top 3 financial products you should know

There are so many financial products in the market that people are spoilt for choice, much like when they are selecting a new phone. No matter how varied the financial products are, they will never veer too much from the basic categories which I will be touching on.

I have always mentioned to my friends and clients, financial products should be the secondary focus in financial planning as they are merely tools to help you achieve your financial goals. The primary focus should be on how a financial planner can help you uncover your financial goals, and provide you with ideas or advice on how you should structure your finances to achieve your goals.

Once you know what you need to achieve, it is a matter of selecting one or a few tools amongst the myriad of financial products to reach your goal. Here are three basic categories of financial products.

1. INSURANCE

Life Insurance

Benefits:

  • Provides Death coverage for whole of life (typically up to 100 years old) and Total Permanent Disability coverage till 65 years old.
  • Premiums are paid till age 85 or more.
  • There will be bonuses and cash value 3 years after the start date of the plan.
  • Paid in one lump sum to beneficiaries.

Variants of this plan:

  • One can now opt for a shorter premium term, i.e. 10, 15, 20 or 25 years while coverage remains whole of life.
  • Life Insurance plans with multiplier effect. Depending on which company and the age when a person buys this plan, there is a multiplier effect added to his chosen coverage. E.g. If person A takes up S$100,000 coverage before age 65, he gets to enjoy a multiplier effect of up to 3x, i.e. S$300,000 when claims occur.

Why people like this:

  • Bonuses added to the life insurance coverage will help to soften the impact of inflation in the long term.
  • People who prefer some form of returns on the premiums they pay.

Term Insurance

Benefits:

  • Provides Death and Total Permanent Disability coverage for a fixed period of time. Total Permanent Disability coverage typically stops before age 6-
  • Premiums are paid for the entire duration of the plan.
  • There are no bonuses or cash values for term insurance.
  • Paid in one lump sum to beneficiaries.

Variants of this plan:

  • Group Term Insurance is a term insurance that is bought among a group of people. Usually has a lower premium than an individual term insurance. The drawback of this plan is it typically stops before age 70, when a person may need the coverage the most. CPF’s Dependent Protection Scheme (DPS) is a good example of a group term insurance plan.
  • Mortgage Reducing Insurance is a term insurance that reduces in coverage through the duration of your plan, according to your reducing housing loan. CPF’s Housing Protection Scheme (HPS) is a good example.

Why people like this:

  • Cheap affordable coverage, especially for people who need a high coverage but may not have the budget or would prefer to deploy their cash flow to other uses.

Critical Illness

Benefits:

  • Provides Critical Illness coverage at early stages or end stages of critical illnesses or at both stages.
  • This can be purchased as a standalone plan or as a rider to a life insurance or term insurance plan.
  • For End Stage Critical illness plans, person can choose to cover for a period of time or for whole of life.
  • For Early Stage Critical Illness plans, person can choose the period of time as well, but typically the plan will end before 85 years old.
  • Premiums are paid for the duration of the plan.
  • There are no bonuses or cash values for Critical Illness plans.
  • Paid in one lump sum to the insured person.

Variants of this plan:

  • Some Critical Illness plans can actually cover up to 3 Critical Illnesses claims.

Why people like this:

  • Important coverage for people to help them with living expenses if they choose to recuperate at home when they contract critical illnesses, instead of rushing back to work.
  • Coverage is helpful for people who may want to seek alternative treatments overseas.
  • Coverage is also helpful for a patient’s family who may want to do home renovations for the patient to be taken care at home. E.g. change of floor tiles to anti-slip flooring, hand railings in the toilet for mobility.
  • If this plan is added as a rider to a life insurance plan, the bonuses and cash value from the life insurance plan can soften the impact of inflation over the long term.

Health Insurance

  • Provides reimbursement coverage for Hospitalisation, Surgeries (Medically Necessary) and certain outpatient treatments (e.g. Cancer Treatments and Kidney Dialysis).

You may refer to my article on Health Insurance in the 2013 April/May edition of the New Age Parents for more details.

Personal Accident

  • Provides reimbursement coverage for expenses incurred due to accidents.
  • Provides lump sum coverage for Death and Disability caused by accidents.

You may refer to my article on Personal Accident planning in the The New Age Parents Oct / Nov 2013 for more details.

2. ENDOWMENTS (A.K.A. SAVINGS PLANS)

man with piggy bank

Benefits:

  • Typically used as a long term savings instrument for a fixed period of 10 – 40 years.
  • Lump Sum Maturity upon the stated duration.
  • There will be bonuses and cash value 3 years after the start date of the plan. Bonuses are typically higher than Life Insurance plans.
  • Provides nominal coverage for Death and Total Permanent Disability throughout the plan duration. Coverage is typically lower than Life Insurance plans.

Variants of this plan:

  • Some endowments have a yearly cashback feature that enables you to withdraw some of your future lump sum maturity earlier before the maturity date. These are known as Anticipated Endowment plans. Returns for these plans are typically lower compared to normal endowment plans.
  • People can now opt for a shorter premium term, e.g. 5, 10, 12, 15 years, similar to the newer variant of Life Insurance plans. E.g. If your lump sum is maturing in 25 years, you may choose to pay premiums for only 15 years.

Why people like this:

  • With the low interest rate environment in banks, endowment plans provide a better return over the long term for a person’s spare funds idling in the bank.
  • People typically use this for their children’s university education fund and part of their retirement fund planning.

3. INVESTMENT-LINKED PLANS (ILPS)

Whole Life Investment-Linked Plans

Benefits:

  • In essence, this is a term insurance plan, with an added feature of investment returns for whole of life.

Whole Life Investment-Linked Plans

Benefits:

  • In essence, this is a term insurance plan, with an added feature of investment returns for whole of life.
  • One can also say this plan is similar to a Life Insurance plan. Instead of getting bonuses in Life Insurance plans, this plan’s cash value is based on the market value of the investment-linked funds a person had chosen.
  • Provides coverage for Death and Total Permanent Disability for whole of life.
  • Flexibility to vary coverage amount throughout the whole of life.
  • Premiums a person pays are diverted to pay for coverage and the remaining premiums are used to invest in funds of his choice.

Why people like this:

  • Flexibility to vary coverage amount anytime.
  • If more coverage is required by a person, he need not buy a separate plan, he can just top up the coverage (and any increase in premium) with the same plan.
  • Flexibility to withdraw (partially or wholly) the investment value anytime.
  • Premium holiday feature of stopping premiums for a certain period of time and resuming premiums at a later date.

Pure Investment-Linked Plans (ILP’s)

Benefits:

  • These plans have nominal coverage for Death, typically 105% to 125% of their invested amount.
  • Premiums that a person pays are used to invest in investment-linked funds of his choice.
  • Typically used as an investment tool for a person’s retirement fund planning.
  • May also be used as a tool for children’s tertiary education fund planning. My professional advice, however, is not to do so. For more details on why, you may refer to my article on Children’s Education Planning in the August/September edition of the New Age Parents.
  • A person may choose between these options of investing: investing lump sum once, investing monthly and topping up your investments via lump sums anytime.

Why people like this:

  • The ability to participate in the stock market at a lower cost. Shares of established companies like Apple, IBM, Samsung, DBS Bank are expensive and may require high capital outflow from a person. Through ILP’s and its corresponding investment-linked funds, they can have the opportunity to own the shares of these companies and participate in these companies’ growth.
  • Provides a minimum death coverage amount. When the investment value is below a person’s initial investment and death occurs, the beneficiaries will get the death coverage instead of the current investment value.
  • Flexibility to withdraw the investments (partially or wholly) anytime.
  • Flexibility to increase your investments anytime.
  • These plans typically do not have a fixed time frame. One can remain invested for as long as they would like.

The above list is by no means exhaustive but it covers the main financial plans that are being offered by financial institutions in Singapore.

Have a question? You can email Winston at tanooisim_winston@hotmail.com.

By Tan Ooi Sim Winston

Writer’s Note: I would like to reiterate that the above are general information with the aim of equipping my readers with enough knowledge to help them understand what they have or what they may be purchasing. For the exact details of a financial plan, it would be best to ask a financial planner as there are so many variants of the above-mentioned plans and it is impossible to cover everything in this article, lest all my readers use this article as a before sleep reading material.

This article was first published in The New Age Parents Apr / May 2014 e-magazine