Lesson from the Swatow Restaurants

Business owners, listen up!

If you wish to avoid potential disagreements, mishandling and even the collapse of business after your death, you need to pay attention to this article.

Here's a real life case study - the Swatow Restaurants.

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.

A Big 'C' to Reckon With

Singaporeans are familiar with the 5 ‘C’s – condo, club membership, cash, credit card and car. Now, there’s another ‘C’ that is making headlines in the media here. You guessed it - it’s Cancer.

Some startling statistics from the Singapore Cancer Society:

• 1968-1972 – 12,000 cases (incidence rate of 135 per 100,000 males & 103 per 100,000 females)
• 1998-2002 – 38,000 cases (incidence rate of 231 per 100,000 males & more than double for females to 240 per 100,000)
• Sharp rise attributed to the dramatic increase in breast cancer in women and colorectal cancer in both sexes

On 6 March 2010, The Straits Times did a special report on Chinese and Cancer. The cover photo is a lady by the name of Mrs Cynthia Fong, age 55 and she suffers from breast cancer. The shocking part is this – her ‘target’ drug Herceptin costs $4,000 per shot and she needs a total of 17 shots. That works out to a whopping $68,000 just for drugs alone!

Cancer treatment, which can cost tens of thousands of dollars, can easily drain one’s medisave savings as well as wipe out the accounts of one’s spouse and family members’. Medishield insurance can be used but there are limits.

Mrs Fong has emptied the bulk of her own and her husband’s medisave, health insurance schemes and family’s savings.

The price tag for Mrs Fong’s new lease of life so far is $100,000 and she still has yet to fork out at least $30,000 more for her shots.

There would be additional treatments and medical expenses after Mrs Fong is discharged from hospital. Realistically speaking, the total bill is highly likely to be more than $130,000. And this is only over a period of 12 months.

Cancer is not a cheap affair, not to mention the emotional and physical trauma that one must endure during and after chemotherapy.

Solution to high medical costs

In Mrs Fong’s case, it seems like she did not own a medisave-approved enhanced shield plan that has ‘as charged’ benefits.

When one has an ‘as charged’ plan, treatment costs, consultations, surgical benefits, daily room and board etc. are charged as per the bill, subject to the yearly claimable limit. For example, the best plan, Plan 1 (any private ward), from Aviva has a yearly limit of $500,000.

It does not cost an arm or a leg to be covered under a comprehensive medical plan.

To give you an idea of what the premiums are like with one insurer:

Age 1-30 - $158.55

Age 31-40 - $241.28

Age 41-45 - $446.70

Age 46-50 - $481.46

You may withdraw up to $800 (for insured person below 81 years old at age next birthday) per insured person per year or $1,150 (for insured person 81 years and above at age next birthday) per insured person per year.

With continuous enhancement to medisave-approved shield plans, the deductible and co-insurance portions can also be fully covered by riders. When you have these riders, you are effectively covered 100% by the insurer - this means you are reimbursed in full without forking out a single dollar.

Why wait when you are healthy?

There is no reason to hesitate getting yourself covered by a comprehensive hospital and surgical plan.

My recommendation is to get the best plan which gives you access to private hospitals. Private hospitals have its privileges – prompt attention, shorter waiting time and reduced agony over availability of beds (as compared to restructured/government hospitals).

As this type of plan could potentially cover huge hospital bills, pre-existing conditions are almost always excluded unless declared and accepted by the insurer.

Aviva’s moratorium underwriting is the first in the industry. This gives people with pre-existing conditions a chance to be covered for their existing conditions.

What this means is that during the period of 5 years of continuous insurance from the date of commencement of the cover, if the insured person has not, in relation to the pre-existing condition experienced symptoms or sought advice or tests from a specialist, physician or alternative medicine provider or required treatment or medication, Aviva will cover that pre-existing condition.

Give yourself and your loved ones the best gift you can, and that is not to be a financial burden when you have an illness.

Fool-proof Medical Insurance Reduces Stress

What is Medical Insurance

With medical care costs escalating steadily, you need to protect your financial health should you be hospitalised as a result of an illness or accident.

Medical insurance or health insurance is perhaps one of the most overlooked area in financial planning. And many people do not realize that a hefty medical bill can potentially derail their financial plans overnight. For example, a heart angioplasty at National Heart Centre would set you back between S$21,000 and S$31,000.

So, do you have a fool-proof medical insurance plan in place?

Since the introduction of medisave approved integrated private shield plans, we are spoilt for choices. An enhanced plan has 'as charged benefits' instead of sub limits for each category of medical expenses. Besides the usual room and board, surgery, doctor's fees and treatments etc, other benefits available with such plans include confinement in community hospitals, pregnancy complications, congenital conditions, letter of guarantee and benefits for major medical transplant.

What to watch out for

Every life insurer would offer medical insurance solutions. A medical plan is made of 2 parts: 1) the basic plan and 2) the rider. There are full riders and there are partial riders. A full rider covers the deductible (up front payment, depending on the ward class) and co-insurance (10% of the balance of the bill after deductible). On the other hand, a partial rider covers only the co-insurance portion. Hence, it is expected that a full rider will cost more than a partial rider.

Besides the riders, the plan type will dictate the level of benefits. In choosing a plan, be sure to go with one that covers your health concerns.

How we help you

So, how do you then select from the plethora of options in the market? Do you have the time and energy to meet up with different insurers to understand their plans?

If the answer is no, then you would be better off consulting a professional financial advisor who has access to the different solutions available in the market. He or she would be able to highlight the differences between each plan and advise on a plan that best fits your needs.

We go through a structured questionaire with our clients to get them thinking about their requirements for health care. Our recommendation will be based on their responses to the questions.

We have counselled many who have pre existing conditions and advised what is best moving forward to ensure that they get cover for other conditions. As a rule of thumb, insurers exclude pre-existing conditions altogether. However, Aviva is the only insurer that has moratorium underwriting v/s full medical underwriting. Aviva’s moratorium underwriting is the first in the industry. This gives people with pre-existing conditions a chance to be covered for their existing conditions. What this means is that during the period of 5 years of continuous insurance from the date of commencement of the cover, if the insured person has not, in relation to the pre-existing condition experienced symptoms or sought advice or tests from a specialist, physician or alternative medicine provider or required treatment or medication, Aviva will cover that pre-existing condition.

The type of medical insurance you have can either make or break your financial plans.

Consult a professional financial advisor before you make the purchase. One wrong move and you could lose your insurance coverage completely.

Term Life vs Traditonal Whole Life

When buying insurance, many people only go for traditional whole life plans. I’ve come across clients who have as many as 4 such plans and still be under-covered!

In planning, I would normally recommend only 1 whole life and the rest of the protection is taken care of by term plans including Disability Income Plan and a comprehensive medical plan.

Traditional whole life plans appear attractive with the monies at maturity being more compared to the latter. But term plans are the best tools to boost one’s coverage. Here are reasons why term plans are ideal for increasing your cover without breaking the bank:

1. Term plans cost much less than traditional whole life insurance. For a male (non-smoker) aged 35, a traditional whole life plan with S$100,000 sum assured (for death or total & permanent disability) will cost about S$2,186 p.a. whereas a whole life term plan (coverage till age 90) will cost only S$863 p.a. That is a difference of S$1,323!
   
   
2. By restricting yourself to traditional whole life plans, you are likely to be inadequately covered due to budget constraint. By going the term way, there is a stronger likelihood of being fully covered.
   
   
3. You can keep protection costs even lower as term plans allow you to limit the actual term coverage to an earlier age like 60. Most of us have much reduced protection needs by age 60 as our mortgage will be fully paid up and our dependents no longer need our financial support.
   
   
4. You can also terminate term plans at any time when there is no longer a need for certain protection, without worrying about the potential loss of savings.

Besides reviewing insurance portfolios with multiple whole life plans, clients also tend to have multiple Investment Linked Plans (ILPs).

A guiding philosophy in my financial planning practice is to separate investments from insurance.

ILPs are infamous for having 'hidden' charges and fees that are not fully explained at the point of recommendation by the insurance agent. Some agents are not even aware of the list of charges and fees deducted via units from the account. Ask them about mortality charges (that eat into the investment returns), and they will draw a blank look. I'll explore the pros and cons of ILPs in another post.

When you invest in pure unit trusts on your own, instead of through an ILP insurance plan, you will generally achieve better returns over the long term. You can also:

• Have access to many more funds available in the market
• Create a proper asset allocation strategy based on your risk profile
• Stop and start investing at any time (to cope with events like retrenchment or unexpected high expenses)
• Change the amount to be invested (when income levels change)
• Change investment managers (when you feel your existing manager is not performing to your expectations)

Therefore, it is wiser to separate the two needs (in most cases) - protection and savings needs. We buy insurance to protect ourselves and our families. We invest to build our future funds and for our children's education.