Financial Planning with M Farhan

What are the top 3 life insurance policies you can recommend?

The following is my answer to a Quora question: “What are the top three life insurance policies you can recommend?”

I am speaking strictly from a Singapore perspective, although I believe the general principle may be applied elsewhere. There are three types of insurance plans that form the foundation of our liability mitigation.

Firstly, it is important to have a good hospitalisation plan. If you can afford it, get the highest tier of coverage, and get it as early as you can. Hospitalisation plans are multiple claim, and are for life. Having a pre-existing condition because you did not get a plan early enough means getting saddled with large hospital bills later.

Secondly, it is important to have a good accident plan. Like hospitalisation plans, they are multiple claim. There is also an option that pays you something for the duration of your incapacitation, or a period thereof.

Finally, the third plan to get is a whole life plan with disability and critical illness coverage. These plans can get expensive, but it is good to start with one, even a cheaper plan, and then add to the coverage as your earning capacity improves.

Terence Kenneth John Nunis

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/05/quora-answer-what-are-top-three-life.html?m=1 ]

Though I agree with Terence in principle, I must add that client’s circumstance is still the main factor of consideration.

That is often when I would recommend a Term insurance plan instead of a whole life plan.

I would recommend a Personal Accident plan that is customisable to tailor to specific needs and concerns.

It should also be noted that this post merely addresses financial protection needs, without factoring in wealth accumulation needs such as retirement planning and child education planning.

With which budget could be a concern; the overall financial planning has to be adjusted accordingly.

4 Lessons on Personal Finance from Covid-19

Perhaps you’ve read 4 Key Lessons That COVID-19 Has Taught Me About Personal Finance.

They are:

Always set aside Emergency savings.
Diversify income streams and skill sets.
Get suitable and sufficient insurance coverage.
Prepare your Will and complete your Nominations.

Here I’ll share additional comments and thoughts on the 4 lessons.

1. Always set aside Emergency savings.

How much should you set aside for Emergency savings? Financial advisors have slightly varying views.

I would recommend 3 to 6 months’ of your income.

This is to provide some cushion should you be retrenched or out of job while you search for a new job or source of income.

2. Diversify income streams and skill sets.

The article has provided some beneficial thoughts. And one can look to Work Skills Future to upgrade one’s self.

What I would like to add is to emphasise on managing your cashflow.

Having additional income streams and skill sets will not make any difference if you are not managing your cashflow well.

3. Get suitable and sufficient insurance coverage.

I would add that this would be a good time to get in touch with your financial consultant/planner to review your insurance portfolio.

This would benefit you in at least 2 areas:

identifying shortfalls in your insurance coverage and what you can do about it
if you’re financial tight or affected due to the current situation, your financial consultant/planner should be able to help you restructure your insurance portfolio and possibly save you some premiums

4. Prepare your Will and complete your Nominations

Perhaps this is a good time to address the elephant in the room.

Estate planning should be addressed sooner than later.

If there is only one thing the current pandemic has taught us, it is that life is full of uncertainties.

You can never be too prepared.

Do get in touch with me should any of the above lessons be of immediate concern to you.

There’s nothing wrong to take a loan.. but..

Did the title catch your attention?

I know it did when I first saw it appear on my Facebook newsfeed.

I hope you didn’t miss out the end part “first, ask yourself these 5 questions”. What are they?

Can you afford a repayment?
Will a loan help you reach an essential goal?
When will your financial situation improve?
Are you bound to a lot of financial commitments?
How is your credit score?

I don’t deny that at times it’s tempting to take a loan, but the 5 questions will help you evaluate if you truly need the loan and if it is essential.

Quite often, it’s good to consult your financial planner/consultant: to review your finances, especially your cashflow, and evaluate what would be a feasible solution for you.

Sometimes, converting your whole life policy to a paid-up term insurance would be a feasible option to ease your cashflow.

Or a partial withdrawal from your investment-linked policy can be another option that can be considered.

Point being, there can be more feasible options than taking a loan. Yet, it is also possible that taking a loan is still necessary.

Consult your financial planner/consultant. Let him help you decide what would be the best solution for you.

Who invented investing?

The following is my answer to a Quora question: “Who invented investing?”

When the first hominid set aside some food for the next day instead of eating everything in that one meal, so that it could be traded for favours in scarcity, that was investing. Investing is putting aside assets for later use, or greater potential future gain .

Anyone who saves money is practising a crude form of investing. Anyone who collects things, and assigns a value to them, is investing. As financial systems got more sophisticated, and an entire class of financial advisors and experts arose, people got intimidated by degrees of complexity, when at heart, it is a simple matter of anticipating scarcity so that certain assets can be parlayed into profit.

Terence Kenneth John Nunis

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/05/quora-answer-who-invented-investing.html?m=1 ]

Succinctly explained for an actually simple concept.

This should be the first step to understanding investment, before we go into the complexities.

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 Kenneth John Nunis

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/05/quora-answer-what-arguments-exist-for.html?m=1 ]

As mentioned in a previous post, while I agree with Terence in principle, I often find myself adopting a slightly different approach, depending on several variables such as:

budget
time horizon
other financial commitments and obligations

Hence, a young client may opt for Term life insurance, weighing in the above considerations. Or simply to maximise his insurance coverage at the lowest premium, while still having surplus for other planning needs.

Hereby, creating an insurance portfolio for the client.

Client can choose to convert his Term life insurance to a Whole life insurance later on when he can afford, without the need for medical underwriting.

MediSave Maternity Package

[This post is extracted from CPF Board’s FB page.]

Welcoming a new baby to the family is an exciting time for the family!

While there are maternity costs to think about, check out how Chris and Pam can get additional support from the MediSave Maternity Package (MMP), to help reduce their out-of-pocket expenses.

Find out more schemes and benefits to help you ease into parenthood: https://www.cpf.gov.sg/AYRBundleofJoyFB

Of Shariah-compliant investments

[This post was originally shared on my FB profile on 27 December 2019.]

When asked about shariah-compliant investments, I personally would steer towards realm of permissibility as it would widen a client’s option.

I personally do not view investments for Muslims to be too rigid as how some would portray it under the claim of “shariah-compliant”.

Based on the fiqh maxim of “origin of a matter is permissible”, mu’amalat or transactions are originally meant to be feasible and practical.

Hence, I’m pragmatic when it comes to investment planning, as well as financial planning & management as a whole, even for Muslims.

Sure, it leads me to “controversies” such as permissibility of investing in bonds, in which I have to disagree with Islamic Finance proponents and enthusiasts.

Being a Shariah student myself, I’ve verified my stance with my lecturers.

Fiqh is dynamic and pragmatic, and provides ease in any situation.

[To end with a note: I do advise on investment planning, on what’s practical for Muslims in Singapore. Feel free to get in touch with me for a consultation.]

What are the best ways to give money to your heirs while you are alive?

The following is my answer to a Quora question: “What are the best ways to give money to your heirs while you are alive?”

A tree continues to benefit those around it, even when its original planter has long gone. An inspirational concept in estate planning and leaving a legacy.

You have many options, and many forms of transferring wealth. One of the best ways is to set up a revocable or irrevocable trust, with yourself as settlor, and trustee. You can even make yourself a beneficiary while you still live, and revert the trust to a testamentary trust upon your passing.

Firstly, a trust is a distinct legal entity, which protects your wealth in the event of a bankruptcy petition, or a law suit. It is also useful in the case of an acrimonious divorce.

Secondly, a trust mitigates your tax exposure, and your beneficiaries get their stipend tax free since it is the duty of the trust to pay the tax before disbursement of funds in every case. Since trusts account for holdings after expenses, unlike personal assets, this is a huge advantage.

Finally, as a trustee yourself, you have full control of which beneficiaries benefit, according to how much, and the discretion to add or remove beneficiaries. As a trust, you also have the option of investing your funds, and stipulating disbursement conditions and periods that cover multiple generations.

Terence Kenneth John Nunis

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/05/quora-answer-what-are-best-ways-to-give.html?m=1 ]

Perhaps, this shall kickstart my Estate Planning series, in which I’ll give more focus on Muslim perspective, its similarities and differences wth conventional estate planning.

What bank will pay me to open an account?

The following is my answer to a Quora question: “What bank will pay me to open an account?”

I would hardly consider this money free. Banks may give you incentives for opening accounts with them, but these extra monies come with some strings attached, such as keeping a certain minimum sum for a specific period of time, or keeping the account for a certain period. Compared to the amount required to open some of these accounts and the hold period relative to the interest offered, it may or may not be more than the opportunity cost elsewhere.

In any case, this should not be a primary consideration for opening such a bank account. Interest rate, bank liquidity, and compliance, and accessibility of the funds are what we should look at. Within a Singapore context, we also consider the fact that the Singapore Deposit Insurance covers the first $75,000 aggregated under that account name. In that light, having more than one account spread over several banks makes sense if you have much more than that.

Terence Kenneth John Nunis

[Shared with permission from: https://terencenunisconsulting.blogspot.com/2020/05/quora-answer-what-bank-will-pay-me-to.html?m=1 ]

Zakat on Savings: Multiple Accounts

[Zakat in Practice (part 11)]

[Introduction: This series is a sharing on zakat from the perspective of a financial planner. It is hoped to be educational, informative as well as practical to help readers better understand Zakat, especially Zakat on Wealth, as a Muslim in Singapore.

Topics to include: Zakat on Investment, Zakat on Savings, and Zakat on Estate.]

[Previously: Zakat on Savings: Savings in the bank ]

First and foremost, we need to understand why one would have more than one savings account.

More often than not, it is meant to cater to different purposes, such as:

Transactional/Expenses
Emergency fund
Savings/Accumulation

Transactional accounts and Emergency fund are necessities. Whereas zakat is only applicable on excess or surplus of wealth.

Hence, it is in my personal understanding as a financial planner, as well as a Shariah student, that zakat is not applicable on transactional accounts and emergency funds, even though they are “savings accounts” in name.

Zakat is only applicable on the third type of account which one uses to grow or accumulate one’s savings, in general.

It is possible for one not to pay zakat on savings (accumulation/growth account) under certain conditions and circumstances, which I will elaborate in a subsequent post.

(To be continued)