Consider terminating whole life insurance policies.

An exchange with a reader inspired this short blog post.

My dad who is almost 70 recently told me that he was trying to reduce his expenses and he asked if he should still pay almost $500 every quarter for his one and only whole life insurance policy. It amounted to almost $2,000 a year as a recurring expense.

Unnecessary recurring expenses are like financial chains.

I explained to him that he has no dependents anymore and that it is OK for him to terminate the policy. He said that we would get more money from the insurance company if he should pass away while the policy was still in force.

My dad is right, of course, but I told him our family don't need the money. We are no longer dependent on him financially.

I think he might already have thought of terminating the policy but was unsure because he would have liked to leave more money for his family when he leaves this world. I persuaded him that the product had already done its job and that it had become a luxury, a "nice to have" item but not a "must have" item.

My dad terminated the policy shortly after and got back a 5 figure sum as well. However, the most important thing to note is that my dad's cash flow improved by quite a bit after this. His financial burden is now lighter.

Need or want?

For many years now, I am a big advocate of buying insurance for the sake of insurance. Buy when there is a need. It is like buying anything on a need to have basis in life.

We might want something but we should think if there is a need for it. This is premised on the fact that money is a scarce resource for many of us. Some of us realise this while some of us don't.

Beware of marketing efforts to create an impression that something is a need for us when it could really be a want. To be fair, however, something could be a need for a person but a want for another.

Related posts:
1. Matt terminated his whole life insurance policies.
2. Term life insurance: Why buy term?
3. Money management: Needs and wants.
4. Eldershield: Is it really necessary?
5. Enhanced Incomeshield for my mother.

Term life insurance: Why buy term? How big a sum should I buy? How long a term should it be? How much does it cost?

A reader shares his wisdom:

Before we discuss about how much insurance to get, we must first understand what insurance is all about. Insurance is 

(1) a risk management tool 

(2) to transfer the financial risk of catastrophic events to the insurer 

(3) in exchange for a small sum of premiums.

In light of the above definition, I usually recommend people to stay away from whole life insurance and go for term-life instead. Insurance, after all, is an excellent risk management tool but a poor investment vehicle, IMHO.

How much life insurance should one get? 

There's many factors to consider. One of that will be your financial commitments. Say, you are a fresh graduate and no dependants at all. Technically, you only need sufficient life insurance to cover for TPD and CI. 

The required sum assured will still be high (up to S$500,000) because a young disabled man in his 20s will need lots of $$$ for care and support until he passes on. Take note that expected longevity in SG is about 82 for male and 85 for females.

An additional point to note is that when buying term-life insurance, I would suggest my friends to cap the term up to retirement age (currently 62 years old).

The reason is simple: Insurance loses it cost effectiveness after a person is in his 60s and 70s. The cost of life insurance will rise exponentially because the probability of dying also rises exponentially.

This is one of the main reasons why the Dependent Protection Scheme (DPS) caps at age 60. Getting life insurance beyond that age is no longer value for money.

When you are in your 60s, life insurance should no longer be needed because your financial commitments should be at a minimum. This means no debt, no dependants and no major financial expenditures.

People in this life-stage should be focusing on retirement adequacy.

Btw disclaimer ah, I am just talking out loud to myself in the above posts. Please visit a professional planner (not insurance agent) if you want sound and constructive $$$ advice.

I bought my insurances when I was 26 years old.

I paid $100/month for $1M term life and $250K major CI. You can use this a base for comparison.

For fresh graduate earning a market rate of $3K/month. $50/month can "smelly-smelly" get them $500K insurance coverage if they go for term-life insurance.

Friends, not everything in life needs insurance one. Ponder and chew on this point.




Get adequate insurance where it matters. Don't overpay for insurance and we do not need insurance for everything under the sun. Words of wisdom.

Note: Author would like to remain unnamed.

Related posts:
1. How much term life insurance should fresh grad have?
2. In my 40s, married with kids? What would I do?
3. Achieving level 1 financial security for Singaporeans.

No free lunch (or dinner) but what about mooncakes?

Recently, I had a mission in town and, so, I had to have an "atas" dinner in town:

Rice with stir fried vegetables, chye poh egg and sweet sour fish.

Price? $4.00. Not too bad. There is less expensive food in town too, I am glad to say.

Now, what was the mission I was on? I had to collect mooncakes and since so many people are putting up photos of mooncakes and blogging about them, let me join in the fun.

Stacked them up in the back seat of the car.

People buying the mooncakes or buying the carrier, I wonder?

I am not really a mooncake person these days and pretty lucky I am not too. They are so expensive (and unhealthy)! On that note,

HAPPY MID-AUTUMN FESTIVAL!

It is happening on 8 September (Monday). Just have to hope that the skies are clear enough to see the moon then. Crossing fingers.

Related post:
Sambal mooncakes!

Investing for income: An important element (UPDATED: BUFFETT ON BUYING HIS FIRST STOCK.)

Wah! So much mail from the broker! 

AK must be trading a lot!


I receive quite a few emails from readers. 

Among them, some are encouraging and some are depressing. 

I usually share the more encouraging ones here in my blog but not the depressing ones. 

No point, right?





Well, in case you are wondering, the depressing ones are usually along the line of how they make so little money in their day jobs and how they cannot save enough. 

So, they can't put much money into investments and for those who did, they get so little dividends that it seems meaningless.

What do I have to say in reply?





It takes time to build a strong income producing portfolio. 

It is not going to happen overnight. 

It is usually not glamorous. 

It is definitely not exciting like promises of fast money.






So, what is needed? 

Time.

Now, you have an idea what those envelopes contained.

Readers who have followed me for a while and who have put some of my strategies into action would be able to attest to how their financial health has improved if they have been disciplined.

With extra money coming in regularly, how could it not be a good thing?





A reader told me how his passive income has improved from just a two figure sum so many years ago to the five figure sum it is today. 

Impressed? 

I know I am.

So, for those who are already on the path to financial freedom, stay the course. 

For those who are just starting, remember that it is always toughest at the start.





Related posts:
1. If we are not rich, don't act rich.
2. Do the right things and we could transform our lives.
3. Seven steps to creating passive income from stocks.
4. The best insurance to have in life.
5. First REIT: AK reveals size of investment.

How to size our more speculative positions?

I have shared before that it is OK to gamble a bit once in a while. 

I am Chinese and gambling is in my blood. 

It's not my fault that I am born Chinese.





So, I have nothing against speculation per se. 

1. As long as speculators know that what they are doing is speculation, 

2. As long as they are mindful of the possible consequences 

and 

3. As long as they are able to take the losses comfortably if things go wrong, there is nothing really wrong with speculation, is there?

http://singaporeanstocksinvestor.blogspot.sg/2014/08/accordia-golf-trust-hole-in-one.html

Well, I would say please keep speculative positions small. 

Of course, how small it is would depend on

1. our risk appetite 

and 

2. our ability absorb losses. 

2 to 3% of our portfolio size for some and 10% for others? 

Sounds rather arbitrary, doesn't it?





When a reader asked me for a "formula" to help quantify "small", what did I say?

I told him it would have to be an amount I can recover quickly within a year or less in case of a total loss. 

This measure has always given me peace of mind and he said it is helpful to him. 

So, I thought I should share this.





Of course, if I should have more than one speculative position, the total exposure should not exceed the amount I think I could recover within a year. 

It is a bit like having one or five credit cards from the same bank. 

The credit limit doesn't increase with each additional card issued.





Like with so many things in my life now, it is about avoiding stressful situations where possible and not losing more money than I can recoup in a relatively short time works for me.

Always ask "to what extent can I afford to be completely wrong?"

Once we have the answer to this question, we will know how to size our more speculative positions.



Related posts:
1. Motivations and methods in investing.
2. How to make recovery from losses easier?
3. To be richer, be comfortable with being invested.

Croesus Retail Trust: Acquisition of ONE'S MALL.

I had expected some form of equity fund raising and although I was hoping that it would be a rights issue, I was not surprised that a private placement has been chosen instead. It is more expeditious, after all.

However, it does not mean that I am happy about it since, in all likelihood, I won't be one of those "other investors" who would be offered new units in the Trust to be priced between 89c and 92c per unit. What? Unit price was about $1.00 when you last looked? Wow! 89c would be a steal, wouldn't it? Bummer.

Anyway, the acquisition of the new (freehold) mall, ONE'S MALL, in Greater Tokyo will cost about S$132.5 million.

The private placement is expected to raise S$70.2 million to S$72.6 million. The Trust will also be drawing upon a Japanese local bank loan for most of the shortfall (equivalent to S$74.1 million) at an interest rate of 1.29% per annum. I like the natural hedge that comes with this and also the very low interest rate.

A much smaller amount of S$6 million will be drawn from the Fixed Rate Notes issued in January this year. To utilise funds from the Fixed Rate Notes minimally is a good move as it attracts a higher interest rate of 4.6% and it is also denominated in S$. So, there will be some FOREX risk but it will be miniscule here with only S$6 million drawn.

Overall, income distribution per unit (DPU) is not expected to receive much of a boost with this acquisition because it is half funded by the private placement. Expect an increase of only 0.2% in DPU. Expect NAV/unit to increase by only 0.1%.

What about gearing level? As the purchase is about half funded by the private placement, gearing level stays more or less unchanged, reducing from 51.7% to 50.5%.

Nothing to be too excited about.

See announcement: here and here.

Related post:
Croesus Retail Trust: 4Q FY2014 DPU improved.

If our income is $3K a month, we could get a 6.6% raise!

People sometimes wonder if it takes a lot of time to prepare food to bring to work. It surprises people to find out that actually it could take very little time. It is very easy to cook oatmeal and to make sandwiches, for examples.

It could take 15 or 20 minutes to make some sandwiches to last us for a few days each time we do it. Therefore, the time taken to prepare meals on a per meal basis is actually very little. (See related post #2.)

Oatmeal takes very little time to prepare too. (See related post #1.)

So, join me for some home made lunch?

What's this?

Bread, cheese, lettuce and ham. Yummy!

Evidence of me chomping away.

Cost? Probably $1.00 or a bit more.

Whenever I ask people to try making their own lunch to bring to work, a common reason for not even trying is that they don't have the time or energy to do it.

Well, I understand that it is more convenient to simply buy cooked food outside but there is always a price to pay for convenience. We might want to ask if the price we pay for convenience is too high.

High, higher, highest. It is all relative, isn't it? So, if our gross salary is $3,000 a month and we spend $450 a month eating out at work (15% of our gross income), is that too high? I don't know about you but it seems like a lot to me.

Of course, for someone who makes $10,000 a month, that same $450 monthly spending on food at work is more manageable, everything else remaining equal.

All our circumstances are probably different and saving a couple of hundred dollars a month might not look like much to some people but to the vast majority of working Singaporeans, I believe that it does make a difference.

A dollar saved is a dollar earned and, for someone who makes $3,000 a month, if he could save an extra $200 each month, it is like getting a 6.6% salary increment each month. Is that not good to have?

Related posts:
1. It takes only a few minutes to cook oatmeal.
2. Prepare 6 gourmet sandwiches at one go.

How much term life insurance should a fresh graduate have?

I don't know if it is a trait of Asian families but it seems that there are certain topics related to money which are taboo. 

I know my family generally don't like to talk about death and insurance, for example. Maybe, it is considered inauspicious but I don't care. I will talk if I think it is necessary because I do care.

When a reader sent me an email with regards to one of my blog posts about what I think young graduates might want to do to get their personal finances in order before thinking about investing money in the stock market, I said the same thing.

As we grow older, our parents grow older too. They will retire one day and might depend on us for financial support. Buying insurance on our life is for our dependents. So, it is important to talk to our parents about insurance and what we are doing for them if they should be dependent on us. They have to know.

In that blog post the reader referred to, point number 1 was:

1. Buy a term policy. Very important if we have parents or other dependents to care for. How much should the coverage be? It is up to you but I feel that $500K is probably more than adequate for most. (See related post number 1 at the end of this blog post for the full article.)

He wondered why I thought $500,000 was probably an adequate amount for a start? There is a very simple reason.

In case the insured (i.e. the fresh graduate) should meet with an untimely demise, each parent would get $250,000. 

If the parents were financially prudent, they would use the money to buy an annuity each. There could be a 5 year or 10 year accumulation period but if the annuities were worth their salt, they could provide a monthly income of $2,000 or more for each parent. 

Sounds good?

This is how that $500,000 paid out by the term life policy should be utilised, in my opinion.

Unfortunately, not everyone is financially prudent. $500,000 may look like a big amount of money but it could disappear very quickly in the hands of the less prudent. 

Then, there are people who are at the other extreme who might just put all the money in a fixed deposit or a few which is better than squandering away the money but it is still far from ideal.

So, although possibly losing their child is not something parents want to think or talk about, we have to talk to them about it at least once and tell them what they should do with the money paid out by the insurance company if the bad thing should happen. 

I believe that talking about it will ultimately give everyone a peace of mind.

The sooner we do it, the better.

Related posts:
1. Take steps towards financial security.
2. Financial freedom is a family affair.
3. An annuity proposal: A case study.
4. Free medical insurance in our old age.
5. What is our attitude towards having children?