Your Guide to ILPs and a peak into “New ILPs”

The Simple Sum recently posted an article, “Your Guide to ILPs: What You’re Paying for When You Buy Investment-Linked Insurance Policies”.

Image courtesy of The Simple Sum.

It is a good read, especially for policyholders who may not be aware of the investment allocation or how the policy actually works.

It should be noted though that the article is based on traditional ILPs.

“New ILPs”, sometimes known as “101 ILP”, offers minimal insurance coverage and focuses more on investment. Premium is 100% invested before charges are deducted later on.

This “New ILP” offers a different kind of investment opportunity similar to that of unit trust investing, with added benefits and advantage by virtue of being an insurance policy, particularly in respect to estate planning.

It is an alternative that customers can consider, especially if to utilise its status as an insurance policy while maximising premiums (from first premium payment) for investments.

Will Agribusiness Bonds do well amidst pandemic?

Climate change will cause a profound impact on our food security. Agricultural areas are at risk from the effects of temperature changes. Changes in ocean currents and temperatures will affect fishing and fisheries. Desertification is a risk for many areas. This means the price of putting food on the table will rise, even as quality may be inconsistent. In the meantime, agriculture commodity markets are expected to do well, because the price of the product will rise.

In 2020, there was a bull run in agriculture commodities which defied expectations and proved immune to Covid-19’s economic and social consequences. People still need to eat, even amidst an epidemic. And people stuck at home tend to eat more. It is true that coffee and cocoa suffered, but grains and oilseeds reached multi-year highs. Even commodities associated with the energy complex, and GDP growth, palm oil and sugar, performed well.

This is easily explained, on hindsight. We know that speculators bought record amounts of agricultural commodity futures in 2020, feeding that price upside. The fiscal and monetary stimulus created a flow of funds out of sovereign bonds, since yields dropped. Investors were looking for alternatives, and agricultural commodities were attractive investment assets. Speculation is part of the reason prices are expected to drive up.

We also owe these prices to the resilient demand of many markets, most especially China, which was stocking up on corn and soybeans. This demand will slowly decline in the coming year, which will lead to some surplus, dampening prices in the near term.

That being said, this surplus will not last long because climate change, and a worsening La Niña and will continue to be a major challenge for farmers around the globe, negatively impacting the availability of agricultural commodities in general. Countries, in order to secure their food security, will continue to drive prices up as they seek to secure adequate supply of these commodities, particularly wheat, corn. and soybeans.

Food security is the key point here. There will continue to be a scramble for all sorts of agricultural commodities, and this is expected to exacerbate in time. Speculation will feed that rise, but speculation creates temporary bubbles. In the long term, the trend is towards scarcity, meaning rising yields.

Terence K. J. Nunis, Consultant

Image courtesy of Terence.
Image courtesy of Terence.

[Shared with permission from AgriBonds Will Continue to Do Well in the Near Term.]

Commentary:

This is an interesting news and market development, amidst much talk of a bullish equity market, particularly technology and healthcare funds.

Sometimes we get carried away with the news of bullish equity market, that we neglect bonds.

While I understand the enthusiasm, a little caution is necessary. Not every wave that we see should be ridden upon.

Always understand our position, risk tolerance as well as time horizon.

While it may be a good time to go into technology funds and even AgriBonds, always remember the golden advice: do not keep all eggs in one basket.

It is thus recommended to engage a professional financial planner for advice.

Graduation… but always a Shariah student

“Nobody said it was easy..”

It wasn’t easy to juggle work and studies. It wasn’t easy to set aside time to attend classes, instead of meeting clients.

But it was worth it. The classmates, the lecturers, the bonding, the learning. It was worth it, al-Hamdu lillah..

This is not an end to learning; the journey has just begun. And yes, it was partly intended to make me a more competent financial planner, especially towards my Muslim clients.

Once a student, always a student.

[This entry was originally posted on Diari Pelajar Syariah SG.]

“Is Islamic banking viable?”

The following is my answer to a Quora question: “Is Islamic banking viable?”

If by viable, you mean to ask if there is there a market for it, then it is because enough people believe in it for it to exist. It is a growing field, and it is evolving. If by viable, you mean to ask if it will ever be a credible alternative to normal banking and finance, I am extremely sceptical. There are structural issues for many of the products and the investment products do not perform as well as equivalent products in normal banking. In some areas, it is far too inferior to be viable for a wider market.

One of the problems is the definition of riba’, usury. Does it include any and all forms of interest? If I send you money in another country, and the financial institution charges more than the principal, is that riba’, when we understand that there is an infrastructure cost involved? Another issue is that Islamic finance products, such as the sukuk are essentially the same thing as normal financial products but with an Arabic name, and higher distribution costs. There is the normal distribution costs, and then there is the distribution cost of the “Islamic” accrediting authority. We can also argue that there is a credibility issue with the accreditation of so-called Islamic products when the shari’ah compliance committees are not independent regulatory authorities, but paid for by the banks themselves.

Before Islamic banking, there was a movement towards ethical banking. Instead of reinventing the wheel for cosmetic and vanity purposes, it would make more sense to revisit ethical banking, and make it a standard throughout the industry.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: Is Islamic Banking Viable?]


Image for illustrative purpose only.

I have to agree with the points mentioned by Terence. And I would add:

  • Riba is greatly misunderstood in current times to refer to any form of interest, due to lack of understanding and ignorance of the current financial system.
    • We really need to review and revisit the definition and understanding of riba and how it applies in the current system.
    • We also need to understand why Al-Azhar and Egyptian Fatwa House view mortgages and other banking transactions as permissible while others regard them as riba. When such a khilaf (scholarly disagreement) exists, we are allowed to take the easier or practical view that facilitates livelihood, especially for Muslim minorities.
  • The higher distribution costs is often either overlooked or regarded as a “necessary cost” to ensure “compliance”.
    • I personally would disagree. It is like saying “halal certification is necessary” for something that is halal in the first place. Like fish in the supermarket or a meat that is known to be slaughtered by a Muslim.
  • And yes, I strongly agree that we should revisit ethical banking & finance, rather than reinventing the wheel.
    • I have sat in a fund house presentation, from which I understood that the fund house’s philosophy in investing includes being ethical; it won’t invest in companies like tobacco which it feels to be detrimental to society.

Muslim consumers need to wake up. It is no longer about embracing and instilling financial literacy, but increasing our knowledge and understanding of the financial industry so as to better engage it in facilitating our livelihood.

“Where does life insurance go if there is no beneficiary?”

The following is my answer to a Quora question: “Where does life insurance go if there is no beneficiary?”

Should there be no nominated beneficiary for a life policy, the policy pays out to the estate of the deceased, and distributed according to the will. It comes under the administration of the executor of the estate. If there is no will, and the deceased passed away intestate, the payout will still be consolidated with the rest of the estate, and distributed according to intestacy laws. If there was a beneficiary, and the beneficiary predeceased the deceased, meaning that the beneficiary passed away before the life insured, the policy pays out to the estate as if there was no beneficiary.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: Where Does Life Insurance Pay Out to if There is No Beneficiary?]


Image for illustrative purpose only.

A brief and apt answer by Terence. I’d like to add a few points:

  • Nomination of insurance policies is just as important as having insurance policies itself.
  • It is important to plan your finances with the end in mind: who would you like your insurance payout specifically, and your wealth generally, be paid out (or distributed) to should you no longer be around?
  • Estate planning (planning how your wealth should be distributed after your passing) is as important as financial planning; often, it is a misconception that having a will is sufficient.

Speak to a financial consultant/planner with regards to your estate planning needs and concerns.

“Which one is better: a monthly contribution to income protection, or investing the same money every month?”

The following is my answer to a Quora question: “Which one is better: a monthly contribution to income protection, or investing the same money every month?”

That depends entirely on your intent, and your need. In the beginning, you need some sort of liability protection, and coverage for loss of income. Pure investment does not address that. For example, if you have saved a $100 a month for three months, and then had an accident, you only have $300, which is not even close to what you need to replace your income and pay your immediate costs. If that $100 a month was paid into a policy, it would have at least meant $100,000 coverage.

When you have a substantial investment portfolio, your need changes, and your priorities evolve. In such a case, you buy policies to complement your portfolio, because now, you have a legacy to protect.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: Which is Better: A Monthly Contribution to Income Protection or Investing the Same Money?]


Image for illustrative purpose only.

Terence has addressed the question aptly.

One should not stand independently of the other; income protection is as important as growing one’s wealth.

Always go back to your goals and needs. And plan your finances accordingly.

Quite often, engaging a financial consultant/planner would help in finding the balance.

“What is better: a stock or a mutual fund?”

The following is my answer to a Quora question: “What is better: a stock or mutual fund?”

When you buy stock, each stock is the purchase of shares in individual companies. The advantage is that gains are more easily realised. In effect, a gain in share price may give you a potential profit may times what you paid for that stock. The disadvantage is that your investment is tied to the performance of the stock, and a drop in share price could result in you making a paper loss. There is more volatility here.

When you buy into mutual funds, you are, in effect, buying into multiple stocks in many companies. Due to this, the potential gains will not be as much as that of that from a single stock. However, because of the inherent diversification of the index, you are unlikely to make precipitous losses since that would involve the entire market losing capitalisation, not just a single stock.

You choose either, depending on your preference and risk profile, or you can choose both, and diversify your portfolio.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: What is Better: a Stock or Mutual Fund?]


Image for illustrative purpose only.

In brief, it’s a choice of investing in shares of an individual company or stocks in multiple companies.

Each has its pros and cons. What matters is how it is managed in your overall investment portfolio.

“Do high yield bonds have a high default rate during a recession?”

The following is my answer to a Quora question: “Do high yield bonds have a high default rate during a recession?”

Yes. These bonds have a lower credit rating, meaning they are not investment grade bonds. These bonds are not rated corporate papers, or sovereign bonds. Their underlying issuer either has a weak financial position, or is already heavily leveraged. To attract investors, they have to offer a higher yield. Most such bonds are essentially junk bonds. Let alone a recession, a high yield bond from a start-up might default simply because that start-up missed a fund-raising target. These are not debt instruments for the faint-hearted, or those with liquidity exposure.

Terence Kenneth John Nunis

[Shared with permission from: Quora Answer: Do High Yield Bonds Have a High Default Rate during a Recession?]


Image for illustrative purpose only.

While the dividend rates of high yield bonds are enticing, we need to bear in mind that they come with some risk.

Yes, you can have high yield bonds as part of your investment portfolio, but it should not be the only bonds. Balance it with high grade bonds.

“What arguments exist for whole life insurance over term life insurance?”

The following is my answer to a Quora question: “What arguments exist for whole life insurance over term life insurance?”

Both whole life and term have their uses. Generally, I recommend whole life when the client is younger. If they can afford it, I recommend a limited pay whole life, so they pay for the coverage during their earning years only. When taken early, whole life is cheap. It will never be cheaper than a term plan, but when we calculate the total premium of a whole life plan over the course of the payment term against multiple term plans taken at successively later periods of life, whole life premiums are much cheaper.

Secondly, whole life plans have a surrender value; term plans do not. This makes them a financial instrument that can be borrowed against if it absolutely becomes necessary.

Finally, whole life coverage for the duration of the plan, once incepted, is guaranteed. When a term plan is up for renewal, and there is a claim against it, that renewed term plan may not cover the condition claimed against, treating it as a pre-existing condition. This may not be true for all term plans, however.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: What Arguments Exist for Whole Life Insurance over Term?]

Image for illustrative purpose only.

Sometimes, customers, even financial planners, get carried away with the notion of “buy term, invest the rest”, as though it is the only right way to plan one’s finances and insurance.

Yet, individual circumstances differ. Hence, the financial and insurance planning differ as well.

Each insurance product type is created with a purpose. It has its advantages and disadvantages.

Hence, when it comes to insurance and financial planning, it is not about what product you should buy but how the product(s) fit into your overall financial plan and objectives.

“My mortgage is late. Should I call my bank and explain why?”

The following is my answer to a Quora question: “My mortgage is late. Should I call my bank and explain why?”

Yes. When it comes to taking loans from any financial institution, it is always important to be in constant communication and update them. A bank can tolerate late payment if they understand the reason why payment is late, and there is a date of payment. Even if there is a contention, this communication ensures that you have an avenue to negotiate, and even get a waiver on late fees.

Going silent on the bank sends them the signal that you are a likely recalcitrant defaulter, and they will treat you accordingly, including levying punitive fees. If you have failed to respond to their correspondence, they move your loan to the bad debt ledger, and that is a precursor to further legal action, including application for bankruptcy.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: Should I Call My Bank to Explain Why My Mortgage is Late?]


Image for illustrative purpose only. Image courtesy of The Economic Times.

Key takeaway is: always be in constant communication with the bank or the financial institution you are dealing with.

You could get a waiver for late payment fee. Sometimes, refinancing might be the solution for you.

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