“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.

“What are the advantages of investing in a money market mutual fund over a savings account?”

The following is my answer to a Quora question: “What are the advantages of investing in a money market mutual fund over a savings account?”

A savings account has a low risk, and that corresponds to a lower return. A money market fund is also low risk, but it is still of a higher risk than a savings account. This allows for a marginally higher potential return. The return on a savings account is fixed. There is nothing you can do to increase the ROI except by maintaining a higher balance. However, in any reasonable scenario, the ROI is likely to be lower than the inflation. A savings account is a place to keep money, not grow it. With the money market fund, on the other hand, you actually have a reasonable opportunity for greater returns by undertaking a bit more risk.

Debt securities available to you via a money market fund are reasonably stable. They may include various types of government bonds and corporate bonds. They are the most reliable debt instruments. Proper weightage in your portfolio will ensure that you are almost as safe as having your funds in a savings account, but you have a higher return. Also, if you are in a developed market, the relevant securities commission monitors this market and keeps things relatively stable.

What may be surprising, is that in certain instances, the costs associated with keeping money in the money market may be equal or lower than the cost of keeping it in a savings account. Again, the fee structure has to be understood and managed. A bank will charge transaction fees, which can add up, and a fee for failing to maintain a minimum balance requirement. The fund has a management fee that is normally below half a percent. Provided you do not incur too much transaction cost for unnecessary movements of your funds in the money market, the fees can be considered negligible. The money market funds are almost as liquid as that of a savings account. There is a slight delay in converting the securities into cash, which may take a day or more. I personally consider this an advantage since it precludes impulse spending.

If the funds are substantial enough, you may incur tax. Depending on how you manage your investments, and where you put your money, and where you are domiciled, there is actually the possibility that much of what you earn in the fund would not be taxed, or taxed at a lower bracket than keeping an equivalent amount in a savings account. This might also be dependent on the vehicle used to manage the funds.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: What are the Advantages of Investing in a Money Market Mutual Fund over a Savings Account?]

Image for illustrative purpose only.

This is something one should consider. Rather than keeping all of one’s savings in a savings account (or fixed deposit even), why not invest them in a money market mutual fund that is reasonably stable with a higher potential return?

Of course, you should still keep enough money in your savings account for immediate access and emergency needs (i.e. an Emergency fund).

Anything more than that, should be invested for potential growth, at least in a money market mutual fund.

“Where or how should I invest $500 monthly, at low-risk?”

The following is my answer to a Quora question: “Where or how should I invest $500 monthly, at low-risk?”

Even at low risk, you cannot go for the safest since the base objective is to still to have a higher return over the investment period than the rate of inflation. If you cannot match the rate of inflation, then there is no real point investment since you will have negative gains. I am assuming that you are reasonably young and have an intermediate to lengthy investment horizon based on the amount mentioned monthly. That being the case, I suggest an investment-linked plan as opposed to a pure mutual fund type investment.

Any sort of fund has the advantage of spreading the risk over several markets and sectors, reducing the chance of a downturn in any one market affecting the overall performance of your securities. However, an investment-linked plan allows you the opportunity of building an immediate estate and afford you some measure protection should anything untoward occur before your investments mature. Also, the ILP is as liquid as a normal fund, allowing withdrawals.

The investment horizon is between 15 to 20 years conservatively. However, these sort of products normally break even in 10 or 11 years. $500 monthly is $6,000 annually. This would be an estimated projection for a typical such investment, which has a similar profile of any conservatively managed fund. In 10 years, you would have paid out $60,000 in total premiums for a $60,000 investment value approximately, which is 0% ROI. In 15 years, you would have paid out $90,000 in total premiums for a $120,000 investment value approximately, which is 33% ROI. In 20 years, you would have paid out $120,000 in total premiums for a $195,000 investment value approximately, which is 60% ROI.

If you know how to manage the funds yourself and move them between the different funds to take advantage of the market, you can do better of course. Based on $500, your coverage is ideally between $100,000 to $200,000 for death, and total and permanent disability. This means, that the claim will be the $100,000 to $200,000 unless your investment value exceeds this amount. The amount paid out is always the higher amount.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: Where or How Should I Invest $500 Monthly at Low-Risk?]

Here, Terence has highlighted the following key advantages of an investment-linked policy (ILP) as opposed to a pure mutual fund/unit trust, which are often overlooked:

  • Building an immediate estate
  • Afford some measure of protection should anything untoward occur before your investments mature
  • As liquid as a normal fund, allowing (partial) withdrawals

In fact, I personally feel it should be your first policy along with other protection policies to form a comprehensive insurance with investment portfolio.

“What is the secret to not losing money in the stock market?”

The following is my answer to a Quora question: “What is the secret to not losing money in the stock market?”

The secret to not losing money in the market is to not invest. However, money that is not invested anywhere still loses purchasing power over time due to the effects of inflation. Losses are not the problem. When you put money in the market, and that debt or equity instrument loses value, that loss is a paper loss. You can hold for long term, and allow it to eventually appreciate in value if the fundamentals of the underlying asset is good; or you can switch over to something else, which may compound that loss in the short term. However, if you take that money out of the market, that paper loss becomes a realised loss. There is no recovery from a realised loss, except by covering it with profits earned elsewhere.

It is possible to not make a realised loss if you have picked your counters carefully, and have an extended investment horizon since the market historically rises with time. That is the natural state of the market, even with cyclical crashes. It is also important to diversify to minimise risk, so that a fall in one sector of the economy, or one part of the world does not lead to an overall decline in your portfolio.

Terence K. J. Nunis, Consultant

[Shared with permission from: Quora Answer: What is the Secret to Not Losing Money in the Stock Market?]

Image for illustrative purpose only.

Things all beginners should know about insurance

Perhaps you’ve read Before you buy: things all beginners should know about insurance by The Woke Salaryman.

Image courtesy of The Woke Salaryman.

It is overall a good article, in simple language that helps laymen easily understand.

However, I’d like to comment on a particular point of concern:

Mistake 3 is itself a mistake. Covering yourself for up to 10 times your annual salary is basic coverage, not high, especially in the event of permanent disability.

And it doesn’t factor in inflation.

It also runs contrary to news articles that around 80% of Singaporeans are underinsured.

The poll also showed that 85% of Singaporeans are potentially under-insured, with only five times their annual earnings set aside for emergencies.

7 out of 10 Singaporeans have inadequate insurance cover, Insurance Business Asia

As for Mistake 2: Jumping straight into investing with insurance, I would like to mention that:

  • yes, one shouldn’t skip to cover the essentials first
    • however, one’s essential coverage varies over time and age. It is common to meet customers who’d opt for basic coverage first while setting a budget for savings or investment plan (ILP).
    • there is no hard and fast rule. A balance or a middle-ground can be struck, and that would be ideal.
  • yes, there are various investment instruments out there.
    • however, not all customers are investment-savvy.
    • ILP tends to be a safer choice, if it is advised properly, with its limitations highlighted along with its strengths.
    • there is a strength and advantage in an ILP that is not in any other investment instruments out there, especially when it comes to estate planning. (This would require a post on its own.)
    • one article available online that’s relevant to this: Why investment-linked insurance policies should be given a chance. (While it may seem to promote AXA’s Wealth Accelerate plan, the article is quite balance in presenting the pros and cons. And to the best of my knowledge, Manulife has a similar plan called InvestReady.)

Engage a trustworthy financial planner/consultant to advise on your insurance coverage needs. Not any Tom, Dick or Harry can explain insurance, especially when individual coverage needs varies.

“At what age should I buy life insurance?”

The following is my answer to a Quora question: “At what age should I buy life insurance?”

You should get it as early as possible. There are two primary reasons.

The first is that you want to lock in your coverage when you are healthy, before the documented development of any medical condition. Once a condition is medically documented, it becomes a pre-existing condition, meaning that any condition related to that part of the body, that system, or organ, is not likely to be covered; and there will most certainly be loading, meaning that you will pay more premium. In the case of certain conditions, once you have it, even if you are willing to pay the substantial premiums, you will not get coverage.

The second is because level premiums are calculated based on your life expectancy. There is a specific number that is divided by the number of years since your policy inception. That means the earlier you get coverage, the more years your policy may be amortised, and the lower the regular premium. As such, assuming a life expectancy of 84 years for men, as in Singapore, a policy incepted when the life insured is 24 years old means the overall premium and distribution cost is amortised over 60 years. In the case of a policy incepted when the life insured was 44 years old, the amortisation takes place over 40 years, which increases the cost of the regular premium.

Terence K. J. Nunis, Consultant

(Shared with permission from: Quora Answer: At What Age Should I Buy Life Insurance?)

Image for illustrative purpose only.

This is a simple illustration why insurance premiums are lower when you’re younger, and higher as you get older.

Fun(ds) Investing was born…

Yesterday, my team conducted our first webinar on investment, a private session.

I used to be lost and clueless when it comes to investments, as I listened to monthly updates from Sani Hamid and Victor Wong back in Financial Alliance.

I only started to focus on investment in late 2018, reading and understanding.

Moving to AXA-Audentia Alliance Group, I decided to focus on investment, especially with AXA’s suite of investment products, attending almost every fund house updates.

I’d also thank Terence Kenneth John Nunis for the occasional questions and discussions on investments, market and economy, in which he helps provide clarity.

My manager, Zainuden, saw my interest and entrusted me and Ahmad Faris to share with the team on investment basics and updates.

“Fun(ds) Investing” was born, to reflect my conceptualisation of investments.

Yes, I was nervous last night.

And to receive that message from my manager, a compliment from our BDM in Malaysia (Audentia has a Malaysian team) who spent time to sit in our webinar last night, is heartwarming.

It’s a personal breakthrough, al-Hamdu lillah! To be “go-to person” for investments, when I used to be clueless about it.

A new milestone, progressing!

Why traders should stay invested amid the market’s latest downturn

Perhaps you’ve read The world’s largest wealth management explains why traders should stay invested amid the market’s latest downturn – and offers 3 specific recommendations from Markets Insider.

Image for illustrative purpose only.

Quoting a colleague in the industry:

Last Friday’s hotly discussed investment topic: Will the sell-off from tech continue and spill-over to other sectors or it is merely a healthy correction?

The good news is that it doesn’t matter in the grand scheme of things. Prepare for both.

The point of 2 and 3 is similar. Diversify across regions and asset classes.

Amir Hamzah, Team Director, iFAST Global Markets (Singapore)

That’s the quick takeaway for you.

And to recap the 3 recommendations:

  1. Ease into markets
  2. Diversify for the next leg
  3. Protect against the downside

I’ll give my brief commentary in the next post.

“Why do insurance salespeople pitch life insurance as an investment?”

The following is my answer to a Quora question: “Why do insurance salespeople pitch life insurance as an investment?”

Whole life insurance is not an investment. A fully paid-up policy may function as a financial instrument, or as a form of leverage, but that does not make it an investment. A way that high net worth policies are financial instruments is when the client buys the policy with premium financing. Such policies are single-premium plans, not regular premium. This means that there is a minimal payment from the client, and the rest is paid for by the bank. The client then pays back the rest of the premium in instalments, at low interest. For example, if the premium is $100,000 for $10 million coverage, and the minimum down payment from the policy owner is 20%, the client has paid $20,000 upfront for that $10 million coverage. The rest of the premium is covered by the financing bank, and the client then pays the bank back in instalments.

This policy is now considered fully paid up, and may be borrowed against, should that need arise. That client, if he has a relationship with the bank, may then take out a credit line that is, for example, 1.1 times the policy value. In this case, that would mean a credit line of $11 million. This means, in effect, the client has paid $20,000 to create liquidity worth $11 million. This does not work for every single whole life plan. This is a simplistic illustration to illustrate the point. Finance works differently when you have money. Wealth grants you access to options not available to the masses.

Terence K. J. Nunis, Consultant

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/09/quora-answer-why-do-insurance.html?m=1 ]

Image for illustrative purpose only.

This is a good illustration in addressing the question. A life insurance policy is a financial instrument with a specific purpose, not an investment.

One should be wary of such a pitch; it could possibly reflect ignorance of the salesperson.

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