Real life story - how Disability Income could help

I was recently reminded again how important it is to protect our ability to earn an income. Here is the situation of a friend which I'd like to share with you.

A real life case :

“A recent catch up with a friend, age 39, a CPA formerly with KPMG, reminded me how vital it is to have a plan that pays you a monthly income.

JJ is suffering from Chronic Inflammatory Demyelinating Polyneuropathy (CIDP). It is an acquired immune-mediated inflammatory disorder of the peripheral nervous system and it is a chronic disease (not a critical illness). CIDP is believed to be due to immune cells, cells which normally protect the body from foreign infection, but here they begin to incorrectly attack the nerves in the body instead. As a result, the affected nerves fail to respond, or respond only weakly, to stimuli causing numbing, tingling, pain, progressive muscle weakness, loss of deep tendon reflexes, fatigue, and abnormal sensations. The likelihood of progression of the disease is high. There is no known cure.

A guy known for his good physique is now a scrawny chap who is incapable of working a job. My heart goes out to him ... he is uninsurable (insurers rejected him totally). At 39, he has no livelihood, depending only on his wife's income. His AIA agent unfortunately didn’t know about disability income plans. His existing insurance coverage did not pay a single cent for CIDP. What's even worse was that when he was about to upgrade to an 'as charged' shield plan, the disease strike and AIA rejected it. He will be facing some huge hospital bills in the years to come."

If you've not engaged a certified financial planner representing an independent financial advisory platform to review your entire financial holdings in the past one year, this, perhaps, is the appropriate time to do so. 

The Emerging Voice of Sound Financial Advice

An article co-authored by Sam Wadia and Karen Tang published in iFAST Insight magazine's inaugural issue -

Case Study: "Before and After" comparison after restructuring the financial portfolio of a real client

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Good financial advice can make a world of difference to your financial well-being. Read on for a real-life case study of how one client actually benefited from this.

Mr. Bryan Lee (the name has been changed to ensure the confidentiality of the client), 35, is an IT manager married to a home-maker. They have two children aged 7 and 5. He earns $8000 per month (before CPF contribution and taxes). They own a 5-room executive HDB flat, a mid-size car, and are repaying loans on both. They enjoy an upper middle class lifestyle - eating out during the weekends, buying new gadgets for their home and children, and taking annual vacations. Their life's dream is to provide a good eduction for their children and to see them happily settled, while never being a financial burden to them.

Just a year ago, Mr. Lee felt like most ordinary residents of Singapore, who believed that lifelong financial security is something reserved for millionaires, and who could not foresee a clear end to their working lives. He was luckier than those who are in an even more precarious situation - those who simple believe that their financial security has been taken care of, with just their few existing insurance policies, or some randomly purchased investments, or even their expectations of subsidies from the government when they retire. Mere belief is a dangerous thing to rely on. Instead, actively knowing all the relevant facts - with professional advice - is what is required.

Over the years they had bought quite a few insurance policies sold to them by insurance agents. Some of these agents were friends and family whom they found hard to refuse. Other agents were so persistent in following up with him, he bought policies from them almost just as a form of compensation for their time and effort. Interestingly though, once they had sold such policies, these agents went almost completely out of touch. The only communication he did receive were reminders from their companies to pay his premiums and the occasional letter informing him of a reduction in bonuses.

Mr. Lee is considered to be a conservative person who had always chosen to buy the products from agents of well-known financial institutions. Besides insurance policies, Mr. Lee had also bought a few investment products from his local banks. These were almost always spontaneous decisions which were initiated by the banks' sales staff. His investments included low capital guaranteed funds and some unit trusts that were considered 'popular' back then.

In Mr. Lee's case his 'status quo' regarding his financial holdings was finally disturbed when he received yet another notice of downward revision of bonus for one of his insurance policies. This revision was blamed on 'volatile market conditions'. At about the same time, he checked on his investments only to find that many were still under performing, even after holding them for a few years.

Mr. Lee realized that he need to seek a second opinion from a financial adviser who would be able to provide him with a holistic, unbiased overview of his entire financial situation.

In the process of interviewing him, the financial adviser uncovered the following areas that were currently lacking in his financial plan:

1. More coverage required, especially critical illness & disability.

2. Premiums paid are costly for the existing coverage amount.

3. Regular portfolio review and rebalancing are required.

4. A suitable investment plan that would suit his risk appetite.

5. A savings plan for his children's education needs.

The financial adviser also conducted a thorough analysis of his present and projected financial requirements, with the aim of deriving the required rate of return which his funds would need to grow, to meet his future financial needs.

Currently, at age 35, the amount of investible funds he has is $70,000 (in liquid assets). He is able to invest $1,500 per month for the next 25 years. He would require $3,500 per month (in terms of current dollar value) during his retirement years. He intends to retire at age 60 and wishes to plan for a life expectancy of up till age 90. During his retirement years, his money will be invested in conservative financial instruments which will give a return of about 4% per annum ( a constant inflation rate of 2% is assumed).

After a thorough analysis of Mr. Lee's financial situation, the amount of liquid funds he would need at age 60, is $1,557,300.

As for the funds required for his children's education needs, in addition to a starting capital of $25,000, he is also setting aside a separate amount of $500 a month, and he wishes to grow that amount to $25,000 in 16 years' time.

To meet his requirements, Mr. Lee needs to grow his current and regularly invested capital at an approximate rate of over 7% per annum.

To achieve his investment objectives, it was recommended that Mr Lee hold a diversified portfolio of unit trusts investing mainly in global equities. Other investment vehicles such as bonds, deposits and structured products were inadequate to attain the above rate of growth over sustained periods of time.

Once his needs and financial goals had been established, the financial adviser commenced work on scouring the market for suitable plans that not only had customer-friendly clauses but which were cost effective as well. Although the companies were not as well-known as the big boys of the industry, they were very strong financially and able to pass savings to clients by quoting lower premiums, and were also able to include legal clauses which were beneficial to their clients in their contracts.

Table 1 gives Mr. Lee's existing insurance holdings - detailing the coverage he receives and the premium he has to pay. The total cash premium that Mr. Lee forks out annually for his insurance is $12,952, for a sum assured of $390,000 for death and Total and Permanent Disability (TPD) and $190,000 for critical illness. In this situation, Mr. Lee is actually "under-insured and overpaying".

TABLE 1: BEFORE RESTRUCTURING

* Excludes the single premiums

** Excludes coverage from single premium policies.

After talking into consideration the various factors listed below, the required sum assured for Mr. Lee was derived:

1. Annual premium budget

2. Critical illness treatment expenses

3. Current and future expected income

4. Number of years of income to be replaced in case of death, disability, illness or accident

5. Liabilities

The products (as listed in table 2) were recommended. It can be seen that there has been significant savings of $5,464, or 42% of the original premium, and yet the coverage has been increased by 55% for death/TPD and 216% for critical illness.

TABLE 2: AFTER RESTRUCTURING

The single premium policies were discontinued and the amount reinvested into unit trusts, due to the following reasons:

a. Single premium Investment Linked Policy (ILP) is cost ineffective for both insurance and investment purposes.

b. He did not need the protection provided by the ILP and single premium investment products because all his needs are taken care of by the new program.

c. The cash value of the single premium investment products was redeemed and reinvested with suitable unit trusts.

Endowment policies offer a rather sluggish rate of growth and this would not be adequate for Mr. Lee's retirement funding. The cost for his insurance coverage was also considered high which was why they too were discontinued and the cash value reinvested.

Mr. Lee's revised portfolio provided him with immediate benefits:

1. Insurance plan with limited premium payment term (payment will end before he retires), and yet provides sufficient coverage for life.

2. 42% lower annual premium costs.

3. Effects of the sequence of the various catastrophic events (disability, critical illness, accidents) were considered in the construction of the portfolio.

4. Greatly increased coverage amount in his working years.

5. More 'client-friendly" legal clauses in the contract

6. A comprehensive mix of products, each positioned in light of the other, versus an almost random addition of policies.

Satisfied, Mr. Lee noted that the whole process was by far a more rational approach - a simple comparison of available options in the market that matched his needs and the selection of the most ideal option vis-a-vis his resources.

The New Emerging Financial Advisory Landscape

Ever since the enactment of the Financial Adviser Act, new independently owned financial advisory firms are offering consumers with greater choice for financial advise that is not exclusively tied to any product provider (insurance or investment company). This new entrepreneurial setup ensured that client's , rather than product provider's, interests are considered first n providing holistic financial advice. As a client and consumer, it is beneficial to know that the wider choice available can make your hard earned money work harder, if you choose discerningly.

The Weakest Link in Your Insurance Program - Disability Income Cover

Why is Disability Income Protection So Important?

I'm sure you'll agree that our wealth accumulation plans and risk management goals hinge on our ability to earn an income and actively contribute to them.

And a disruption of our income generating ability need NOT necessarily be due to either one of the 30 critical illnesses or total and permanent disability (TPD).

For example, orthopaedic-related, psychiatric issues and rheumatological conditions are not classified under critical illnesses or TPD. And these conditions can be debilitating enough to stop you from working.

Truths:

• 1 in 3 workers will become disabled for a period of 90 days or more before age 65 (source: Commissioner's Individual Disability Table A)
• The average disability absence is 2 ½ years (source: Commissioner’s Individual Disability Table A)
• 3%-4% of Singaporeans are estimated to be currently disabled and unemployed 1 in 7 workers will be disabled for 5 years or more before they reach 65 (source: http://www.stretcher.com/stories/9907261.cfm)

The impact of this disability is a loss of income, and even if you can return to work it may be to a lower paid job due to some level of ongoing disability or illness. This is the real disability cover you need to look into.

But you may ask: I am already covered, aren't I?

Many people believe they are already covered for the risk of disability. Let's look at the common misconceptions:

1. I have a policy that covers me for Total & Permanent Disability (TPD)

This only covers very severe and permanent disability. I suggest that you read the fine print definition in your policy document to understand under the circumstance under which you can make a claim. Some policies state that you need to have your limbs amputated before the insurer pays you. And it must be a pair of limbs (one leg, one arm or both legs/arms)! How often do you think this happens?? TPD protection is useful to have but falls well short of the real disability cover required.

2. I have a Critical Illness policy

Critical illness policies only cover a specific number of illnesses, usually 30. Critical illness policies work well to provide a lump sum in the event of a critical illness. But it falls short of the real disability need too.

3. I have medical insurance

Medical insurance and MediSave can help you pay your hospital and surgical bills but they do not replace your income.

4. My employer will pay me

Most employers define how long you will receive your salary in the event you are unable to work. In Singapore, this is often between 1 and 3 months, and again falls short of the real disability need too.

5. My savings or my family will help

Yes, of course you can rely on your savings or your family, provided there are sufficient funds available and you feel comfortable doing this. Unfortunately, most people do not have enough savings and most do not want to be a financial burden upon their families.

So, what can you do about it?

1. Worry

2. If option 1 is not acceptable, then you need to consider a Disability Income Plan that takes care of this gap in your protection program.

Disability Income Plans

These are specifically designed to protect against disability and will offer income replacement of around 75% of your regular income.

These plans tend to offer flexibility to meet varying needs. Hence, such plans are taken as a "standalone" plan. The rationale for this is that your need for disablilty protection is long term - if such protection is bought as a "rider" to a basic savings plan, you may find yoruself without protection if you decide to stop savings.

Hence, keep your options open and take a standalone plan.

Female Illnesses - The Men Don't Get It!

It’s a known fact that women generally tend to outlive the men. In the Singapore context, women live an average of 83.2 years vs men at 78.4 years (Source: Health Facts Singapore 2008). This is good news for women but this genetic make up also puts them at a higher risk of diseases, specifically female related illnesses.

Facts:

• From 2003 to 2007, on average, about 2046 female Singapore residents are diagnosed with breast cancer annually. That translates to 5.6 cases per day.
• Among the top 5 female cancers, Breast, Ovary and Uteri cancers are ranked 1st, 4th and 5th place respectively. (Cervical cancer is ranked 6th)
• Systemic Lupus Erythematosus (SLE) occurs 10-15 times higher in females than males.
• Rheumatoid arthritis hits women 3 times more than men.
• 70% of Chronic Auto-immune Hepatitis cases occur in women
• Osteoporosis hits 1 in 3 or 4 females over age 50

A comparative look at historical statistics revealed a rise in the incidence of breast, cervix, ovary and uteri. For instance, between 1993-1997, there were 3,574 breast cancer cases. For the same 5-year period between 2003-2007, the incident rate for breast cancer went up to 6,798. That is close to a 50% jump!

Carcinoma-in-situ vs Cancer

When we talk about cancer, we need to first understand the difference between Carcinoma-in-situ and Cancer.

Carcinoma-in-situ refers to a pre-malignant stage without invasion of the cells. As for cancer, it points to the presence of malignant tumours where there is abnormal and uncontrolled growth of cells and evidence of invasion of cells.

A plan which covers critical illness covers cancer. A female illness cover, on the other hand, covers both carcinoma-in-situ as well as cancer.

Other Special Needs of the Woman

Motherhood and maternity, plastic reconstructive surgery due to accidents and burns, medical procedures on female organs and annual routine medical check ups are also special concerns of the females.

In the competitive marketplace, there are a few insurance companies that offer female illness cover. Some come in the form of standalone plans whereas others are riders to basic plans.

With a plethora of options in the market, which female illness plan is most suitable for your needs?

What to look out for in a Female Illness plan

• Check if it covers carcinoma-in-situ stage of major female illnesses
• This is one of the key differences between female illness cover versus normal critical illness cancer. A female illness plan allows for claims even at early stages.
• Pay attention to the number of sites the plan covers i.e. 1 or 2 sites for some and others 6 sites
• Look out for coverage of specific illnesses that females are prone to
• A free medical check up (usually bi-annual) would be useful
• Maternity cover – this benefit covers pregnancy complication and congenital anomalies. It is mostly optional and it comes at a substantial cost. If you have a Shield plan that reimburses for these, then this may not of importance to you.
• Female surgical procedures reimbursement – if surgical procedures are required and done in a hospital, then this can be taken care of by your Shield plan.

In conclusion:

• Get yourself covered with a female illness plan now before it is too late
• Protection is an investment and it is one of the best forms of leverage for your money
• Ensure you have adequate critical illness coverage in place (If you do not know what is your ideal coverage, seek professional help.)
• Lead a balanced lifestyle – pay attention to your physical, mental and emotional health
• Spend quality time with yourself and with your loved ones; cherish the blessings you have been given
• Go for a health screening every year