Monday, June 29, 2009

Darling or Burden???

I was referred to Ms Lim recently by one of my existing client. She called me on my handphone requesting my assistance to see through her Insurance Plans. She wants to know what are the insurances that she had purchased in the past.

I dropped by her Seng Kang place in the morning as requested. In the house was herself, her Dad-in-law and her maid. She is in her early 40s and Dad-in-law in his early 70s. As usual, I introduced my company and my range of services. I shared with her about benefits of Financial planning and the type of insurance, etc.

In the midst of our discussion, I smelled something foul, seemingly from the Room and Ms Lim suddenly covered her face and lamented "Not again". I don't know what happened and asked her. She told me that it was her Dad-in-law. She led me to his room and allowed me to take a glimpse of what had happened.

Her Dad-in-law had just shitted on his diapers and dug some shit out from the diapers and rubbed on the wall. I was lost for words and Ms Lim called her maid to clean up the mess and we proceeded to the void deck for further discussion.

Ms Lim later shared with me that her Dad-in-law suffered from Severe Dementia few years ago and turned for the worst recently. He could not remember anything and was acting like a baby since early this year.


Few things went through my mind today...
a) We will age one day. I can be a burden like her Dad-in-law in future if I'm not careful.
b) We better be prepared for Long Term Care Insurance. I don't think Ms Lim's in law has an Eldershield because it was not available then.
c) We better be prepared for our own retirement. We will be a real burden if we do not save for ourselves now.
d) Severe Dementia is one of the 30 Critical Illnesses. There is no need to be hospitalised but long term domestic care is needed. If you feel that we don't need a CI plan after age 60 or 65, make sure you have enough money to take care of yourself...

My mind is very heavy today. This question keep popping in my mind. Do I want to be a Darling or a Burden to my family one day???

Friday, June 26, 2009

Leaving Peace not Frustration for your Loved ones

When we are alive, we can give anything we own to whoever we like. However, when God calls us to heaven, the law will decide how our Earth assets will be distributed. Writing a Will is important to avoid the hassles and problems that arises when we leave without one.

Will writing is an important part in the Wealth Distribution process. Other areas of concern will be the CPF nominations, NTUC policies nominations, Section 73 policies and establishment of trust, etc. I'm neither a Will Writer nor a Lawyer but as a Financial Planner, I'll help my client in the process when they are ready to get it done.

Currently, I only help my clients with it and not just anyone because its a service and I don't get a single cent for going through the whole thing.

Step 1: Know your assets and liabilities
Certain situations to take note when taking inventory of your assets
a) Take note of assets that have a debt tied to it. Example, Property or Car. It might be your good intention to leave behind some assets for your loved ones but pls don't leave behind a huge debt for them instead. If there is a liability on that asset, take an insurance to protect it.
b) Take note of your overseas assets. Example, Overseas properties or investments. There might be estate duties payable for these investments or property in that country. Your intention might be to leave behind $1million but it may ended up giving only $600,000.
c) Some assets under joint name. Example, Joint Bank Accounts or Joint Investments. They may or may not follow in accordance to your will. Don't assume that the money will go to the other party.
d) CPF monies. You have to make a separate nomination for it.

Step 2: Know who to give
* This can be the tough part especially if you have many assets of different types. Example, Investments, Properties, Businesses, Cash, etc.
* You can give to Charities if you like to. There are many under-privilege people around. Your lawyer or Will Writer can help find out their Charity Registration number.
* A simple will is to allocate all your assets in specific percentage and perhaps 1-2 unconditional and specific gifts.

Step 3: Select your Trustee, Guardian and Executor
* The executor is a very very important person in ensuring your Will is carried out. Select him/her carefully based on your judgement of competency and willingness to take up this challenging job. Consider leaving him a small part of your asset for this poor guy who have to shoulder such big responsibility.
* The natural guardian will be your spouse if you have minor children but you may add a substitute guardian in event of common disaster where spouse do not survive.
* For trustee, find one who is meticulous enough to handle money. Decision in allocating the allowance or to invest the funds etc are things he/she may need to discuss with the Guardian or Executor.

Step 4: Write your Will
* You can actually DIY your Will, find 2 witnesses and get it done.
* However, I will advice you to look for a Lawyer or a Professional Will Writer to do the job. If there are errors or omissions, the whole will can be disputed and become void.
* Don't save this money. A simple Will cost you only $150 to $200.
* If mistakes are made in the Will after our demise, it will be too late...

Step 5: Register your Will and keep in properly
* You may find a good place to keep your Will. Inform your executor about the location.
* Register your Will with the Public Trustee, so that people will know that you had written a Will before.

It is important and actually not that difficult to write a Will but most of my clients often do not have the patience or see the need to write one. They know its important but due to the non-urgency nature, they will procrastinate...

Friday, June 19, 2009

The Perils of Rule 78

Investopedia explains Rule Of 78 as below:
* When paying off a loan, the repayments consist of two parts: the principal and the interest charge.
* The Rule of 78 weights earlier payments with more interest than later ones. If the loan is not terminated or prepaid early, the total interest paid between simple interest and the Rule of 78 will be equal.
* However, because the Rule of 78 weights the earlier payments with more interest than a simple interest method, paying off a loan early will result in the borrower paying more interest overall.

History of Rule 78
* The earliest official use of the Rule of 78s to calculate the unearned portion of a loan’s finance charge was in Indiana in 1935. Most loans then were for small amounts at low interest rates for short period like 12 months during the pre-computer era.
* The number 78 is actually the sum of 1 to 12 (1+2+3.....+11+12 = 78).
* Assuming a 12 month loan with interest of $1,000,
1st month - 12/78 x $1,000 = $153.85 will be your payment on this interest,
2nd month - 11/78 x $1,000 = $141.02 will be your 2nd month payment on this interest
12th month - 1/78 x $1,000 = $12.82 to be your 12 months payment on this interest.

This Singapore Case
* This rule 78 normally applies to Car loans where early settlement of the loan will entitle you to a rebate on the interest, calculated using this “Rule of 78” formula.
* If your loan amount is less than or equal to $55,000, your loan is bounded by the Hire Purchase Act. This requires you to pay the principal and interest that would have accrued over the entire period of financing.
* If the loan amount is more than $55,000, the loan is governed by the Common Law. If the interest is on a flat rate basis, the “Rule of 78” will also apply.

The Formula
R = [n(n+1)]/[N(N+1)] x TC
R represents the interest charges rebate;
n represents the unexpired loan period expressed in months;
N represents the original loan period expressed in months;
TC represents the total amount of interest over the loan period.

An Example
Car loan taken ==> $50,000
Interest Quoted ==> 3% flat rate x 7 years (84 months)
Total Interest ==> $50,000 x 3% x 7 = $10,500
Loan + Interest ==> $60,500
Monthly Instalment ==> $60,500 / 12 / 7 = $720 per month

Decided to redeem the loan after 3 years
Total Instalment paid ==> $720 x 12 x 3 = $25,920
Number of months remaining ==> 48
Rule of 78 rebate ==> [n(n+1)]/[N(N+1)] x TC
==> [48(48+1)]/[84(84+1)] x $10,500
==> 0.329 x $10,500 = $3,459

Amount to repay after rebate
$60,500 - $25,920 - $3,459 = $31,121

You are actually penalised with this formula
* You had paid 36/84 = 42.8% of your tenor but the rebate is only $3,459/$10,500 = 32.9%. This differential will be greater if you choose to repay your loan much earlier.

Lock-in Period and Penalties
Be careful when your dealer or distributor is giving your cash rebate. There might be a catch.
a) Lock in period is the time frame where the bank applies a lock in period as long as 5 years to discourage you to go to another lender.
b) A Penalty charge will be applied if the loan is redeemed within the lock in period. The penalty rate differs from bank to bank, and it can even be a hefty 20% of the unearned interest.

Sunday, June 14, 2009

World Blood Donor Day

It is "World Blood Donor Day" today. I was being invited to Jurong Bird Park to participate in this event on Saturday. I donoted my blood 2-3 times a year and even my platelets on 2 occasions. Its my habit to drop by the blood bank whenever I visits my clients in SGH. I'm very happy that they actually appreciates of what I did over the years and gave me 2 free tickets to Jurong Bird Park. I'd enjoyed the day very much.

I will like to encourage you to donate your blood on a regular basis. Not necessarily 4-5 times a year but at least onces a year. The nurses at the Blood Bank are very skilled. I never felt any pain in all my donations over the years.

About World Blood Donor Day
Millions of people around the world owe their lives to individuals they will never meet – people who donate their blood to help others. But millions more still can’t get safe blood when they need it. World Blood Donor Day, celebrated on June 14 every year, provides a unique opportunity to thank those very special people that help and to raise awareness about the need for more support.

Established by the World Health Assembly, this day marks the birthday of Karl Landsteiner, the Nobel laureate who discovered the ABO blood group system. There is broad international support to raise awareness of the need for safe blood around the world and encourage eligible individuals to donate blood regularly so that blood is readily available for all who need it when required.

Friday, June 12, 2009

My Clients(2) - The Families

There were quite a number of arguments in my previous post on whether we should provide for our parents in event of death of a single person. I think it stems down to whether we treat parents as dependents. If we do, then its a "need', if we don't, then its a "want". However, my role is to guide my clients, especially the young singles. As they are semi-dependent on their parents, they may find it hard to understand that their parents can actually be their dependents in the later years. Anyway, this is out of topic for todays posting on "The Families".

Young Families
The Young Families I described here are those with Children aged 12 and below
a) The dependency need is the highest for this group of people. They generally have large loans outstanding such as car and mortgage and probably have several children below 12 years old.
b) The needs are increased especially if the family relies on only one breadwinner.
c) The needs must be met first via term insurance. I always recommend a combination of Level Term, Decreasing Term and even Group Term for the budget constraints families.
d) A mistake they always made is getting additional Life Insurance for themselves and kids at this stage. Life insurance at this stage is not likely able to meet their dependency needs or even retirement or savings needs.

The good and not so good on this group of client
e) This is my core group of clients and the group I love to meet. I will talk to them about medical, disability, critical illnesses and death coverage. I'll make sure they are well covered especially on the breadwinner.
f) They find the urgency to talk to us. They know that they need to do something with their insurance covrage. They know they need to save for their children, etc.
h) Their budget are normally constraint and unpredicatable. Many of them might have purchased too much Life and Endowment policies. They feel that they had spent too much money on insurance and its hard for me to recommend them additional coverage even when the need is there.

Matured Families
The Young Families I described here are those with Children above 12 yrs old
a) Their needs had reduced significantly compared to young families. Mortgage loans are nearly paid off and Children are in a less dependent age of 16 to 24.
b) Their cashflow are predictable and they are able to start a regular investment scheme over the next 10-15 years to accumulate up to 60 or even 65 yrs old.
c) They probably have a sizeable amount of savings in preparation for retirement. Some speculated in shares, some seek our advices for investments.

The good and not so good on this group of client
d) Its not easy to tell them about asset allocation and geographical or sectors diversification. Their mentality towards investments are normally extremes. Penny Stocks or Guaranteed Funds with maturity in 2-3 years.
e) Their health may not be that perfect and if they are still not covered under a medical insurance, the underwriting can get quite tricky.

Finding our own clients
* The beautiful part of our profession is the ability to look for the group of clients that suit us best. My favourite are the young families because I believe in term insurance and regular investments. As for the matured groups, I usually able to help them with their car insurances and investments.
* The group I'm find it hardest to serve are the young singles. They have all the time to research or even meet 2-3 advisers before deciding on a Shield or PA Plan. They read from every internet sources, demanding a lot of comparisons, capable of asking very extract questions and end of the day, they do not really value what we did .
* Having said that, I still need to have young single clients in my portfolio as they will have their families one day and will fall into my favourite category of clients. I just need to grow with them, serve them and be a friend to them.

Sunday, June 7, 2009

My Clients(1) - The Singles

Over my 6 years as a financial adviser, my current clientele base is around 20% young singles, 20% matured singles, 50% young families and 10% matured families. Most of them are in the region of mid 20s to early 40s. My age is between them and hence I can understand their concerns quite well when I met up with them. I can perhaps share a bit of my observation about these 4 groups of my clients with you.

Young Singles
The Young Singles I described here are between early 20s to mid 30s.
a) Singles theoretically have lower needs against death. Their parents are probably between late 40s t0 early 50s and are not depending on their children earnings. When I asked them how much they will like to provide their parents on a monthly basis, they will give me a very low figure or even providing nothing at all. I have to encourage them to give to set a higher amount by telling them how much their parents had spent for them over the past 20+ years.
b) Those who are getting married are confused on how much they need to spend for the big day and for their 1st property. They need our help in analysing their situation.
c) Many aspires to buy a car because they have low commitment and able to see good surplus every month.

The good and not so good about this group of client
d) Many are not very concern with insurance and likely miss an appointment when they have slightly more work in the office or when they have a new appointment.
e) They have plenty of time to research and read from Internet and even meet with multiple advisers before they buy their first shield plan. They can ask many interesting questions and quite are quite demanding on us.
f) The good thing is that they are the group which I can see them grow and they will look out for me when they form their family nucleus.

Matured Singles
The Matured Singles group I described are between mid 30s and above
a) The matured singles I met are normally professionals like Engineers, Managers and Lecturers, etc. Their expenses are still low and have good monthly cash surplus.
b) Their parents are older and they begin to see the need to provide for their parents when they are not around, especially on hospitalisation expenses. Their Insurance needs for death is probably lower at this stage because they will have more resources/savings by this age.
c) They are concern about retrenchment, not able to work and hence they like to leave a huge amount of liquid cash in banks for all sort of unknown emergencies
d) Many of them look out for a property. Perhaps a 3 room condominium or HDB flat because they will have quite a bit of CPF monies and they have quite good monthly surplus.

The good and not so good about this group of client

e) They are relatively busy and it is not easy to fix a date to meet them. Many don't even like to reply my sms or emails. However, onces a date is fixed, they will do their best to meet up.
f) They will have many friends in the Financial Advisory industry and they like to look out for their friends first because they don't have the time to do all sort of research. Its usually by referrals that I'm being introduced to this group.
g) The good thing is that this group of client see a more urgent needs towards financial planning as they understand that they are solely responsible for their own retirement in future.
Till here and I will share more about young and matured families in my next posting.