Week 47 – Life Insurance and Estate Planning

We know that we will die one day but we will not know exactly when and under what circumstances we are going to die. Being in the insurance business for over 20 years, I have seen some people left either little or no money behind for their family. Far too many men and women are financially unprepared for the day they meet their Marker because of procrastination, fear and ignorance about life insurance and estate planning.

I know that many people do not like to talk about insurance and estate planning. Yet insurance and estate planning are two of the most important aspects of financial planning.

Proverbs 13:22 talks about good people who will have wealth to leave to their grandchildren. One of the best ways to achieve that is to have the proper amount of life insurance and do adequate estate planning.

We all do not like to talk about death and yet 100 percent of all people born today will eventually die.

Therefore you need to plan so as to ease the burden on your family when you make the transition.

There are four areas:

  1. Estate planning.
  2. A will or a living trust.
  3. Life insurance.
  4. Financial records.

Estate planning is not just for the rich but for everybody. Estate planning helps us to determine who get to keep our assets or estate. I will give you some general guidelines about insurance and estate planning. However, since this is a very complex area and each individual situation is unique, I recommend you seek wise and professional counsel before taking specific implementation steps. It may require input from tax attorney, life insurance agent or financial planner, banker and lawyer. I simply want to get you started in the process.

Life Insurance Planning

Why insurance? The basic purpose of insurance is to transfer the risk that one is not willing to take or unable to take to the insurance company who is willing to take the risk in return for compensation or premium payment.

The objective of life insurance is first, to protect the family income and net worth growth in the event of the death of the breadwinner and second to provide protection to maintain the estate (house, car, property) in order that it might pass on to the heirs.

Buying an insurance is not a shifting of trust from God to insurance. If anyone does not provide for his relatives, and especially for his immediate family, he has denied the faith and is worse than an unbeliever. Insurance helps to give your family the opportunity to continue to live in a proper environment. ~ 1 Timothy 5:8

 How much do I Need?

There is no one-size-fits-all solution, because the greater your financial need, the more life insurance coverage you require. Most people need enough life insurance to cover five to ten times their annual salary. This method is pretty simplistic because it does require you to address any specific insurance need such as education funding. You can explore another method that is based on a person’s financial needs that involves determining the expenses you need to cover.

Some of these expenses will include funeral expenses, income replacement, education funding, pay off of any outstanding debts and taxes.

With this method, you should also minus all other assets that you have accumulated to calculate your insurance coverage.

  1. Should I buy a term or whole life insurance?

Term-life insurance protects you for a specific term with no cash value. With whole life plan, the policy does not expire after a set period of tie. As long as you pay the premiums, the policy remains in effect. Sometimes, you need to buy a mix of both. Whichever you choose, you have to consider cost, coverage and complexity.

  1. Is it wise to have all my life insurance through my employer?

No, it is not wise to have all your insurance through your employer. The reason being you may leave or get fired from your job or you may want to have additional policy to protect your insurability. If you develop an illness such as cancer, finding affordable insurance or any at all will be difficult.

  1. Is there any other insurance cover that I need?
    1. Your health is the top priority. With advancements in medical science, treatment is available for a wide range of ailments and illnesses. However, treatment cost money and healthcare cost are expected to rise substantially in the future. Have you provided for such expenses?

Buying a critical illness protection plan will give you financial support for the treatment of critical illness even in the early stages. Some of other plans also cover protection against critical illness, total and permanent disability and loss of life. There are other standalone hospitalisation income plans, such as one that provides you with daily cash for each day of confinement in a hospital due to sickness or an accident.

  1. You may also like to explore buying a disability insurance. This is essentially pay check protection. If you are sick or injured and cannot work, disability insurance replaces up to 70 percent of your income.

It allows you to pay most of your bills. Please also consult your insurance advisor for your detailed planning.

Questions:

  1. What four areas do I need to look into in my planning?
  2. Why is it important for me to buy insurance?
  3. How much do I need?

Week 46 – Retirement Planning (Part 2)

Do you have the resources to spend up to a third of your life in retirement? Retirement can be great and can be the time when you enjoy the fruit of your labour. But if you are not prepared, you can be financially broke and you can be depressed or even in despair. Be prepared for your retirement years.

Is retirement biblical? Today we believe that at some point in our lives we can stop working and enjoy our lives. But what does the scriptures have to say about retirement? To me, it could mean I slow down or stop working and increase my level of volunteer work in the church. But in order to do that, I have to plan ahead during my pre-retirement stage to save more so that during retirement, I have the freedom to choose and serve.

Unfortunately with our cost of living, most of us may need to spend much of our time just making a living. Without an adequate saving plan, we may find ourselves lowering our standard of living or working longer than we had expected.

So if you do not want to work during retirement, you will need to spend a great deal of effort and planning before retirement. You have to plan, save, and invest. Do not retire too early, avoid procrastination and start planning.

Start planning and saving for your retirement. Your CPF fund may not be sufficient to meet your retirement needs. Eliminate debt and usually that starts off with your credit card first. Create an emergency fund of six months of your living expenses. Contribute to your CPF fund and create retirement assets so as to enjoy passive funds during your retirement. Treat your monthly investment and savings plan as your fixed expenses, you will be more likely to save more.

Planning for retirement and having a commitment to save go hand in hand. You have to be intentional as your retirement nest egg will not happen overnight. Take advantage of the miracle of compound interest. The longer you wait to save, the less time your money has to work for you. There are ways to increase your savings and decrease your spending. Is there any way you can increase your income and reduce your expense? Perhaps you have to eat out less and spend less on luxury goods. Reduce credit and debt. Make it your first priority to get rid of your credit cards debt. You may have to look at your investment strategy and invest in growth mutual funds.

Can you rely on your CPF fund? Is it enough? Do you have other saving plan and assets to cushion you? The general rule of thumb is that you need between 70 to 80 percent of your present income when you retire.

Insurance Issues

Health Insurance

Most retirees live on fixed income and neglect looking into their health insurance. A serious health problem without insurance could eliminate all retirement saving. Be sure you have good Medi-Shield plans and if need to, top up with an integrated Shield plan. Looking forward to your golden years in retirement? For many, the retirement lifestyle, the anticipated and hoped for will not be a reality. Is there any hope? Yes, but it requires a process of planning, commitment and developing strategies for providing for a comfortable retirement.

Only you know what you want your retirement years to be like and only you can plan and work towards it and achieve your goals.

Questions:

  1. Why would eliminating credit cards and instalments be an important step rather than putting money in savings?
  2. Are you financially prepared for your retirement? If not, what action do you need to take in order to reverse the situation?
  3. Do you intend to set aside more of your time in serving the Lord during your retirement?

Week 45 – Retirement Planning (Part 1)

We spend close to a quarter of our lives in retirement. The average new-born female could expect to live longer than the average new-born male. A girl born in 2013 would expect to live an average of 84.6 years, longer than the average of 80.2 years for a boy. This sounds like a wonderful prospect, but accumulating enough money to live comfortably for that many years is a daunting task. One of the common mistakes people make is not planning early for their retirement.

Despite its importance, retirement planning is often neglected by most individuals. For some, retirement is too distant and for others, they may feel that their CPF saving will provide enough of a nest egg for their old age.

To achieve our goal, we must start planning as early as possible. We may not be able to depend on our family to support us during old age. With our high standard of living, higher medical cost and increase in life expectancy, we need more money to meet our living expenses during retirement. Many people will not have enough CPF savings for their old age.

So how would you go about planning for retirement? It involves four simple steps of setting your retirement goals, estimating your financial resources, determining the shortfall in funds and formulating an investment or saving plan.

Common questions about retirement

1) What should be my priority: saving for my retirement or investing for my child’s education funding?

Ideally you should plan for both but if you are tight on fund, than planning for retirement funding is more important. Please understand that I am answering purely from the financial point of view. I know you love your children and want to help them fulfill their dreams and achieve their success but on the other hand you are also concerned whether or not you can retire comfortably.

Your children do have many options they can explore but you don’t.  They can work in order to pay their way through college. They can also take study loans or apply scholarship but unfortunately there are no scholarships for retired people or senior citizens loans to help you to get by.

2) When should I begin investing for my retirement?

As soon as you can. Don’t wait because time magnifies compound interest. The earlier you start the better. Even $1000 left alone to earn 6 percent a year will multiple to $39,000 in twenty years! That is the power of compounding interest.

3) I’m over fifty years old, it is possible for someone like me to catch up with my investment?

You need to ask yourself, why haven’t you been able to invest it save? Whatever the reason, you need to correct the behaviour and start saving or investing.

Then you have to make some tough decisions like downsizing your house, driving a cheaper car, traveling by public transport or continuing to work as long as your situation allows. Whatever it takes, you must free up some money and starting building your nest egg.

 The Common Pitfalls in Retirement Planning

People tend to start too late, save too little and earn too little with their saving and investment. Our Singapore government recognises the fact that Singaporeans are living longer, and hence will need more money to see them through old age. In light of this, the government proposed all CPF members to set aside savings in their retirement accounts, to allow them to use their savings to buy an annuity from an approved life insurance company. Instead of purchasing an approved annuity, you can also deposit the minimum sum in a CPF approved bank or you can choose to leave your money with the CPF board.

In conclusion, my advice to you is to start planning. How you want to live your retirement depends on how you save and invest while you are working. Start planning early, save sufficiently and invest wisely so as to ensure a pleasant and comfortable retirement.

Questions:

  1. What is the average life expectancy for man and woman?
  2. Have you started too late, saved too little or earned too little in your retirement plan?
  3. How do you see yourself spending your time as a retired person? How much will it cost?


Week 44 – The Real Deal about Real Estate

There is no place like home. Yes, there is nothing like owning your own home, thanks to our Singapore government who made this possible for us. As Singaporean, a home is more than a financial asset. A home is a place to live in and raise children, and plan for the future. But make sure you invest on the property that you can afford. Do not follow the crowd. Remember, it is better to buy the home or property that fits your budget. Work out your budget.

In my opinion, your house payments should not be more than 35 percent of your net spendable income (that is income minus CPF, taxes and tithes.) Choose a house that you can afford, taking into account your giving, saving and other lifestyle choices. One of the biggest mistakes I see is when young married couples quality for a mortgage based on both their incomes and get the largest house on the maximum mortgage loan they can get. After a few years, they have children and decide the wife should stop working and become a stay-at-home mom. But unfortunately, she cannot because of their mortgage that is based on both incomes.

The number one financial problem facing most young couples face is they spend too much on housing. I am a strong advocate of buying a home that you can afford and paying off your mortgage loan as soon as possible. People may advise otherwise due to whatever reason. I would rather live debt-free and pay off my house as fast as I can. In order to do that, we may have to force ourselves to do so. Therefore, a shorter year mortgage is best. I know it is going to be tough and a little bit tight, but most of us can make our lifestyle adjustment. If you are not brave enough to do a fifteen years mortgage, then pretend that your thirty-year mortgage is a fifteen-year mortgage. Simply make the payments as if you had a fifteen-year mortgage. In that way, you are not locked in but you can still accomplish your goal. I usually used my bonus for my capital repayment and I can determine the amount of the payment based on available funds.

For some of us, investing on a second property may be a good option. You can generate rental income and also profit from increasing housing prices. But before you do that, you have to make sure your financial house is in order. You need to be financially healthy to succeed as a real estate investor. Make sure you crunch the numbers properly. As an investor you should think of profit and loss and risk and reward.

Therefore, your cash flow is very important. Do not subject yourself in a situation whereby you have to false sell your property because of your flow. As an investor, most of us make money out of our capital appreciation, which means you need to have holding power.

Before investment, know your market. One of the key ingredients to any successful real estate transaction is location, location, location! It pays to know something about the market condition in the area before you invest.

If property are in short supply, you probably do not have a problem in renting or selling. Your first line of defence against vacancies is a good evaluation of the rental market before investing.

Remember that owning an investment property is a business; you have to be willing and able to commit the time and money in order to run your business successfully. So make sure you understand how much time and money you will have to spend, before you invest.

Questions:

  1. Is it better to pay off my mortgage early or keep taking the tax deduction (investment property)?
  2. What is the best way to pay off our mortgage early?
  3. What should I know before buying any investment property?

Week 43 – Saving and Investing

 

All of us wants to see our money grow. But we are seeing an increasing number of people piling up their debts with little or no savings. A lot of us like to spend money but do not like to save. And although most of us know how to work for money, few know how to make the money work for them. Therefore, it is time for us to save and invest.

In the house of the wise are stores of choice food and oil, but a foolish man devours all he has.

~ Proverbs 21:20

 In the Bible, the ants are commended for saving for a future need (Proverbs 30:24-25). Many times, in order for us to save, it requires self-denial – denying on expenditure today so that we will have something to spend for the future. Unfortunately as Singaporeans, we are developing a culture of self-indulgence, not self-denial. We live in the society where when we want something, we want it immediately.

In Matthew 25:14-30, Jesus tells the story of a man who left money for three of his servants to invest.

The master commended the first two servants for investing the money wisely and condemned the third for not doing anything about it. Sometimes, we Christians are so scared of taking any legitimate risk. In our context today, we need to invest and save in any investment that can yield 3% so as to beat inflation.

Putting money in the bank will erode our money with the 0.5% to 1% interest. Saving money consistently requires self-denial. For some, it may require a change of lifestyle. We may have to stop ourselves from spending on our wants. Nobody is going to beg you to save unless you really want to. Most advertisers and merchandisers are telling us to spend, spend and spend.

Learn from the ants, who store up food in the summer so they will have something to eat in the winter (Proverbs 6:6-8). Arrange an automatic payroll deduction to channel your funds to either a savings plan or account so that a certain portion of your income is saved regularly. Ideally set aside at least 10% of everything you earn into a saving plan but if you cannot do that, then save whatever you can, but save something.

I do not think that the Bible is against us from investing but we must check our motives before we invest.

The Bible condemns the motivation to get rich instantly, but you invest because you do not think it is wise to throw away money that God has entrusted to you. When you gamble at casinos and play the lottery, the odds are against you. It is almost a guaranteed way to lose money. Placing your money in the stock market, on the other hand, is an investment decision and a way of planning for the future.

With the help of a financial advisor, your chances of increasing your funds should outweigh the risks if you have a long-term horizon.

The following table shows the annualised returns and risks of Singapore shares, bonds and cash between January 1995 and August 2009.

 

wk43

Source: Morning, SGD, dividend reinvested. Shares refer to MSCJ Singapore. Bonds refer to UOB Singapore. Government securities index. Cash refers to 1-month Singapore interbank bid rate. All returns refer to the annualised average rate of returns. Risk refers to the standard deviation of returns.

For someone who has never invested before, I strongly recommend that you find a good financial advisor. As a matter of fact, I think even the experienced investors need a financial advisor. Find someone who is experienced, ethical, an expert and who shares the same value with you and start investing.

  Questions:

  1. What happens to those who put their wealth before God? (Proverbs 28:20).
  2. What are the consequences for not diligently managing and investing money? (Proverbs 24:33-34).
  3. How important are effort and discipline in our financial activities? (Proverbs 14:23, 21:5).