Risk Management: Considerations before choosing Term or Whole Life Insurance plans

I have read with interest on the above topic. While much debated, the following is my personal opinion. While opinions differ from Financial advisers, there’s really no right and wrong answer. I hope this article crystallizes the on-going debate choosing between Term or Whole Life Insurance plans.

Before I commence, it would be wise to understand the features of 'Term' and 'Whole Life'. While both are insurance plans, the common monetary benefit is that each provide a coverage/protection for a face value (required amount) of x dollars in return by paying a premium for the cost of risk transfer to the insurer.

The Term plan does NOT provide any cash value at the end of the Term while the Whole Life (WL) plan provides a cash value depending on the investment performance of the participating funds. This is the major difference between the two plans.

There is a primary consideration before you should take into account before making a decision. This consideration stems from your Budgeting and Cash flow statement. It all depends how healthy is your Cash flow statement?  If it is not healthy, would you choose a WL plan?

Another consideration is the journey you will make in financial planning. You could start a financial plan after you complete your studies or when you start your first job or career. As you progress on a journey through life from being single, getting married, buying your HDB flat or property, having one or more children, would you have the budget to buy WL policies as a solution? Not forgetting endowment plans are also participating plans which contains cash values. The decision is entirely yours.

There are several terms/definitions in the Benefit Illustration of an insurance plan that you might need to be familiarize with. One of the definitions being ‘the projected rate of investment return’ (and the effects of reducing the projected investment rate of return). This might range from 1% to 4% but does not represent the lower and upper limits

The question is ‘Are you investment savvy?’ If you are and by assuming that your investment yield each year is higher than the projected rate of investment return, than the course could be buy Term and invest the difference. However, if you are NOT investment savvy, the choice is obvious.

Our profession as financial planners is/are to make recommendations for your risk management or financial plans. In this situation, while your financial risk had been highlighted, recommendations are laid on the table, advantages or disadvantages are being spelt out, you as the Client is deemed informed of possible recommendations. Based on some or all of the above, the decision on Term and Whole life seems pretty obvious.

In summary before coming to a choice between Term or WL recommendation?

·         How healthy is your Cash flow statement?

·         Consider the journey in financial planning?

·         Are you investment savvy?

·         Is your rate or return higher than the projected rate of return?

·         (Not an exhaust list of consideration)

Please do NOT be ‘tested’ by insurance agent who emphasize that Term plans have no cash value or that WL plans have cash values. The objective is risk management! In the first place, did your financial planner lay down the possible Term and whole life plans? I hope the above article would crystalize the decision making process of choosing between Term or Whole Life. If I did, please drop me a line. Thank You

Sell in May and go away

Most of us are familiar with the saying, ‘Sell in May and go away’. Does this probably mean that financial markets will turn in June? Personally, I really do not know and I do not subscribe to this saying. If you remember, May 2009 IS a good month!

Today, May 31^st  being the day for end of month, how did markets perform for the month of May 2011? As you probably know

·         Global Equity indices are lower

·         Commodities like Oil is lower

·         Currencies like the Euro, Aussie, Lonnie is much lower

·         Gold is neutral and

·         The US dollar index is much higher.

What does this mean?

In my interpretation, Gold being neutral means there’s still a demand for safe haven. Commodities are lower means there’s speculation that global demand is not that optimistic. High yield currencies are lower probably means speculators are not willing to take higher risk. Notwithstanding, weak economic data from the US, the S&P downgrade outlook for US debts, etc the US dollar is much stronger? Together, as a whole you should be able to interpret, right?

Today, currencies are much higher, so are commodities like Gold and Oil, Regional equity indices in Asia and Europe closed much stronger. You will probably read news like

·         Nikkei rises on recovery signs, Asian markets closed much higher

·         Speculation that Greece will get more aid, Euro roars to a 3 week high

·         Gold steadies as Greece is in focus

·         Global demand for Oil, dollar weaken, Oil rises

The fact though closed higher for the day, the market trend for the MONTH is lower. My personal interpretation is that most global investors are still probably watching from the sidelines or sitting on the fence. I noticed that since mid last week, there emerged bargain hunters and speculators who may be anxious to take on more risk.

However, is it time to buy? Personally, I would not speculate with just 2-3 days of fundamentals or data or optimism. You might want to ponder

·         Is the US dollar index getting much stronger? Any sign of inflation or US rate rise?

·         Is there global demand for Energy? Higher stock prices

·         Is global weather hindering the supply of agricultural commodities? Demand?

·         Are earning ratios attractive?

·         What’s the status of Europe debt crisis?

·         How are economic data of the world’s largest economy (US, China, Japan, Germany)?

·         How will QE2 end in June?

If you have the answer to all the above questions, that’s where the financial markets will be heading towards.

Risk Management: Financial impacts that may be overlooked

Financial planning is an on-going process between the client and the planner, where the Planner fact finds, compiles and analyzes the data, with the end process of making recommendations to possible impacts or financial risk to his Client. However, there will be instances where some impacts may have been overlooked.

(My opinion is that you should have a financial planning review at least once a year or when there are changes in your lifestyle, a change in marital status, job or career, occupation, etc. Similarly, you should review your investments at least once a year or when there is a change in Market trends. Read my related blog on Market trends – which direction, North or South? And now to the subject matter….)

Risk management. You would be familiar with the following:

·         Hospital & surgical expenses and outpatient expenses

·         Retirement funding

·        The event(s) that would trigger a potential loss of income of the  breadwinner (and/or spouse)

·         The event(s) that would trigger a temporary loss of income, say five years

·         Child education funding (local or foreign) and Child protection

·         Mortgage protection,  Personal Accident, etc

More often in our profession, we have come across the following areas of financial impact that had been overlooked and like to share with you (for your attention):

1.   Disability Income (unable to perform own occupation, for e.g. lawyer, teacher – loss of voice, surgeon – temporary unable to perform surgery, etc)

2.   Cost of last expenses (regardless of insurability)

3.   Gender illness (male or female) or child illness, etc

(With that in light, I hope the above would throw some thought provoking questions and you may wish to re assess your financial risk.)

In relation to the above, the questions I would pose are

(1)What’s your potential loss of income in the event you are not able to perform your own occupation? Risk transfer?

(2)Have you thought of transferring the risk of emergency funding and cost of last expenses, in the event of premature death? Even though one is not insurable!

(3)What’s your potential loss of income (or additional expenses) in the event of diagnosis of male, female or child illness? Additional expenses for nursing care for your sibling, spouse or child.

With a possible new 'light' to risk management, I would recommend that you seek your ‘financial planner’ for more details.

Meanwhile, please feel free to contact me if you have any queries relating to the above topic or any other articles I have published.

Weekly summary 20110529 - Gold strengthens. Equity drops

It had been a long and volatile week. Fortunately, most financial markets ended the day on a positive note.

At closing, Friday May 27^th, Global equity markets closed higher for the day with the exception of China, Japan and Argentina.

The US markets closed up following

·         Stronger than expected University of Michigan consumer sentiment data and

·         Encouraging comments from the Group of Eight (G8) about the strength of the global economy.

However, the Dow and S&P closed lower for the fourth week! The performance of other major indices in Asia, Europe, Latin America, MENA and Emerging markets were also not spared.

As for commodities and currencies,

·         Crude Oil, Gold and Silver closed higher for the day and week

·         The Aussie, Kiwi and the Loonie were much stronger.

The question for today is that when most markets end up on a positive note, where is the weakness?

As US is currently the world’s largest economy, its economy and reserve currency status affects the whole world. Global markets would normally take cues on how the US market performs. When the US market sneezes, other major indices will soon catch the cold.

Similarly, the strength or weakness of the US dollar will affect the prices of commodities – agriculture, mining, currencies and dollar denominated instruments and vice-versa.

Hence, there is no prize for guessing that the weakness lies in the US dollar. The US dollar index closed the week much lower, near 74.90. It had peaked earlier this week on Monday near 76.53.

However, the point I am trying to emphasize here is not where the market closes for the day or week but that while investing, I would certainly take note the strength of the US economy, the economic data and the US dollar.

While the US dollar is currently still the reserve currency, its strength and weakness can determine the prices of commodities, crude oil, precious metals and some currencies. Hence, it would also determine the demand and supply. Please note the daily chart of the US dollar index and its technical representation.

Notes: The Group of Eight normally referred to as G8 comprises the Group of Six (France, Germany, Italy, Japan, UK and the US) with the inclusion of Canada and Russia.

Memorial Day falls the following Monday where all US markets will be closed. Click here for the following week's weekly summary.

Risk Management & Investment strategy: What pain can a toothache cause?

A recent client of mine recently had a tooth/gum problem. Initially he felt pain. He bear the pain for a couple of days until the pain is unbearable, he seek dental advice. He was prescribed antibiotics and pain/swollen medication. The keyword here is unbearable PAIN!

The above is not uncommon to us. How could this be avoided?

·         Does he have a regular dental check up?

·         How regular is the appointment? Once or twice a year?

·         How old is he? Age 45, 50, 55, 60?

·         Does he have a bad tooth?

·         Was there prevention better than cure?

Whatever, the morale is that, most of all would not seek advice until the pain is intolerable? Why is that? Is it our character or life style? How does the above topic lead to insurance and investment strategy?

Insurance: As in my related topics on Insurance, buying insurance is not like buying clothes that makes you presentable. Seeking Insurance is one of many risk management techniques to address a financial risk.

I had noticed where the bread winner would seek advice on risk management after a particular ‘event’ which would trigger him to ‘wake up’

The event could be a close friend or relative who had just

·         passed away

·         been diagnosed of a major illness like Cancer

·         gone for a heart surgery, etc

He would then discuss with his spouse on his health, financial matters and subsequently schedule for a comprehensive health screening. If all is fine with the health screening report, there’s a peace of mind. Otherwise, they would seek medical advice and subsequently financial risk management. For a further discussion, please read my related article:  Slapped by ratings, exclusions, extra premiums

Investment: As in my related topics on investment, do you have an investment strategy/plan in place BEFORE you invested? Your investment strategy should include but not restricted to:

·         Timing or dollar cost averaging

·         Diversification

·         Asset Allocation

·         What is/are your investment risk?

·         What sort of climate to look out for? Etc?

I had notice during the global financial crisis period, investors and financial advisers were in a stage of panic (PAIN). Some would wonder

·         What is happening? (oh my god)

·         How far will this continue? (still wondering)

·         Or speculate it may be the low and buy more

·         If the market would even go lower

And until the PAIN is unbearable, they would liquidate their positions. Trust me, when most of us liquidate, that’s when the financial markets reverse! For a discussion to prevent losses in your investment please read my related topic on Investing (or Trading) is like going to WAR.

While some of you would speculate (retaliate), were my Clients’ Affected? Concerned? Called up? Angry? in a stage of panic? The answer is NO! Most are safe and still safe.

The above and related articles is to Thank God for giving me this knowledge, experience, foresight and to share with the public that Prevention is better than Cure. Seek financial planning and investment planning early. And it is not until the pain is Unbearable.

Market trends – which direction, North or South?

As I could not possibly discuss all the investment vehicles in the market, I will pick (a few) on each category for a discussion, namely Stock counters. Unit Trusts or ILPs and Leverage trading like forex, commodities, and major indices. You will need to have a chart for the discussion.

Markets could be trending Northwards, Southwards or consolidating before finding the next direction. Though volatile, there is a trend. To identify a particular trend,

·         Northwards – the highs and lows are getting higher

·         Southwards – the highs and lows are getting lower

·         Consolidation – the highs and lows is within a trending range.

Though the instrument may display volatility, you will need to take note of the trend. (Advise: once the trend is against your position, it is advisable to cut loss. Remember, the market is always there tomorrow. Live and fight the next day.)

Next, as an investor or investment advisor, you will need to know what made the market trend in that direction. The following could be some factors

·         Global investor/speculator sentiment as a result of news/fundamentals

·         Technical support and resistance of respective investment instrument

·         Monetary policies (QEs), interest rate differentials

·         Absence or presence of carry trade activities

·         Yield curves (not an exhaust list)

For e.g.

·         The start of QE1 and QE2 had a very BULLISH effect on equities and commodities. (Please note the effects of the said instrument since the launch of QE1 and QE2.)

·         QE1 and QE2 also encouraged carry trades activities (in a low volatility environment) where the main beneficiaries had been commodities (Gold, Silver) and currencies like the Aussie, Kiwi and the Loonie. (You wished you knew sooner, right?)

·         Technical & tools– In my related articles, I mentioned of Head and Shoulder formations which most likely will be trending southwards while the inverse Head and Shoulders will be trending northwards.

·         Yield curves – One of the indicators before the Lehman crisis which lead to the infamous Global Financial Crisis was the formation of Inverted Yield curves. (You may Google for a more complete definition on inverted yield curves.

From my observation, the short term trend could be

·         Equity markets will be trending Southwards – end of QE2. (There is a rumor that if the US data continues to be unfavorable and/or US markets tend to go Southwards to soon or too fast, there could be QE 2.5)

·         Commodity – precious metals like Gold and Silver (Safe haven assets) to go northwards. What contributes to uncertainty may NOT do well for equities or currencies, but Gold and Silver would be the main beneficiary.

·         Commodity – energy like crude oil to consolidate. (Economics basics; demand and Supply). Currently, global weakness will lead to lower demand. There could be volatility due to positive major indices or MENA tensions.

·         Currencies – Aussie. This is very volatile trending southwards (From a high Audusd of 1.10 thereabouts). Weakness in China/Japan, Oz financials. The NON beneficiary of unwinding carry trades.

In conclusion, I hope the above would have helped you to identify the market trend. And your knowing of the possible cause towards that trend would have helped you to identify the reversal of that trend.

The above is my personal opinion where the market would be trending. The above is NOT an offer or advice. Please consult with your advisor/consultant before deciding your investment strategy.

Risk management – Are you over OR under insured?

Are you over insured or are you under insured?

You are the judge whether if you are adequately covered. There are two methods which you may need to consider. Which method depends on the angle where your priorities lie? You may be concerned from the angle of

·         Annual Expenditure (Ex) or

·         Annual income (In).

Your financial advisor will be able to assist. However, if you do not have one, you may consider the following equation

Potential loss = ((Ex) or (In)) * time horizon * inflation

You may use the Future Value (FV) formula from Microsoft Excel to generate the result.

So for e.g. your monthly expenses is S$ 1,000 per month or S$ 18,000 per annum, potential loss to cover your dependants for a time horizon is 10 years, at an inflation rate of 4.5% (Apr 2011), the potential loss works out to be S$ 231,000 thereabouts.

Taking into consideration all your life policies (for e.g. S$ 100,000) and DPS (for e.g. S$ 46,000), you are then, classified being under insured by S$ 85,000.

You can use the same formula for potential loss of income, for Total & Permanent Disability (TPD) or upon diagnosis of major illness. However, not as simple as it seems, the

Potential loss depends if you are

·         A fresh graduate,

·         Gender: Male of Female

·         Stage of financial planning: Single, Married, Married with child(ren), Pre-Retirement, Retirement and Post Retirement, etc

·         Expenditure may include household, child support, parent support, income tax, vacation, etc

·         Time horizon depends on your child, spouse and/or care giving to your parents, etc

In other words, you decide on the input to the equation. And how and what we will do is to generate the equation, and hence the status: surplus or deficit. In such a way, where you decide on the inputs and assumptions, there’s no way, the figures can be inflated or otherwise. And the result, you will notice if you’re under insured or otherwise.

Based on the above, a risk management is identified and put into plan. However, there may be situations where the public may/will buy from their trigger happy insurance salesman (without a probable justification from a financial planning point of view). The end result is NOT that you will be over insured BUT buying the wrong things and putting up for display! Unless you are CASH rich, you may find yourself in a situation that you may not have the funds for seeking a risk management solution at a later stage. As such, this is ONE of the considerations between choosing Term or Whole Life?

Note: a word of caution! While you seek lawyers for legal matters, medical doctors for medical problems, please seek a professional, certified experienced financial planner for your risk management needs. The above is just a SIMPLE guidance that leads to a ball park figure.

Financial markets are seeking direction

From a macro point of view, global speculators/investors are favoring safe haven assets than higher yield assets. The higher risk assets being commodity currencies (Aussie, Kiwi and the Loonie) and Equities.

·         Equities follow the sentiment in Europe

·         while precious metal commodities like Gold and Silver (being a safe haven for uncertainties) rose.

Global equity markets are tending with a Southward biased. The US market closed lower with weakness in tech stocks while Energy provided strong gains. Asian markets are lower (12:40 pm Singapore time) with sentiments focusing on US economic outlook and the Euro zone debt concerns.

Is it a good time to buy, average or go bargain hunting?

PE, PB ratios, valuations are very attractive. There’s no right or wrong answer. Only time will tell. However, consider the following before you embark on your next investment strategy

·         What’s the current global sentiment? Mixed, good or weak

·         Are global investors seeking safe haven or taking more risks? Carry trades

·         What’s the volatility index? Risk?

·         Is gold and silver going up? Safe haven or risk appetite?

·         Where are currencies like Aussie, Kiwi, Loonie trending? Indication to Higher or lower risk

·         When is the next important economic data from the world’s largest economy (US, China)?

The above is not an exhaust list of questions I ask myself. It is actually the Inter market analysis one SHOULD consider before making your investment strategy. If you’re not investment savvy, please contact your investment savvy financial consultant.

As I do not see any optimism or favorable attempts to buy, I would constantly monitor global news’ fundamentals, technical, global sentiments. Stay tuned to more updated news at this blog!

Global markets continue their Southward journey

Global markets peaked end April 2011. With my article date May 4^th on Profit taking, my initial speculation was profit taking. Following which, I suspected there was unwinding of carry trade in my article dated May 5^th on Further profit taking accelerates unwinding of carry trades.  My speculation was based on my theory, published May 11^th on Without news on QE 2.5, QE2 coming to an end accelerates unwinding of carry trades

A wise man once said, ‘There’s always a market tomorrow!’. Therefore, I find it reasonable to trade and invest when, where the situation is in our favor. This is explained on May 18^th on Investing (or Trading) is like going to WAR. However, as financial markets lack the optimism to go higher, I tried to find a reason by digging up the events, leading to the end of QE2 as published on May 19^th with Global Financial Crisis, QE1, QE2, Inflation, Higher interest rates. What’s next?

US equity markets closed lower last Friday. Asian markets closed in a ‘sea of red’! Europe markets do not fare better.

At point of writing, May 23^rd 5:30pm,

Currencies against the US dollar

·         Euro - is at 1.3996 from ( high of 1.49) – Greece issues;

·         Oz and kiwi – 1.0534 and 0.7885 respectively – global investors take less risk

Commodities

·         Crude Oil – 97.42 from 114 – lower global demand

·         Gold – 1,510 (safe haven on Greece issues).

Last but not least, the US dollar index is currently at 76.38 (2011 low is at 72.86 approximately). In addition,

·         Global economic data last week was not optimistic.

·         Neither are the Head and Shoulders on most daily charts in technical.

·         Inflation risk is met with respective monetary policies.

These are the current situation. The situation does not look favorable since early May. I hope your financial consultant had provided their ‘point of view’ and strategy.

My ‘Generals’ are not thought to speculate nor bargain hunting. In the Chinese Art of War, they will find a suitable climate, a suitable terrain and a suitable time. And unless there are more optimistic indicators, they would delay the War as long as possible. Meanwhile, the search for optimism and favorable terrain continues.

The market does not close today. There’s always a market tomorrow!

Risk Management: Slapped by ratings, exclusions, extra premiums

I read with much interest where the public shares their discomfort of being slapped with ratings, exclusions (etc) being imposed on their life insurance policies.

Prevention is better than Cure. Most of you who were fortunate to have any insurance plan implemented, you will not be facing such a problem. However, there may be situation where you may have delayed implementing your solution because:

·         I am too busy.

·         It would not happen to me.

·         No hurry. No worry, No need.

·         Buying insurance is bad luck, etc

(As we grey towards being more distinguished, these may lead to medical illness being diagnosed. The first step in prevention is buying early to avoid the possible imposition of ‘extras’.)

These are endless situation that promotes the procrastination of financial planning. These are situation that leads the Public to Plan to Fail rather than Fail to Plan. Similarly, these are the same reason why people do not see the investment of getting their timely, health screening being implemented.

When they ‘feel’ like it or when they are ready, the respective ‘financial’ or medical health screening is implemented. Time waits for NO man. Upon the ‘financial’ or medical health screening, the diagnosis may/would highlight certain health conditions.

As a result, extra premiums, ratings, and exclusions (etc) will be imposed for sub standards cases due to a medical condition. And the public responses

·         Too expensive (compared to what)

·         Too much exclusions (there are other diagnosis or accidents which may occur)

·         Unreasonable ratings, and endless reasons

As such, the majority of the public does not take up the plan or procrastinate indefinitely. (Please allow me to crystallize the solution on how to see the actual problem.) Let us look at the situation from a medical point of view. You may have being diagnosed of

·         Obesity, high BMI

·         Hypertension, High Cholesterol

·         Major illness like Cancer (Stage 2 or higher)

As a client or a ‘patient’, would you say that you would not seek treatment for yourself and your loved ones? Would you respond that the treatment is

·         Too expensive

·         Too much exclusions

·         Unreasonable ratings and endless reasons

These two situations are NO different. Do we have double standards in implementing a solution? You are the judge. You decide!

My opinion is you should execute or accept the plan with the best offer (While the tied agant is ONLY able to offer from their respective insurer, independant financial advisers (IFA) can provide various offer from more than one insurer!).

The justification. Here is why you do not procrastinate, once the plan is implemented by paying a ‘premium’, the risk or the financial impact is immediately transferred to the insurer – risk management. You will then have achieved a financial peace of mind because when the unfavorable event occurs, the benefits will be payable (read related blog on insurance claim problem)

Seeking a recommendation is not buying insurance. (Read related blog on common mistakes) One of the processes of financial planning is to identify your financial risk, the impact of that financial risk, how much damage or the expenses will cost? Seeking solutions is the planning. After which, executing by implementing a solution is the risk transfer of that financial risk.

In my opinion, the point here is not whether the solution is expensive, or the ratings or health extras imposed, it is whether you are serious about identifying a financial impact to you or your loved ones, and whether you want a peace of mind by transferring the risk. If you have failed to be convinced, we as financial planners have failed, not YOU. The FP never SELLS, he is merely trying to explain the consequences and YOU decide.

The value add of a financial planner lies not in just doing a fact find, analysis and making recommendations. in addition, the FP should lay down all the facts, possibilities, advantages and disadvanages of implementing, and, NOT implementing the solution and the financial impact. Once the various solutions are laid down on the table (due diligence done by the FP), the end decision is YOURS ENTIRELY!

After which, the client is deemed informed of possible recommendations and decides to implement or NOT. There is no right or wrong answer. However, the FP had done his due diligence. This is the due diligence of the Financial Planner. This differentiates the salesman from the professional Financial Planner.

Now that you may have viewed the financial impacts from a different angle, you may know how to decide if being faced by a similar situation in the future. If you had encounter this problem before, you may wish to reconsider your previous decision before any conditions deteriorates. It is better, to implement the solution LATER (meaning now) than Never. Please consider for yourself and your loved ones. If you are still not convinced, please seek your financial planner or a second opinion!

Related reads:

How to avoid insurance claim problem with your insurer in the future?

The most common mistakes the public make when buying a financial solution!

Why you should not buy Insurance blindly?

Before you BUY your first/next insurance policy…