LCF Answers Readers' Question

Question 1
In my previous post on calculating total insurance needs, a reader remarked that by liquidating all Mr Lim's assets, it essentially means there is neither a house nor liquid cash for his family to stay and use after his death.

This is correct. Therefore, if Mr Lim does not want the house to be sold and wants his wife to still have liquid cash in the bank upon his demise, he should omit both his house market value and cash from total assets computation.

Therefore, total assets available to settle his current liabilities is now equivalent to $ (890k - 500k - 10k) = $ 380k.

His insurance needs to cover for the shortfall is now equivalent to $ (1210k - 380k) = $ 830k.

A Convenient Way to Check Insurance Policy Cash Value

e-Connect is Great Eastern web-based service for policyholders. With e-Connect, you can:

• View and download your Life Insurance Premium Certificate(LAPC) 

• Check your policy details and values

• Download form for transactions

• View Investment Link Annual Report

Steps to sign up as user

Step 1: Go to Great Eastern e-Connect Portal and click Sign Up Now.

How to Evaluate Retirement Annuity Plan

Retirement planning is one of the often overlooked aspect in personal finance. By the time one realizes the significance of a retirement plan, he usually discovers that there are only a few years left to retirement age. The primary focus for the years which has passed by had been on children education fund and settlement of debts or mortgage.


In budget 2012, there is this new RM 3,000 tax relief (previously RM 1,000) on contributions to private retirement scheme and insurance annuity for 10 years. This tax relief shows that the government started to recognize the importance of insurance annuity as retirement income because lump sum retirement savings such as EPF, more often that not, gets exhausted too soon.

Insurance nominee or beneficiary?

As a general rule, all your assets will be frozen when you die. With or without a will, your assets will be used to pay off creditors' claim and outstanding taxes before the leftover is being distributed to your family.

I guess by now everyone knows that only insurance proceeds and EPF balance are the 2 types of funds which will be paid directly to your nominee or beneficiary upon one's demise. These are said to be protected from creditors' claim even though a person is declared bankrupt prior to his death.

One thing you notice is that the terms beneficiary and nominee are always being used interchangeably.

In the context of EPF, they are the same. Your nominee is your beneficiary.

In life and personal accident insurance context, however, they are NOT. The following info are quoted and simplified from Section 166 of the Insurance Act.

How much insurance one really needs?

A case study based on Total Needs Approach:

Say, Mr Lim, aged 35, earns $ 100k annually. He is married with a 3 years old son.  Should he dies, he wants his family to have an annual income of $ 60k for the next 25 years, with the first payment due his death. He also needs to ensure his son is provided with at least $ 150k for his tertiary education in 15 years time. His biggest debt includes his house mortgage with $ 250k outstanding amount. His wife is also working and will be able to service the house mortgage with her salary.

The Grim Reaper Investment Fund

...aka the controversial Life Settlement Fund.

What happens is this:

1. A life insurance policy owner has coverage of $1 million, and has paid a total of $200k premiums for the last 20 years.
2. The policy owner offers to sell his policy at $500k.
3. A third party pays the policy owner $500k cash, and essentially becomes the legal beneficiary of this policy.

Motivation for policy owner to do this

1. No longer need the policy, but instead of letting it to lapse, which essentially means insurance company pocket up the $ 200k premium, he can make immediate cash out of it.
2. The surrender value of the policy is way lower than its sale value or total premiums paid.
3. No longer can afford to pay the premiums - but reselling it for quick moolah is better than letting it lapse.
4. Need additional, immediate cash for medical treatment after exhausting every financial channels.

Imagine you are the third party who purchased this policy - you rate of return is directly related to how soon the policy owner dies. I was like "WTF?, there is not other investment more ghoulish than this!" And this is actually near to risk-free, say if he dies after 1 year, your rate of return is (1 mil/0.5 mil) x 100% = 200%!. Even if he dies after 5 years, your rate of return would have been 14.9%, guaranteed! 

They say, there are only 2 things in life are certain- death and taxes!

Seems like a win-win situation? Not so.In most investments, either the seller or the buyer will be the loser in a zero-sum game but here, the biggest loser is the rightful beneficiaries of the policy owner - the spouse (if still alive) or the children (that's if the policy owner intends to leave the $1 mil as an estate to them). Still, I think if there's no surviving spouse or children, then this could be close to a win-win scenario. However, another argument is, if there's advancement in medical technology which prolongs the life expectancy of the population, then investors' rate of return would be drastically reduced. In other words, the key to profitability is an accurate projection of life span.From investor standpoint, the risk is reduced if the policy owners are those in their twilight years. Ah, how morbid!

Again, Malaysia being a conservative nation, you don't have this. Then again, would you be able sleep to sleep at night knowing there is someone out there who is eager to see you kick the bucket ASAP so he can reap a profit? That's why it is almost irrational to trade these investments Over The Counter; in reality, they are managed as mutual funds. Hey, those funds are somehow as good as high grade corporate bonds, but with higher yield! Better yet, they are absolutely negatively correlated with the business cycle. You still get your ROI, albeit variable - due to one and only factor - how soon people die! Widespread, unexpected early deaths (a pandemic of sorts, more deadly swine flu anyone?) will result in windfall for life settlement funds investors.

I bet if this is legalized in Malaysia, Ah Longs' drastic shift in their modus operandi would be to buy their borrowers' policies, and when borrowers failed to pay up, they will happily chop you up, no questions asked! No more taunting or splashing red paints or hanging pigs head!

Stark Reality: Child Education Costs & The Endowment Policy

Create Now, Save Later
So I read a reader contributed article (Personally Speaking by Hazel Leong) in Personal Money Sept issue, on why she felt that generic endowment insurance plan is insufficient to meet her child's education funds requirement in 20 years. 


The key takeaway here: Guaranteed lump sum rate of return in 2 decades time is even less than the current risk-free rate of return for Fixed Deposit of 3.15 percent.

In Excel, use the formula: Rate(20,4800,0,-120000) and you get 2%. 

And she further illustrates that an engineering degree currently costs about RM 150,000, with the assumption that the cost of education doubles every 10 years. I do not know how she came up with RM 150,000; but it could not be anywhere in local public or private institutions. An engineering degree at Multimedia University, my Alma mater, is currently tagged at RM 50,000. Therefore, let's take this as baseline for calculation below. Overseas studies are really, the privilege of the rich, and they are not any man on the street like the rest of us. Moreover, there are factors such as exchange rate fluctuation which we could not anticipate in the future, so let's be realistic and keep things simple.

*assume the education doubles every decade

Second key takeaway here: Endowment plan payout in 20 years can only fulfill one third of your child's education cost plus living expenses in the same timeline.

Now, the contributor advocates properties investment but I am not going into details of her plan here although it is very ideal if you have the cash for at least 10% down payment of the properties value, plus other closing costs.  Whatever the investment vehicle, everyone has their own preference. Just be prudent to balance the risk versus return.


Anyway, below are my estimation of the investment needed now to cover education cost of RM 370k.

Save  Now, Create Later

If anyone starts to allocate RM 10k today into investment vehicle of your choice with moderate return of 6 percent per annum, with yearly top up of RM 9.6k, he or she will be able to cover his/her child education cost in 20 years. 

RM 9.6k per year translates to setting aside RM 800 per month, with father and mother each contributing RM 400. Do-able right?

And you still have surplus of RM 14k, which can be used as down payment for your child's first car when he or she starts working after graduating.

Bear in mind this is only for one child. What if...

a) You have more than one child?

b) You child desire to study medicine, and he/she is capable of - you don't want to kill their dreams right?

Securing a scholarship though, is an added bonus. But I will only using EPF Account 2 for children education as last resort, because it will surely jeopardize my retirement plan.

The Downside of Active Self Investment

There is no insurance element in it, unlike endowment plan. The insurance component of endowment plan will provide the insured amount compensation to the proposer (parent) in the event of death or total permanent disability of the child. I do not think this is critical. On the other hand, if the proposer passes away/permanently disabled/suffers from any of the 36 critical illlness, the policy will sponsor the child until maturity.

To mitigate the risk of parent not able to provide financially to their child, any parent should be sufficiently insured. Like my previous CFP facilitator mentioned, if you love your family, and being the primary income earner, you should buy more insurance for yourself, NOT for your spouse/children. I am not expert in this, but probably after CFP Module 2 this semester, I could analyze total insurance needs more objectively.

Disclaimer: I am not an insurance agent.

Who am I?

An advocate of financial literacy :)