Singapore Savings Bonds: A Practical Guide for Beginners

One question I’ve received after publishing The Newbie’s Guide to Budgeting is: “I tend to spend every dollar I see in my bank account, are there any alternatives where I can park my money so I can’t spend what I can’t see?” While there are many options available, the most indubious answer is to put our money somewhere with high liquidity (ability to withdraw anytime). This is especially important if we are saving for rainy days and/or any big purchases in the near future. In addition, according to a study by trading economics, the current annual core inflation in Singapore is 1.8%. Thus, to protect our capital from depreciating over time, we should look to park our money somewhere with high interest rates, preferably >1.8%.

Introducing Singapore Savings Bonds

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Image from Singapore Government Securities

What is a ‘Bond’

A bond is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer. -Investopedia

How Bonds Work

When companies or other entities need to raise money to finance new projects, maintain ongoing operations, or refinance existing debts, they may issue bonds directly to investors instead of obtaining loans from a bank. The indebted entity (issuer) issues a bond that contractually states the interest rate that will be paid and the time at which the loaned funds (bond principal) must be returned (maturity date). The interest rate, called the coupon rate or payment, is the return that bondholders earn for loaning their funds to the issuer. -Investopedia

In the case of Singapore Savings Bonds, the borrower is our Government and they pay the interest rate (coupons) every 6 months.

Is there any risk?

All bonds come with risks and they are measured with a Bond Credit Rating. SSB scores a rating of AAA for Moody’s, S&P, Fitch and R&I. According to the credit rating description, the obligor has an EXTREMELY STRONG capacity to meet its financial commitments. This means that the investment is EXTREMELY safe.

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SSB’s Credit Rating, Image from Singapore Government Securities

How does it work? What are the returns?

Every month, the SSB website is updated with the following month’s bonds (November 2018 will show December 2018 bonds etc). Interest rates change every month and you can purchase the bonds anytime within the application period stated on the website. Once your application is successful, the bonds will be credited to your CDP account on the following month. These bonds can be sold at any time in the event that you need money urgently, making SSB one of the best liquid assets to own.

As we hold the bond towards its maturity of 10 years, the interest steps up every year. Taking this month’s (November 2018) issue, i.e. applying December 2018 bonds:

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Dec 2018 Bonds, Image from Singapore Government Securities

As shown in the table above, the longer we hold the bonds, the higher the interest earned. The interest from 1 to 10 years is between 1.89% to 3.04%, with an annualized return of 2.57% after the maturity period of 10 years. That’s very impressive for a risk-free investment! For comparison, the guaranteed interest for short term (5 years) endowment plans issued by insurance firms ranges from 2% to 2.7%. Fixed deposit ranges from 1.4% to 1.9%. However, I must emphasize that SSB comes with no penalty should we withdraw before its maturity, making it a good place to store our cash for short term saving goals or in times of emergency.

Returns in dollars ($)

Taking this month’s bond for example: $10,000 invested in December 2018 bonds. Here’s how much we would’ve earned by Dec 2028.

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Returns for $10,000 invested in December 2018 bonds
SSB Dec
You can calculate your potential returns using their interest calculator.

Keeping the bonds to maturity would earn us $2,592, about an average of $259 additional income every year!

A couple of notes: 

1. Yearly interest is credited into your bank account every 6 months, twice a year.
2. Interest is not compounded (You can read about compounding here), you cannot reinvest in the same Bonds but can choose to reinvest in new bonds by purchasing bonds for that current month yourself.
3. You can apply for SSB with a minimum of $500, and in multiples of $500. The total amount of Savings Bonds held across all issues cannot be more than $100,000.
4. There is a one time charge of $2 when you buy and sell bonds.
5. Once the bonds are applied and approved, the interests are locked-in. Application for the following month’s bonds does not affect any of the previous bonds.

Sounds great! How do I apply for Singapore Saving Bonds?

Step 1: Opening a Central Depository Acocunt

First of all, you need a Central Depository Account (CDP account). A CDP account is similar to a bank account. But it is for Equities (Stocks, ETFs etc) and fixed income instruments (Bonds, Treasuries etc). Singapore Savings Bonds you bought will be stored under your personal CDP account. Dollars and Sense has written a step by step guide on how to create a CDP account in Singapore.

Tip: You can create through the firm you are planning to open a brokerage account with. I created my CDP account through DBS vickers, killing two birds with one stone.

Step 2: Linking your bank account

Secondly, you would need a bank account with DBS/POSB, OCBC or UOB and the CDP account must be linked with the bank account through Direct Crediting Service (DCS). Now you are ready to apply for SSB!

Step 3: Applying for SSB

There are two ways, applying through ATM or Ibanking. Because I bank with DBS/POSB, and this is how their users can purchase SSB. (Credits to POSB website)

Applying through ATM:

  • Insert your ATM/Debit/Credit Card and key in your PIN.
  • Select More Services and your preferred Language.
  • Select ESA-IPO / Rights Appln/ Bonds /SSB/SGS/Investments.
  • Select SGS / Singapore Savings Bonds, followed by Singapore Savings Bond Application.
  • Confirm the on-screen T&Cs and select the Bond that you wish to apply for.
  • Verify the Bond Details and enter your Application Amount. Press Enter to proceed.
  • Select your Debiting Account.
  • Select your Nationality and verify that your CDP Account Number is correct.
  • Check through all details and select Confirm to submit your application.
  • Collect your Card and Receipt.

Applying through iBanking:

  • Log in to digibank Online with your User ID and PIN.
  • On the Top Menu, under Invest, click on Singapore Government Securities (SGS).
  • Select Singapore Savings Bonds Application and click Next.
  • Select the bond, tick to acknowledge the Agreement and click Next.
  • Enter your personal particularsamount to purchase and select your debiting account. Click Next.
  • Verify your application details and click Submit to confirm your application.

Note:

  • A non-refundable transaction fee of S$2 will be charged for each application request.
  • Application via digibank Online is only available on Monday to Saturday; 7:00am to 9:00pm (excluding public holidays).

    TLDR: Why should we apply for Singapore Saving Bonds?

    1. It doesn’t require thousands of dollars. $500 is enough.
    2. High liquidity compared to fixed deposits and endowment plans.
    3. Interests beat fixed deposits and short-term endowment plans (occasionally, depending on the current month’s interest rate).
    4. Safe and protects our money against inflation.
    5. Suitable for all forms of savings, whether it is saving for a short-term goal or even retirement.
    6. Compared to a regular bank savings account, SSB doesn’t require us to fulfil any requirements (credit card spend etc)

Conclusion

Singapore Savings Bonds is a safe alternative to put our hard earned money to work. Although the interest changes with each application period, it usually provides higher returns than most fixed deposit accounts and short-term endowment plans. In addition to higher interest rates, SSB is flexible and can be withdrawn at any time with no penalties. In my next article, I’ll show you a simple hack to maximize our savings using SSB. Thank you for reading and happy building your layers!

*Featured image from SGS

Continue reading “Singapore Savings Bonds: A Practical Guide for Beginners”

The Magic of Compounding

If you don’t earn much and can barely pay your expenses, the idea of saving is ludicrous as just saving $30 or 1% of your monthly income may seem small and irrelevant. The old me would rather indulge in a good meal at Chomp Chomp than to save it in my piggy bank. Why would I even bother?

Because Rome wasn’t built in a day.

Everyone, including myself, has to start somewhere. Small pieces of bricks put together will eventually form a fortress. Our financial situation will improve over time and even the smallest amount of savings will definitely benefit us over the long run. This is largely due to the power of compounding.

Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods. Compounding, therefore, differs from linear growth, where only the principal earns interest each period. -Investopedia

The Math Behind Compounding

Power of compounding proves that time is our greatest asset when it comes to building wealth. Here’s the mathematical breakdown on a fixed deposit account.

Formula (1)

For illustration purposes, let’s take $100,000 initial deposit with 5% annual interest and compare the differences between saving it for 5 to 40 years.

Screenshot_3 (2)

From the graph above, it’s shown that the 5-year growth increases with the number of years deposited, causing an exponential effect. This proves that the longer you let your money compound, the better. Which is why investors always like to say:

Time in the market is better than timing the market.

However, the above formula represents interest compounding at a continuous rate. Realistically speaking, interest doesn’t compound every day and second. A high interest savings account such as DBS multiplier compounds every month while an endowment plan offered by banks or insurance companies compounds 1-2 times a year. To put it into simple terms, the more times the interest money is credited annually, the better. A 2.5% interest savings account that credits twice a year is better than a 2.5% interest savings account that credits annually. So do remember this when you are considering two or more saving plans at similar interest rates!

Effect of increased compounding periods per year

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As you can see, having interest credited twice a year is definitely beneficial. Although the returns are small and negligible during the first few years, they could really ramp up over the long run and this difference would mean having an extra holiday with your family or not!

The actual formula for compounding is shown below:

FV = PV * [1 + (i / n)] (n * t), where:

  • FV = future value
  • PV = present value
  • i = the annual interest rate
  • n = the number of compounding periods per year
  • t = the number of years

Case study

Now that you know compounding is basically earning interest on interests and time is our greatest friend, let’s take a look at a typical scenario.

Johnathan and Mike have the same retirement goal of wanting to retire at 65 with $1,000,000. They both, however, led very different lifestyles. Johnathan is a smart saver and started saving $500 every month since the age of 25. Mike led an active lifestyle and was willing to double Johnathan’s savings when he hit 40 to compensate the loss in savings during his mid-20s. They both put their money in a portfolio which compounds yearly with an average return of 7%. Let’s take a look at their retirement accounts at 65.

mike vs johnathan (1)

Annual addition Years to grow Interest rate Compound
$6,000 Johnathan: 41 Mike: 26 7% 1 time annually
Total amount invested ($) Final amount ($)
Mike 312,000 881,806
Johnathan 246,000 1,377,793
Difference 66,000 -495,988
% Difference Mike invested 27% more Mike had 35% less

You must be wondering, how did Mike end up with 36% (496k) lesser than Johnathan despite saving 27% more? Ladies and gentlemen, this is the power of compounding! At 7% interest rate, taking the rule of 72, it takes roughly 10 years to double his capital. $6,000 would turn into $12,000, then $24,000 then $48,000 and finally $96,000 over 10, 20, 30 and 40 years. It was the final 1-2 doubles that really mattered and widened the gap between Johnathan and Mike.

“I’ll start saving next year”

Sounds familiar? Although there is little harm by delaying a few years, we could miss out on great returns the later we start. Here’s the graph showing Johnathan’s returns should he start at ages 25, 26, 27, 28 and 29.

savings at different age (2)

Age 25 to 26 26 to 27 27 to 28 28 to 29 Average
Difference ($) 96,136 89,847 83,969 78,476
Difference (%) 93.02% 92.99% 92.95% 92.92% 92.97%

On average, every year Johnathan delays reduces his potential returns by ~7%. Of course, this is not meant to scare any of you, but I hope these figures and graphs show you the importance of starting today. When people start to save, it often seems slow and pointless because things don’t change overnight. But as time passes, the rate of absolute change gets faster and faster and this is why the power of compounding is magical.

Before I finish, I would like to highlight that albeit the advantages of starting early, we should’t have a one-track mind and only focus on growing our wealth. If you’re like me and enjoy spending on movies, concerts and cafes, you don’t have to overly sacrifice your lifestyle just to lead the ‘suffer now, enjoy later’ life. Remember, progress is best made in a moderate and sustainable manner.

The future is unpredictable, so we should find a good balance between saving and spending. The best way is to set a goal and live within our budgets. I’ve covered this in my previous article: The Newbie’s Guide to Budgeting.

Lastly, if you don’t know how to find consistent returns on your savings and investments, my suggestion is to talk to your trusted financial adviser. I’m a huge fan of diversification and although I prefer to manage my own portfolio, I also feel the need to allocate a portion of my savings in a high growth investment plan. This protects me from the risk of losing all my savings if my investments were to turn ugly. If you are looking for an agent that comes from an investment banking background and managed to bring consistent returns for his clients, you may contact me at thefivelayers@gmail.com and I’ll link you up with him. Thank you for reading and happy building your layers.

The video below summarizes this article in two minutes.

*Featured image from Business insider

Continue reading “The Magic of Compounding”

The Newbie’s Guide to Budgeting

Working more than 40 hours a week is daunting for many and we often resort to rewarding ourselves with a great meal over the weekend. Couple that with the active social lifestyles of millennials, controlling our expenditures on a daily basis can be difficult. As the cost of living continues to rise, the best way to prepare ourselves is to keep our spending habits in check by creating and sticking to a budget plan.

The Savings Layer

This introductory article talks about the different layers of wealth. Savings can be broken into two parts:

  1. Getting the most value from day to day purchases through cash backs, discounts etc.
  2. Putting aside a sum of money in a bank for future use.

The focus of this article is to introduce the golden rule of budgeting and how it can be fine-tuned to match our current financial situation.

50/30/20 Budgeting Rule

the-50-30-20-rule-of-thumb-453922-final-5b61ec23c9e77c007be919e1.png

*Image from The Balance

This golden rule allocates a portion of our take-home income (after CPF) into 3 different categories: 50% on needs, 30% on wants and the remaining 20% for savings. It’s as simple as that. However, I’m not a huge fan of this allocation as it doesn’t seem to be in sync with the goals of an average fresh graduate. According to the news, the median fresh grad salary take-home salary is $2,720. Following this rule means saving $544/month. If you have seen my goals, I’m targeting to save around $1,182/month and this doesn’t align with it.

Adding 13th-month bonus (assuming another 20% savings each year) and taking 2% annual pay rise, the average fresh grad takes about 7.4 years to save $56,750, equivalent to the average marriage & house renovations cost for each individual (excluding BTO downpayment). What happens after that? Savings go back to 0, leaving nothing in the emergency and retirement accounts.

The same concept applies when we have kids. According to an article by Business Times, 66% of parents are concerned about not having sufficient money to retire. Digging deeper, majority wish they had started saving for retirement earlier. This is why it is important to start early and let the power of compounding do its work, so we could take a breather and relax in the future.

However, if you are a working adult and have already made all your big purchases, then the above rule should work well if the 20% is solely for retirement. But I’ll always challenge my readers to find ways to increase their savings. No matter how financially savvy we are, there are always better ways to manage our expenses.

50/30/20 (Seedly version)

I came across an article by Seedly and they took the budgeting rule to another level.

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*Image by Seedly

Over here, 80% expenses on “needs and wants” are reduced to 50%. The additional 30% will be used to invest through the 3rd layer of wealth which focuses on growing our upcoming goals and retirement pots.

This is definitely a better approach for fresh grads like myself as I can build my retirement pot and prepare for my next big ticket purchase at the same time. The 20% savings will be focused on building my emergency funds (3 to 6 times of monthly expenses) before I divert it to accelerate my retirement pot.

Now you have a rough idea on the allocation, bear in mind that just because a budget plan works for the majority doesn’t mean it works for everyone. Let’s break into further details with a step by step approach to budgeting.

Typical Fresh Grad Example

1. Set a target ratio

Just because I introduced the 50/30/20 rule doesn’t mean you die die have to follow. Take some time and think. Some may prefer to save more and have a 40/40/20 ratio, some have more bills and expenses to pay and have a 70/10/20 ratio. Personally, I have my emergency funds ready, I do donations and give allowance to my parents, so my ratio is 60/30/10.

For the sake of this example, I’m sticking with the Golden 50/30/20 rule.

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2. Pay yourself first

interest

*Graph showing how much interests our student loans can add up to.

Set aside the minimum sum to pay our loans immediately after we receive our salary. This is a fail-proof way that prevents us from overspending and having to borrow from others just to pay our loans.

I couldn’t stress more on the importance of paying our credit card and student loans as bank interests could ramp up over the long run. Hence, the quicker we pay off these loans, the better. In fact, unless I’m very confident my annual returns on my investments will beat the interest on my bank loans, I wouldn’t even start investing and would rather focus my 30% (wealth allocation) on top of the $400 minimum sum. Taking the median fresh grad take-home salary, that would be $400 + 30% of $2,720 = $1216/month.

Note: If it is a credit card debt with 24% interest, I would allocate a much higher portion to pay the debt.

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3. Input your monthly expenses

Estimate your current monthly expenses. This includes bills, insurance premiums, food, transport, entertainment, healthcare etc. As long as money is leaving the bank account, it is considered an expense. If you can’t estimate your monthly expenses, try tracking it for a month using a budgeting app.

Note: Don’t forget to set aside a sum for income tax! Click here for rates.

Taking $1,200 (44%) for this example, there is 11% left for savings.

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4. Optimize it!

Optimization is important. It shows our current status and guides us to our goals.

To meet the 50/30/20 target ratio, expenses need to drop by 9% to push savings up to 20%. That means spending $250 less!

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What if I’m struggling to cut my expenses?

This is common and many struggle to adapt to sudden changes. Imagine if you decided to cut $150 from grab and another $100 from entertainment. That probably means you cannot afford to sleep an additional 30mins on rainy days that are so sleep-inducing or have 1-2 less drinking sessions with your friends! Similar to when one resorts to quitting smoking, those who quit cold turkey often fail and find themselves back to square one.

The solution? Progressive approach. From the stories I’ve heard, those who succeed don’t aim to cut 9% right away. They reduce their expenses by 1% each month and slowly but surely, they reach their targets. I’m sure there are better ways and would love to hear how you did it below.

Summary

The budgeting guide is easy to follow. It helps us spend within our limits and at the same time, it ensures we are saving enough for the future. However, one must not be too rigid with the golden rule as it differs for each individual. Always do proper planning and set realistic targets. Thank you for reading and happy building your layers!

*Featured image from WallStreetSurvivor

Continue reading “The Newbie’s Guide to Budgeting”

One Thing I’ve Learnt from the Service Industry

What’s the first thing that comes to mind if I were to ask you which is the most popular Hot Pot in Singapore? If your answer isn’t HaiDiLao, chances are, you haven’t been there yet. Despite the high prices (Average $40/pax), they seem to have no issues getting full table reservations every weekend and people are willing to queue up to 4 hours just to have a meal. While I was dining with my family there recently, I asked myself what made them so popular and why people are always coming back? HaiDiLao is able to retain their customers and attract new patrons at the same time – something most businesses struggle to achieve. What made them so successful?

Top tier customer service

This is no doubt the core of their business. From the beginning when we get our queue numbers to the moment we leave the restaurant, we are always greeted with a huge smile. Every single time I patronise HaiDiLao, I would leave with a really good feeling. But is this really the main reason why they are so successful? How do businesses such as Singapore Airlines enjoy such high levels of customer satisfaction too? We have to dig deeper into the true meaning of customer service.

The true meaning of customer service

During my time as a staff in Universal Studios Singapore, I got a glimpse of what the tourism industry is like. I was a part-time admin staff and had to do frequent patrols around the park to ensure things were smooth for both guests and employees.

During one of my afternoon checks, I happened to spot a little commotion. One of the guests approached the staff stationed at the express queue and told him that his one-time express pass was wrongly marked and he hadn’t used it yet. However, his ticket was clearly marked and torn, indicating that it was used. I could tell the staff was not buying his nonsense and wanted to turn him down, but his leader quickly stepped in and apologised for the error, even giving him entry into the express queue.

Baffled, the staff asked his leader: “Why did you let him in? It was clearly a scam and he is cheating us and the resort’s money.” The leader responded: “It is not worth it. Because this is what customer service is all about.”

I was shocked. I always thought customer service was all about greeting customers with a wide smile.

It was at that moment I realized:

“Customer service is all about biting the bullet, even when we know we are in the right”

In Singaporean slang: suck thumb and continue…

Why is this the case?

From the logical point of view, let’s say…with every 100 customers, 95% are happy paying customers, 2.5% are scammers, and the remaining 2.5% are legit customers with issues. What happens if we start to think we are always right and are not prone to mistakes? We are going to group these 2.5% customers with actual issues with the other 2.5% scamming customers and end up in a situation where we identify all 5% of our customers as “scammers”.

Starting to see my point? Let’s say for example you buy the latest iPhone, unbox it at home and find a crack on your front screen probably dented during shipping. You head to the Apple store and they deny your claim, saying you dropped it and have to bear full responsibility for the damaged phone. How furious would you be? You will start ranting to your friends, family and might eventually take it to social media, destroying their reputation. But if the staff bit the bullet and took responsibility for it, you will walk away happy and wouldn’t make a huge fuss. In fact, you might even leave a nice review for them! Not only do they keep you as their customer, they also manage to protect their reputation as the first trillion dollar company.

The fact that 2.5% of their customers are trying to cheat them isn’t the issue. The real issue lies within what these 2.5% scammers + another 2.5% legit customers with issues can do if they do not get what they want. I can guarantee that if this happens to any one of my aunts (and they aren’t the type that scam), they are going to spread the news like wildfire, stronger than you can ever imagine.

It isn’t worth it

The same concept applies to any business out there. Going back to HaiDiLao, I’m sure they are aware that there are customers making false claims that they are celebrating their birthdays just to treat themselves to a free fruit platter. Yet, they still give their customers the benefit of the doubt and celebrate with them.

As a business, it doesn’t matter if we give in and our customers don’t write us a good review or thank us for it. Because if they do, it’s a bonus for us. But the moment we put our pride in front of us and assume they are trying to cheat us, it doesn’t matter if their claim is legit or a scam. We can be rest assured they are going to say bad things about our company and slowly but surely, these negative news will cause a decline in customers and a damage to the business. Would we rather lose a small amount of our capital on those 2.5% scammers or lose 97.5% of our happy and legit customers?

Applying it to our lives

Most of you must be wondering – I’m not a business owner, so what does this got to do with me? Well, the principle I shared can be applied to many areas in our lives.

At work, when someone from another department (especially the seniors and bosses) claim they are busy and request for our help on tasks unrelated to our job scopes, be grateful, bite the bullet and help them. Don’t assume they want to slack off and take advantage of us and tell them “It’s not my job”. If we help them, who knows? We may have made a new friend! However should we be really busy, then we can explain our situation and I’m sure they will understand. If they still enforce it upon us repeatedly, then it’s time to ask ourselves if they really do deserve us, weigh the pros and cons, and decide if it is worth all the pain. If you continue to read my blog in the future and save your emergency funds, I’m sure some of you will be more than willing to leave a toxic environment to pursue greener pastures.

In the stock market, it is important to bite the bullet and admit our loss. A very good example of this is GoPro Inc (Ticker: GPRO). Towards the end of 2016, investors were hyped about their new drone and started buying their shares at $10 each. When it failed, they didn’t accept their loss and claimed it was just a ‘paper loss’. The company had no other areas of growth, it was screwing up over and over again, and sales are continuing to decline, yet some investors continued to hold their shares until they reached an all time low of $4.42 per share.

If we make a bad decision and buy a certain stock only to discover later on it isn’t a good company and it doesn’t align with our investment plans, then ‘suck thumb’ and accept the loss. Don’t let emotions overwhelm you and start taking control by making the right move.

I’m sure there are more examples of biting the bullet, but I hope this article brings a new perspective about customer service, how we can learn from them and how we can apply it in our lives.

*Featured image from Evolllution

Continue reading “One Thing I’ve Learnt from the Service Industry”

All You Need to Know About Personal Insurance in 15 Minutes

Earlier this month, I’ve talked about understanding cash flow, how you can protect yourself from going bankrupt and goal settings. However, things don’t always go according to plan. We may have the best budgeting hacks, savings accounts and investment strategies. But what if something were to happen to us and we’re unable to keep our jobs? We wouldn’t want to risk losing all our hard earned savings or put our families in a bad financial situation! This is when the importance of insurance comes into play.

In this article, my goal is to introduce all the insurance plans available in the market, whether it’s worth getting and how I plan the amount of coverage I need.

Disclaimer: The list of insurance plans below are ranked from the most important to least important based on my own opinion. I am no insurance agent, but I’ve done a lot of research and met a number of agents who share similar sentiment with the order below.

Before we begin, here are some things to note:

  • Insurance agencies usually require us to undergo medical underwriting or health declaration when we purchase their policies. If we have any existing conditions, the insurer may choose to exclude that particular condition or raise our premiums.
  • Premiums will increase with age and lifestyle. A 30-year-old smoker will have to pay more than a 25-year-old non-smoking adult. These premiums are usually fixed (except hospitalisation) till they mature, expire or upon renewal.
  • This means the best time to insure ourselves is when we are young, healthy and have no existing medical conditions.
  • Insurance isn’t always cheap. We should plan and set aside a small sum of money to protect ourselves from the “what ifs” in life. Generally, a well covered individual would spend about 5-10% of their annual income.
  • If you do have an existing medical condition, your priorities would differ from a healthy individual. Please contact your trusted agent and I’m sure they will be more than willing to help you.

If you need help in finding a good agent, drop me an email / PM at thefivelayers@gmail.com or https://www.facebook.com/thefivelayers and I’ll link you with my personal agent. He’s an independent financial adviser (IFA) and has access to almost all the insurance policies from the major insurance firms. You get to compare and select the best policy amongst the different insurance companies and get the most value depending on your needs, saving time and money. 

1. Integrated Shield Plan AKA Hospitalization plan

Should I upgrade to an Integrated Shield Plan 2.png

*Image from CPF

This plan covers medical bills so long as we are hospitalized. As compared to MediShield which only covers up to Ward B2, getting a hospitalisation plan allows us to stay in a private hospital for wards A and B1. This plan is regarded as the “most important” because medical bills can be really costly should any unfortunate circumstances fall upon us. Click here for a cost guide on hospital treatments in Singapore. Luckily for us, hospitalisation shield premiums are extremely cheap and allow us to claim up to 90% of our medical bills. We only need to pay the first $1,500 – $3,500 and 10% of the remaining bill, also known as deductibles and co-insurance.

Want full coverage?

axa.JPG

*Image from AXA’s brochure

Insurance firms that sell shield plans often allow the insured to add a rider on top of their hospitalization plans to cover the deductibles and 10% co-insurance. The premiums are slightly more expensive but may be very well worth. With increasing medical costs, a $100,000 medical bill today could cost about $450,000 in 30 years time. 10% of that and we have to pay $45,000. If we are unfortunate and have to pay a million dollar bill, that’s $100,000 of our savings gone! While there is no guarantee how much medical bills will cost in the future, personally, I would prefer to pay a more expensive premium and have full coverage. That way, I know I wouldn’t have to worry about hospitalization bills in the future and any form of hospitalization would not put my retirement funds in jeopardy.

Unlike Critical Illness and Term/Whole Life plans, the premiums for Shield plan will increase as we age. Due to the rapid rise in medical costs, most, if not all insurance agencies will adjust their premiums from time to time.

If you think getting the rider is too expensive, you may want to get the plan in the following order from the most important to least important:

Integrated Shield plan > Co-insurance benefit rider > Deductible benefit rider

2. Critical Illness (CI)

As the heading says, Critical Illness plans insure us if we are unfortunate to land with one of the 36 defined critical illnesses. A few examples include heart attack, cancer and stroke. There are plans that only cover critical illness but they usually come as a rider to our Term/Whole Life insurance (See point 3).

A common misconception for Critical Illness plans is the sum assured by the insurer is meant for hospitalisation. This is wrong as hospitalisation is covered by a Shield plan (ISP/Medishield) and the sum assured is supposed to cover our loss of income / medical expenses not covered by the shield plan while we recover at home.

A good gauge on how much coverage you should have is usually 4-6 years of your annual income.

While the chances of recovering from critical or terminal illness are low, early detection increases our chances of survival by 2-3 folds. Thus, one may consider getting a rider that allows the insured to claim part of the sum assured under “Early Critical Illness“.

The second type of rider allows one to claim “Multiple CI“. Below is an example taken from a plan I’ve gotten from Aviva recently (not sponsored).

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*Source: Aviva Website

Although it sounds really good, the premiums for these riders usually cost ~4 times more than the usual CI plan. I’m paying about $1,000/year for early CI + Multiple CI rider while the usual CI rider only costs $260. To have a good gauge on the market rates for CI plans, you may want to visit DIY Insurance.

Now the million dollar question is…

Is it really worth it? Should you get these riders on top of a CI coverage?

Unfortunately, I do not have an answer for that as it varies for each individual. It’s totally up to you to decide.

A few points to note:

  • These riders usually have a limit for the claims we can make for the same category. In this case, Aviva groups Early cancer, Heart-related illness and Nervous system/Systemic conditions separately and each group may only be claimed once.
  • Critical illness may or may not be claimed twice if there is a relapse, depending on the insurer.
  • There is usually a waiting period between each claim

My take on this is the Multi CI rider should, at the very least allow us to make subsequent claims for the same Major CI as the chances of relapse is higher than getting a new CI.

A few questions you might want to ask yourself:

  • Check your family history if there is any record of inherited cancer genes. If yes, don’t panic because it doesn’t mean you will get cancer. But it would help you make better decisions when getting a CI plan (Increased coverage, multi coverage etc).
  • Can you afford these riders? A well covered individual would typically spend 5-10% of their monthly salary on all their insurance needs. Don’t put yourself in a situation like one of my agent’s clients who spends 60% of his monthly salary on insurance + other products that don’t align with his future goals (yes, he was scammed by another agent) and has little to no funds left to build his other layers of wealth.

If you think getting the early CI and Multi CI rider is too expensive, you may want to get a CI plan in the following order from the most important to least important:

CI plan / rider > Early CI rider > Multi CI plan / rider

3. Term/Whole Life insurance

These plans give us a lump sum of money when we die (Death) or become permanently disabled (TPD).

Why is this important? Similarly to CI, they cover the loss of income for our family should we leave this world or are unable to work due to permanent disabilities. Some also purchase such plans to leave a “legacy” for their loved ones.

Term vs Whole life

This is a topic for another article. There are people who worship Whole Life plans and others that resent them. In a nutshell, I feel both Term and Whole Life plans have their pros & cons and we should only purchase the plan after knowing how we would prefer to approach our personal finance. The main difference between Term and Whole Life insurance is one covers you till a certain age (Usually 65-year-old for Term) and the other for “life” (Usually 99 for Whole Life).

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*Image from moola

I would also like to add that even though a Whole Life plan gives you the option of withdrawing your cash value, you would lose your coverage during the process. This is extremely important especially if you are planning to leave a legacy for your loved ones.

How much coverage should I get?

It’s difficult to determine the exact figures as our expenses increase when we reach certain milestones. Still confused? Here’s what I mean:

  • A typical student may not require a high death coverage as he/she does not have any housing loans or dependents. The death coverage they require should minimally be sufficient to support their parents through retirement and cover their student loans. The worst case scenario that could happen at this age would be an accident that requires medical care for the rest of their lives. Thus, one may consider increasing their coverage just in case.
  • A typical working adult looking to start a family would require an even higher coverage as they have to account the loss of income for their children’s upbringing, home loans etc.
  • A typical 65-year-old senior citizen looking to retire would require minimal coverage as they have no dependents and loans to pay.

Here’s how I do it

Before I begin, I would like to emphasize that the illustration below is for my own planning. It wouldn’t be the same for everyone because it depends on whether you plan to have no kids or 4 kids, stay in one room flat or condo, parents have sufficient retirement funds or not etc. In a nutshell, coverage needed is different for everyone.

The best way is to ask yourself and have a rough plan of your future. If you really can’t, speak to your trusted financial adviser. Should you decide to upgrade your lifestyle in the future, don’t worry, you can always increase your coverage in the future.

Death Coverage = Debts/Loans + Dependents

The way I plan is simple. Assuming if I were to die or get bedridden at the worst possible timing, (just moved into my BTO with a huge housing loan to pay, with other outstanding loans, have 2 babies, parents not enough retirement fund, only breadwinner of the family) I take the sum of my debts and expenses at that time to get a rough estimate of the coverage I require.

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In this case: $350,000 (to support my disability / death benefit for my other half) + $350,000 (Housing) + 2*$300,000 (Kids) + $200,000 (To support my parents retirement) would add to about $1,500,000.

Optional legacy planning: I plan to add a buffer of $300,000 to support my wife.

Are my calculations above exaggerated? In my opinion, yes.

  • Firstly, there are schemes available for single parents and this would reduce the costs of raising kids by a huge sum.
  • Secondly, if death was caused by a CI, the insurer would also payout the CI portion.
  • Thirdly, my company provides a group term insurance covering 36 times my monthly basic salary.
  • Fourthly, in the event I’m bedridden and disabled, there will be disability insurance given out on a monthly basis to cover my loss of income (see disability insurance below).
  • Lastly, if death isn’t caused by CI, chances are it is caused by an accident. Insurance companies would also payout if we have a personal accident plan.

Thus, my realistic coverage for Term+Whole Life would be much lesser! But in my humble opinion, it’s better to have more than less. Just treat the additional payouts from the other insurance plans as an additional benefit. Term Life plans are usually cheap for the amount of coverage we get, and even better if we are eligible for the MINDEF group Term plan.

My insurance buying strategy

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Firstly, I add all the sum insured from my current Term/Whole Life plans.
Note: If you own a Whole Life plan, you can call your insurance company and request for the latest benefit illustration to be mailed to your house. From there, you can see the declared non-guaranteed bonuses and current cash value of your plan.

Company A Whole Life (Since childhood, plan matured) 50,000 + 14,000 declared bonus + future non guaranteed
Company B Whole Life (Since childhood, payable for life) 75,000 + 16,000 declared bonus + future non guaranteed
Company C Whole Life (Since childhood, plan matured) 15,000 + 9,000 declared bonus + future non guaranteed bonus

Total = $179,000 + future non-guaranteed bonus

Secondly, I subtract it from my expected coverage at my current age.

Age Amount needed Shortfall
24 (Working) 500,000 -321,000
28 (Marriage) 900,000~1,200,000 -721,000 ~ -1,021,000
32 (Kids) 1,500,000~1,800,000 -1,321,000 ~ -1,621,000
55 (Semi-Retirement) 500,000 -321,000
70 (Retired with no loans) 0 0

As you can see, I need $321,000 to be covered at my current age and at 55 when I’ve fully paid my housing loans and children’s education. What I did was to get a Term plan with a fixed premium that will cover $350,000 till I retire. When I signed up for the Term plan, I noticed it only costs a few dollars more per year to cover $500,000 (economics lol) so I just went on with it.

Lastly, the remaining will be covered by personal accident / company’s group term plan. For me, I didn’t add the company’s plan because there is no guarantee I’ll be working in the same company for life and not all companies provide insurance for their employees.

$1,321,000 (required coverage at 32) – $500,000 (term life) – $100,000 (personal accident) = $721,000. Plus $300,000 legacy planning = $1,021,000

If you are a Singaporean male that served National Service, the MINDEF group insurance under Aviva is a good plan to keep as it is one of the cheapest if not the cheapest plan in the market. However, do not be too reliant on it as a massive disaster could limit our claims. While we are young and in good health, we can easily get the maximum coverage of $1,000,000 at $41/month. The best part about this plan is they will return a portion of the premiums paid for that year if there are little to no claims made. My strategy here is to cover the remaining ~$1,000,000 with this plan and slowly downgrade as the years pass.

My tip: It’s best to get the coverage we need at the “worst case scenario” while our health is still in good condition than to upgrade as we hit certain milestones (e.g, increase coverage from $500,000 to $1,500,000 after we get married). We’ll never know what is going to happen tomorrow and if (touch wood) anything happens to us, getting an additional coverage will be tougher as we will have to fill a medical declaration form when we want to increase the sum assured.

4. Disability income insurance (DI)

Most people get confused and associate this plan with TPD and Long term care insurance. TPD pays a certain percentage of the sum insured when we permanently lose a portion of our body (limbs, eyes etc) while the long term care insurance plans provide us with monthly income in the event we aren’t able to do 3 out of 6 of the activities of daily living.

Disability income insurance

Disability income insurance protects us and pays a certain percentage (up to 75%) of our declared salaries in the event we aren’t able to continue our current jobs due to illness and disability till the retirement age of 55-65.

A few good examples would be:

  1. Singer loses his voice
  2. Door to door salesman loses his ability to walk due to spinal injury
  3. Analyst suffering brain damage

We don’t usually hear about this plan when we meet our agents because only 3 out of the 8 leading insurance companies offer it. These companies are Great Eastern, Aviva and AIA.

Is it necessary to get this plan?

Yes and no. A few things to take note:

  1. Your greatest asset is yourself and your ability to work & generate income. For me, while I’m still young and have about 41 years to retirement age, I have huge growth in human capital ahead of me. Assuming my annual income is $45,000 and with a salary increment of 2.5% yearly, I would have an estimated capital of $3,232,791 after 41 years. Should anything happen to me tomorrow, I will potentially lose my $3.2m capital but with disability insurance, I could protect myself to about $2.5m.
  2. As we age and achieve financial stability or freedom by building our five layers, our needs of disability insurance would decrease. I see no point in getting this plan if we don’t have to work for money.
  3. To be eligible for claims, we must be employed at the time of disability. Freelancers are not eligible, but may wish to consider freelance income protection offered by Etiqa.
  4. There is a waiting period before the payout begins. It ranges from 2-6 months and insurance companies charge higher premiums with a shorter waiting period. If we have our emergency funds set aside, this shouldn’t be a huge issue.
  5. If we are back to work after the recovery period of 24 months and are drawing the same salary or earning even more, we will not be eligible for claims. If we are earning lesser, the insurer will top up to meet the sum assured.

I find this plan a great value for money (est ~$1/day for $3,000 coverage) especially if we are young, gainfully employed and still have many more years till retirement.

5. Personal accident (PA)

For a small premium (less than $200/year), it covers death / TPD caused by an accident, medical expenses, recovery care, TCM and even Chiropractors if the injury is caused by an accident due to recreational sports, leisure underwater activities and so on. Some even have full terrorism coverage!

Earlier when I talked about Integrated Shield plan, we will have to pay the first $3,500 on hospitalisation bills if we do not have a deductibles rider. In the event of a minor accident and we are charged $3,000 for a one day stay to do some additional scans and stitches, we still have to pay the full bill.

Many like to combine this plan with hospitalization as it helps them cover the deductibles portion while having extended coverage to TCM and Chiropractors.

You should consider this plan if you are an outdoors person that enjoys hikes, sports and motorcycling or if you are working in an industry that is more prone to accidents (e.g. Engineering, Grab/Taxi etc)

Personally, I got this plan because I’m injury prone when doing sports and I consider my work environment risky.

6. Long term care insurance

The Long term care insurance plans provide us with monthly income in the event we aren’t able to do 3 out of 6 of the following activities:

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*Image from policypal

The most basic plan in the market is provided by the government and by 2020, all Singaporeans and permanent residents will be covered by CareShield once they reach 30 years old. This plan will replace the current ElderShield plan.

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*Image from MOH

Long term care insurance is extremely difficult to claim as the insured must be certified by a doctor that he/she is unable to perform 3 of the 6 daily activities. Its main purpose is to help families with the high cost associated with taking care of the insured. If we already own a Disability insurance and Term/Life plan, the basic plan provided from the government is sufficient. At the moment, I don’t see any value in getting any additional coverage for this as it is much easier to claim disability income and TPD. One might argue that disability income only provides us with income till 65 and TPD is just a one lump sum payment. Even at the worst case scenario where the insured suffers from paralysis at 66 years old after his/her DI and term life has expired, the insured will have sufficient income from CPF, personal savings and an additional $1,000 from CareShield to cover them for life. So I’ll prioritize disability income over this plan unless I’m self employed and want additional coverage.

7. Investment linked policies (ILP)

There are certain variations of this plan, but the most common ILP can be broken into 2 parts: a yearly renewable term life insurance and an investment plan. For the first few years, a large portion of the premiums paid will be used to renew the insurance policy while a smaller portion will purchase a few units of investment funds depending on your risk appetite. See below for a simple illustration:

Picture-ILP.jpg

*Picture from moneysense

Pros:

  • ILPs are more flexible compared to Whole Life and Term plans as they allow us to adjust our insurance coverage as required (Increasing may be subjected to underwriting).
  • Unlike Whole Life plans, we are allowed to decide which funds to purchase based on our risk appetites. It could potentially give you higher returns than a savings plan.
  • These plans often come with an option of selling part of our investment portfolio to pay off the premiums for that year.

Cons:

  • ILP is not like any whole life or endowment plan. It does not have any cash value. Just like any investor’s portfolio in the stock market, the value of the investment portfolio will vary from time to time depending on the performance of the funds we purchase.
  • The insurance portion renews every year. As we age, we are more vulnerable to diseases and disabilities. This causes the insurance premium to slowly escalate as we renew each year.
  • In the event if the investment projections don’t go as planned, it is possible to encounter a situation where our investment funds are no longer sufficient to renew the insurance portion, forcing us to decrease our coverage to lower the cost to renew.

Should you be getting an ILP?

Before you sign up for an ILP, consider these factors:

  • Are you willing to take the risk of not having guaranteed returns on your investments?
  • Does an ILP fit your investment style and risk profile?
  • Are you adequately covered by other policies in the event your units in investments aren’t sufficient and you have to lower your coverage?

Will I be getting an ILP?

For me, no. The premiums are just too expensive given my annual income (the ones I’ve seen costs $3k/year, more than all my policies combined and it doesn’t give me half of my current coverage). Yes, there is an investment portion which may potentially give me higher returns. But with every investment comes risk. I’m not a big fan of renewing my insurance, paying higher cost of insurance as I age and risking my coverage just for a chance of getting higher returns. Also, I’m still young and I prefer to manage my own portfolio. ILP doesn’t fit my investment style and risk profile.

In the future, when I start writing on the third layer of wealth “Long term Investments”, I’ll show you that it is possible to build wealth and beat inflation in a safe and risk-free manner.

Final tips

  • Do not tunnel vision & spend too much on one type of insurance and neglect the others (e.g: spending 3k/year on a Whole Life insurance + Critical Illness rider without covering yourself with hospitalisation, disability income and personal accident)
  • Have a good balance between each type of plan and spend within your limits. Don’t forget: General rule of thumb is to insure yourself with 5-10% of your annual income.

Before I finish…

Most of you must be wondering how many % of my annual income do I spend on insurance. My current premiums cost exactly 7.28% of my annual take home salary.

I currently own:

  • Integrated Shield plan + Co-insurance + Deductibles rider
  • Term Life insurance + Multi CI + Early CI rider
  • MINDEF group insurance
  • 3x Whole life my parents got me, 2 of which matured and I don’t have to pay a cent
  • Personal accident plan

Getting soon:

  • Disability income insurance

Right now, I’m helping some of my friends sort out their insurance and personal finance. If you have any questions with regards to them, I’m willing to help you as long as it’s within my limits. You may drop me an email at thefivelayers@gmail.com or PM me at https://www.facebook.com/thefivelayers. I do not have any products or services to sell so I’ll just help you to the best of my abilities.

Lastly, shout out to feedspot for featuring my blog as the top 100 retirement blogs. Have a good day and happy building your layers!

*Featured image from Hamilton Leonard

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