rankings

Currently the interest rate for CPF OA is 2.5% p.a. and Special, Medisave and Retirement Accounts (SMRA) is 4% p.a. with an additional 1% paid on the first $60,000 of a member’s combined balances (with up to $20,000 from the OA). Refer to my earlier post (http://www.ngaikboon.com/do-you-know-01-earn-up-to-5-interest-on-your-cpf/)

However, do you know that these interest rates are not guaranteed and we will likely see more fluctuations in the rates after 2015 especially for SMA!

  1. Ordinary Account.  Monies in the OA currently earn the legislated minimum 2.5%, or the 3-month average of major local banks’ (UOB, DBS and OCBC) interest rates, whichever is higher. I think it is highly unlikely in the near future that the 3-month average interest rate of the 3 local banks will exceed 2.5%, hence we can be quite confident that the OA interest rate will continue to stay at 2.5% for the foreseeable future.
  2. Special and Medisave Account. Now if you are thinking that SMA will continue to earn 4% interest rate, it’s time to think twice! The current 4% floor rate is guaranteed by the Government only till Dec 2015. The interest rate for SMA is actually pegged to the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%. This will take effect from 1 Jan 2016 if the Government does not extend the floor rate of 4% any further! The current yield ranges from 1.6% to 2.6%, so we may not be getting the 4% interest rate on SMA any much longer! :( However, 3%+ is still not too bad a rate I feel since it is essentially risk free.
  3. Retirement Account.  The current floor rate for RA now is also fixed at 4% p.a. RA monies will be invested in Special Government Securities (SSGS) which will earn a fixed coupon rate equal to the 12-month average yield of the 10YSGS plus 1% at the first point of issuance in the year from 1 January 2010. The average yield of the 10YSGS plus 1% from November 2013 to October 2014 is 3.40% p.a. Need I explain further? :(

Hopefully you are not lost by now! A simple takeaway from this is that the days of 4% interest rate are numbered and we should brace ourselves for lower interest rates for our SMRA come 2016 unless the Government extends the floor rate further. Perhaps a positive note from this is that we could also potentially get more than 4% if the yield rates of 10YSGS are good! Let’s wait to see how this will pan out soon.

Source:

1. http://mycpf.cpf.gov.sg/CPF/News/News-Release/N_17Feb2015.htm

  1. http://mycpf.cpf.gov.sg/Members/home.htm

Thank You Mr Lee Kuan Yew

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There will be no further posts this week.

Because of you Mr Lee Kuan Yew, many ordinary Singaporeans myself included are able to pursue our dreams and lead a much comfortable life than what our parents used to have. Your selfless dedication and lifelong efforts in building up Singapore will never be forgotten. Your legacy shines bright and true in each and every Singaporean and in this beloved Nation that we now call our very own Home. Thank you Mr Lee Kuan Yew, I sincerely thank you from the bottom of my heart. May you rest in peace and together with your wife now – 23 March 2015

Do You Know #01 – Earn up to 5% Interest on your CPF

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Overview

 

 

 

 

Source: http://mycpf.cpf.gov.sg/CPF/About-Us/Intro/Intro.htm

5% risk free interest rate! I don’t think you can find a better offer out there in the market. To maximise your savings in the CPF, I would recommend the following:

  1. Maintain $60,000 in your CPF. You should at least maintain $20k in your OA and another $40k in your Special, Medisave and Retirement Accounts (SMRA). As OA is more liquid and if you do not have $20k in your OA, do try to maintain at least $60k in your SMRA so as to enjoy the extra 1% interest. To give you a better sense of what the extra 1% can mean to you – 1% interest on $60k for a year is $600 and when compounded over a period of 10 years, you can get about $6300 in interest. So if you have $60k in your SMRA earning a 5% compounded interest, you can double your principal to $120k in about 14.5 years. Hence, do note that if you want to invest your OA and SA, it is advisable to invest your OA and SA only if you have excess of $60k in your CPF accounts. Else you may be better off keeping the money in your CPF and enjoying the additional 1% interest rate.
  2. Voluntary Cash Top Up to CPF. If you have excess cash on hand and is not into investment. It may not be a bad idea to make cash top up to your CPF to make up to the $60k limit. I’m coming purely from the angle that your money is better in the CPF than leaving it idle in the bank where you are getting much more interest and the money in your CPF can be used for future retirement planning.

Get Insured for the Sake of Your Loved Ones

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HPS

It is always very sad to read about such news. Two thoughts came to my mind after reading this news.

Home Protection Scheme (HPS) is a Cheap and Effective Mortgage Insurance.   HPS is a mortgage-reducing insurance scheme to help insured members and their families pay off outstanding housing loans in the event of the insured members’ permanent incapacity or premature death before age 65. If you are taking up a HDB house loan, I would suggest not to opt out of HPS thinking that you already have a whole life insurance. HPS is the most cost effective mortgage plan in the market and it is really affordable. You can choose to pay for the premium using CPF, so no cash payment is involved. I was under HPS previously till my HDB loan was paid up. Great plan! Find out more about HPS at the following link:

(http://mycpf.cpf.gov.sg/Members/CPFSchemes/HomeProtectionScheme.htm)

Getting Yourself Insured.   It is quite uncommon these days to read of someone opting not to be insured as he thinks that he is healthy and fit. I don’t think anyone of us can foresee the future. We will not know when we will be stricken by a disease or be incapacitated or even be called upon to meet the Lord early. Hence, the very basis of insurance is to manage this unknown/risk by protecting oneself against significant potential losses and financial hardship, and this is done by transferring the cost to an external entity (insurance company) at a reasonable price. It makes all the more sense for you get insured when you are healthy and fit rather than waiting till your health deteriorates before you start to panic and decide get an insurance policy. By then, you may be uninsurable or be excluded from your existing health conditions. Getting yourself insured and protected is important and all the more important if you have dependents relying on you. So for the sake of your loved ones as they will most likely be the beneficiaries not you, do seek a financial consultant early to find out how much you should get yourself adequately insured for.

Considerations for Getting a Hospitalisation Plan – Medishield and Private Integrated Shield Plans

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Medishield (MS) or Private Integrated Shield Plans (ISP)

Hospitalisation plans should be your primary and foremost consideration in your financial planning management. Basically there are only two categories of shield plans in the market today – (1) Medishield by CPF Board and (2) Private Integrated Shield Plans by private insurers.  The key differences between MS and ISP are as follows:

1.   Claims.   There are sub-limit claims imposed under MS while ISP provides as-charged claims for most the treatments and surgeries. The annual policy claim for ISP is also much higher (about 2-4 times) compared to MS. Both MS and ISP are subjected to deductibles and co-insurance but a rider can be purchased to offset the deductibles and co-insurance for ISP.

2.   Coverage.   MS only covers restructured hospital B2 ward and below while ISP covers all ward types in restructured hospital and standard ward in private hospital as well as as-charged pre and post-hospitalisation bills depending on the plan purchased.

3.   Riders.   There is no rider option under MS. Rider under ISP which can only be purchased in cash can help to offset the deductibles and co-insurance. There are also other additional benefits provided under ISP rider which you should get your financial consultant to explain when making your purchase.

The key consideration choosing between MS or ISP is budget. I will strongly encourage that everyone purchase an ISP if you can afford the premiums as with growing healthcare costs, you may still find yourself paying huge hospitalisation bills for just being covered under MS.

** Do note that Medishield Life will replace Medishield at the end of 2015 and there will be changes in the features and benefits. You can find out more on Medishield Life in the meantime at the following website: (https://www.moh.gov.sg/content/moh_web/medishield-life.html)

Private Integrated Shield Plans (ISP)

ISP is currently offered by five insurers namely: (1) Prudential, (2) Great Eastern, (3) AIA, (4) Aviva, and (5) NTUC.  Given the number of choices available, it is natural to compare to get the best deal. You can check the following website by MOH which gives a good comparison of the features and premiums between the ISPs offered by the five insurers.

(https://www.moh.gov.sg/content/moh_web/home/costs_and_financing/schemes_subsidies/Medishield/Disclaimer.html)

Personally, I feel all the ISPs are quite competitive in their pricing with varying benefits. I have listed some key considerations which you should look out for when purchasing an ISP.

1.   Premiums.   I believe this will be the first thing most people ask when purchasing an ISP. I did a computation of the total premiums to be paid till age 85 between the different insurers which you can find in the table below (click to enlarge).

Presentation2

It is important to note that premiums for ISP are not fixed and insurers can raise the premiums at any point in time so long as they give advance notice to their clients. Another important point to note is that you will have to fork out some cash to pay for ISP on top of the cash for rider once you hit age 50 (annual premium will exceed Medisave withdrawal limit), and premiums will also get increasingly more expensive after age 60, hence do look at longer term premium affordability before deciding on an ISP. While affordability is an important consideration, it does not mean that the cheapest plan is the best, rather you should look at the different benefits offered to decide which is most suitable for you. There may also be different promotions and deals offered at certain periods.

2.   Hospital and Ward Type.   You will have to decide if you are those who want to seek treatment in a private hospital or if you are fine going to a restructured hospital and the types of ward you will be comfortable to stay in during hospitalisation. This is very much a personal preference but if you can afford the long term premiums, I will strongly suggest you to take up the most comprehensive plan. I have a friend who took up a restructured hospital plan but had to seek treatment in a private hospital and ended up with a huge hospitalisation bill. Furthermore, you can downgrade your plans easily in future but to upgrade will come with underwriting. Having a comprehensive ISP will give you a peace of mind that your entire hospitalisation bill will be taken care off.

3.   Claims Return Rate.   Another popular question that most people will have in mind is how fast their bills can be reimbursed. MOH publish the claims return rate in their website every quarterly. The table below shows the latest statistic for last quarter of 2014 (1 Oct to 31 Dec).

  Cumulative Claims Return Rate Median Claims Return Rate (days)
<= 1 week <= 2 weeks <= 4 weeks
AIA 92% 95% 96% 0 (Same Day)
AVIVA 84% 89% 94% 0 (Same Day)
Great Eastern 93% 95% 97% 0 (Same Day)
NTUC Income 93% 96% 97% 0 (Same Day)
Prudential 94% 96% 98% 0 (Same Day)

(source -https://www.moh.gov.sg/content/moh_web/home/costs_and_financing/schemes_subsidies/Medishield/Medisave-approved_Insurance.html)

4.   Period for Pre and Post Hospitalisation.   This is a personal factor that I will look out for in an ISP due to my previous experience where I was unable to claim for my post hospitalisation treatment as my appointment was beyond the 100 days under my current ISP. Given the long waiting time for post hospitalisation appointments these days, I feel that insurers should extend the pre and post hospitalisation period. There is currently ISP which allows up to 180 days of pre and post hospitalisation claims.

5.   Servicing Consultant.   Personally I feel this is the most important consideration, to get a financial consultant whom you are confident is able to be there for you in the event you are hospitalised. Imagine a situation where you are hospitalised and still have to worry about what benefits you are entitled to and how to make your claims. A good consultant should be there for you to take care of all these administrative matters while you solely focus on your treatment and recovery. This I feel is priceless. I came across the article below some time back and it is the perfect example of why you need to have a personal consultant to help you manage all the issues so that you can just focus on your treatment. Hence, do look for a good consultant on top of an ISP that meets your requirements.

(http://www.straitstimes.com/premium/forum-letters/story/caught-between-insurer-and-hospital-20150105)

I have listed some key factors that you should look out for when purchasing an ISP which i hope you will find useful. However they are not exhaustive and you should still look for a financial consultant for further discussion to understand the features and benefits. If you are intending to switch between insurers, do remember to ask your consultant on the waiting period for certain conditions.