Friday, February 26, 2010

Family insurance

I felt good after buying all the basic insurance as mentioned in my previous posts. The comfort was dangerously misplaced. I am not protected until all my loved ones are protected. Out of love and duty, it is expected of me to fork out cash to pay for unexpected medical bills faced by my family members.

It was too late to raise insurance cover for my parents and parents-in-law. At their age, the health problems which they are genetically predisposed have surfaced. Pre-existing conditions are either not insurable or insurable at prohibitive cost.

The lessons learnt is to buy medical insurance early when you have a clean bill of health. Hence, I bought the best health insurance plans that I can afford for my children while they still have a clean health record. Make sure the health insurance policies are guaranteed renewable. Otherwise, the insurer can cancel it when health problems surface later. It will be terrible to lose cover at a time when you most need it. Like bankers who take away the umbrella when it starts raining, insurers may do the same in the name of profit. Don't give them the chance to do it.

By the way, travel insurance saved my family's finances. My father had a heart attack during a vacation in US when I was still in university. The operation would have severely damaged my parents' retirement fund had it not been for the insurance. So, don't forget to buy travel insurance on family vacation trip.

Saturday, February 20, 2010

Death insurance

Death is a risk that will not hit you when it happens, but it will hit your dependents. Buy death insurance if you are a breadwinner to protect your family. Do not buy death insurance for your children unless you intend to profit from their death. It is a waste of money for people without dependents to buy death insurance because nobody is worse off financially when they are dead.

Even if you have no children, do consider buying death insurance for the sake of your parents especially if they are highly dependent on your monthly allowances. After having children of my own, I realized that raising children for protection in old age is an almost sure-lose investment. I resolve to be at least a break-even investment for my parents in the worst case. Hopefully, I can be a multi-bagger investment to them. Hence, my interest in managing my own money

With the above considerations for my beloved ones, I maximized my death insurance coverage until I am worth more dead than alive. Too much death insurance can create new risks. However, I am lucky to have married a good woman. I have no fear that she will murder me. I believe my children love me enough not to rejoice by my coffin. I have absolutely no worries with my parents. Even very selfish people become selfless when it comes to their children.

Death insurance is the cheapest among all the kinds of insurance plans. So, it was not expensive for me to maximize my death coverage. You can even use them as a cheap form of insurance for family protection.

My subsequent paragraphs may be offensive to some. You are free to ignore if you disagree.

Death insurance can be used as a form of cheap disability/health plan to protect your family. If you are disabled at a young age or get diagnosed with a terminal illness that will cost a bomb to treat with low chances of survival, you may consider suicide but make sure your insurance covers suicide first! This way, not only do you avoid becoming a burden to your family, you can also provide a lump sum to support for their future living expenses. They sorely need it after losing a breadwinner. If it is honorable to die in war for your country (a group of strangers who can be unappreciative), then it is even more honorable to die for your family (people whom you love and love you back).

Medical and income disability insurance

After I have decided on term insurance plans, I still have to think about what term plans to buy. A starting point is to think about the risks that can happen in your life.

The types of insurance plans discussed here applies to the Singapore context. Foreign readers can skip this post. I will not discuss about specific plans. Everyone has to analyze their personal situation on their own and choose the best-fit plan. I will talk in terms of broad principles to get readers started. I am also not an expert on insurance. Experts out there, please point out any errors or mis-information that I make.

Falling sick with an illness that requires hospitalization and surgery is a very scary thing because doctors are so expensive. There is no point in being saved by a doctor from a heart attack, then suffer another heart attack on seeing his bill. You might consider dying in the second round.

Protection can be obtained through a hospitalization plan and a normal health plan with a co-deductible component. The latter can be bought using Medisave and I bought the best plan (most expensive). Since you cannot touch CPF money until retirement, you might as well use it to buy the best insurance that money can buy. In this way, you use untouchable money(CPF) to protect touchable money(cash) because the chances of forking out cash is reduced by better coverage.

I know of many Singaporeans who are covered for the 30 critical illnesses but not covered for hospitalization. This is unsafe as the chances of getting hospitalized is much higher than getting the 30 critical illnesses. Buy this first, then consider critical illness protection.

As a working adult, my most valuable asset is my ability to earn a living. Therefore, it makes good sense to insure against losing it.

I bought an income-disability plan which will pay me a percentage of my salary should I be unable to work due to accidents or disease. Even if this money is not sufficient to allow my family to live as comfortably as before, at least I will not become a burden to them should a disaster hit.

Thursday, February 18, 2010

Insurance agents serve themselves first

Knowing the importance of insurance for protection is a start. Knowing what kinds of insurance to buy is the difficult part. The first insurance product I bought was a bad buy for me. Having zero knowledge, I was totally reliant on the insurance agent who was not incentivized to give good advice. He was paid on commission. Therefore, he will sell what pays him the most commission which may not be a suitable product for me. In fact, it probably will not be a good deal for me because the high commission will be priced into the insurance plan.

It is hard to blame the insurance agent. But I certainly blame the incentives that drove him to the bad behavior. He has to earn a living after all. I would have done the same if I were in his place.

My objective of buying insurance is purely protection. Insurance plans that mixes investment or saving with protection are not suitable buys for me because they substantially raise the premium. To maximize protection for each dollar spent, I should have bought term insurance plans instead of the whole-life plan (my first buy). Term insurance holds another advantage for a know-nothing like me then. If I had made the wrong choice (likely if one knows nothing), I can cancel the plan and go for another one without incurring penalty charges. Not so for the whole-life plan. I wanted to cancel that plan in 2008 when there was a "bank run" on AIA(subsidiary of AIG) in Singapore. I end up still paying for the whole-life plan to avoid heavy losses which I will incur upon cancellation.

I am not dismissing the whole-life or endowment plans. One thing bad about term plans is that they become more expensive when you grow old and stop at a certain age. Not so for the whole-life plans.

However, I will consider them if there is spare money left in my budget after I am covered with adequate protection from the term plans. This is especially important for people like me with limited budgets.

Based on my mistakes, this is how I would advise those who are getting started with insurance. Buy term plans to ensure adequate protection first. If there is spare money left in the budget, then consider the more expensive plans. Otherwise, you end up paying a lot and still suffer from inadequate protection. This is a not an uncommon problem given the combination of insurance agents without the right incentives to sell suitable policies and ignorant buyers who provide a ready pool of suckers (which I hope this post can reduce).

Wednesday, February 17, 2010

Insurance before everything else

When I just entered the workforce, one of the pleasant problems I faced when I received my first paycheck was what to do with the money. I chose to save it. Many would say that was prudent. However, on hindsight, I think that was wrong. I should have used it to buy insurance. In fact, I would go so far as to say that insurance should be the first item to spend on when one starts to have an income. Insurance before everything else.

Even if I had faithfully saved for the next five years, an accident or disastrous medical condition could have wiped out all my savings and plunge me into debt. Or worse still, drag the rest of my family members into debt. What is the point of saving all that money then? I should have used a small portion of the savings to buy some term insurance plan to protect against such disasters.

I used to have a colleague who does not believe in insurance because he thinks it is a waste of money. Most people do not gain from the insurance because the probability of the bad event happening is very low. While he was right about the probability, he completely missed the point. In insurance, one should not think in terms of probabilities. One should think in terms of consequences.

I would think of insurance as spending a small sum of money which I can afford to lose today to protect against disasters which I cannot afford to pay tomorrow.

I will not feel any sense of loss even if I shall never make any insurance claims. This is because I regard premiums spent on unclaimed insurance as charity. Insurance can be viewed as a tool that allows the lucky(no insurance claims) to help the unlucky (entitled to claims). In return, the lucky people of today will be assured of help should one day their luck turns.

Buying insurance is one of my favorite ways to do charity indirectly as I can help myself while helping others as well.

Saturday, February 13, 2010

Choosing a profitable hobby

Everyone's got to have some hobbies to fill up their spare time. Most of us are willing to spend money on our hobbies. That is perfectly fine. But, I think it will make much more sense if I can earn money from my hobbies.

My hobbies are related to managing my own money - growing my money(investing), protecting(insurance) and maintaining(saving, spending wisely) it.

The most respectable way to earn money is to become an entrepreneur. He is someone who enriches himself while enriching the lives of others by creating new products/services for his customers, jobs for his employees,  business for his suppliers and wealth for his shareholders. It is hard to be jealous of the wealth of such an entrepreneur because of the value he creates to society. As of now, I will prefer to focus on the activities of managing my money.

Thursday, February 11, 2010

Preparing for forced retirement

My analysis of the job market conditions in the sector that I work in is not optimistic. I am an engineer working in the consumer electronics industry - it is an industry which churns out products that are cheaper, better and faster every year. I am proud to work in this industry as an engineer.

The pace of technological change is very fast. In fact, that was one of the reasons that attracted me to work in this sector when I was a fresh graduate because I thought that was fun. It is still fun but it is bad economics. When the body of knowledge in your field of expertise changes too fast, the number of years of work experience do not count as much. Worse still, the experience becomes close to worthless if it is obsoleted by a superior technology. The value gap between someone with 2 years experience and 10 years experience is not that great if the technology/business landscape changes too drastically. Meanwhile, the salary gap between the 2-years and 10-years experience workers widens. When a deep recession hits, the older worker will have to live in fear of losing his rice bowl every day.

I have seen a distressed older worker getting emotional over such issues during meetings in my very eyes. I was a young man then and it was my first job. It disturbed me personally then and it got me interested in my own future social security.

(By the way, if you are interested what happened to that distressed older worker, he kept his job while I lost mine - my first job. Maybe I will talk about it in another post.)

Globalization is a phenomenon that worsens this problem. With globalization, a younger, cheaper worker in a foreign country need not migrate to your home country to take away your job. He can stay at home and still take away your job by attracting employers to shift work abroad.

When you talk to financial advisers, one common advice is to start planning for your retirement now. I think they are not keeping with the times. Planning for retirement is a luxury for me. I have to start planning for FORCED retirement, not just retirement. Forced retirement means losing one's job at an awkward age - old enough to be discriminated by employers but not old enough to retire in the eyes of the government (cannot collect pension, retirement savings like CPF ...)

Risk-averse as I am, I have to put my money at risk to grow it faster. Friends who know me are surprised that I buy stocks. I have no choice. I have to manage my money so that it grows fast enough before the day of reckoning arrives. Meanwhile, I shall save hard and work hard at my job.

Sunday, February 7, 2010

Manage your own money yourself

The safest person to trust with your money is yourself. Yet, most of us choose to delegate the task of looking after our money to strangers. That's strange, when you come to think about it.

Most people I know do not love their jobs. Most do it for the sake of money. If we spend half of our waking hours slogging at a job which we do not like for $$$, then shouldn't we at least spend 10% of our remaining spare time learning how to manage it?

One reads about tragic cases of retirees who lost a big portion of their life savings in toxic investments in the financial crisis of 2008 - the most notable one in Asia being the Lehman Brothers Minibonds. During the heights of the Minibonds crisis in Singapore and Hong Kong, Tan Kin Lian's blog became my daily reading. In one of the comments to his blog, a Phd holder humbly admits that she and her spouse possess 2 Phds between them. Yet, they were duped into the toxic. These are people much smarter than me and the average man. If they had spend more time learning how to manage their money, they probably could have avoided it.

There are countless silent instances of retirees losing a big chunk of their life savings after enduring a lifetime on a job they dislike. It pains me when the victims are the elderly retirees who no longer have means to recover from the financial setback. They could easily have been my parents.

The reason so many people, including the conservative ones, got caught was that these structured financial products (Lehman Brothers Minibonds, DBS High notes) were sold by financial institutions they thought they could trust. While the banks were clearly in the wrong, it is not beneficial for the victims to put the blame entirely on them, however justified. As these events involve heavy losses, they offer valuable money lessons that are too expensive to waste. Don't waste the school fees by putting all the blame on the banks. To learn from something requires one to accept some amount of blame first. Of course, this is easier said than done as I was not a victim. I am sorry if you have been a victim of fraud.

Banks are supposed to be guardians of the people's hard-earned savings. Even if they cannot be trusted, they are still regulated by the monetary authorities. How could this happen? The immediate reaction is to blame dishonest bankers, incompetent regulators ... everyone else except ourselves. First and foremost, it is our duty to take care of our own money ourselves. The best person to trust with your own money is yourself.

This is my maiden post. I would like to attract like-minded people to share their ideas and experiences on this blog to help everyone, including myself, help themselves with their own money.

October 2021 electricity bill for Singaporeans on Wholesale plan may be 4 times more than previous month. Keep things in perspective.

EDIT: For people on wholesale plan, you can switch back to SP Regulated tariff price at SP online portal any time you like, with about 1 wee...