The Insurance Cafe Has Gone Mobile

I've decided to take The Insurance Cafe mobile! Still learning how, so if it doesn't look very pretty on your device or you've got problems accesing the mobile site please let me know. Am using mobify as the mobile site designer.

If you access The Insurance Cafe on your mobile browser it should automatically redirect you to the mobile site. If not you can find it here theinsurancecafe.mobify.me  

Dato Din (Dinesh) hope you can now read my blog at work on your HTC Desire : )

Have You Unwittingly Fallen Prey To APL?

Premium holiday is a phrase that gives a happy connotation to something you might not be so hot about if you knew its workings. I was having a discussion lately with a friend of mine and he told me that his insurance policy is still inforce despite him not paying for a few months.  How was this possible? In insurance language, he has gone on a "Premium Holiday".

However, be clear that this post only applies to traditional life insurance policies and not investment-linked policies. You can take premium holidays on an investment-linked policy but its workings are different and hence are not applicable to what we're talking about here.

Premium holiday is available to any policy that has enough cash value accumulated to pay the next premium. You then get to skip paying your insurance premium while still enjoying the coverage. You can be on this holiday until your policy runs out of cash value. If it runs out and you still cannot pay your premiums, the policy will lapse and you will not be covered anymore.

While you might think that having your premium paid through the accumulated cash value in your  policy is a good option, this may not always be the case. How detrimental or beneficial a premium holiday is depends highly on the method used to go on a premium holiday. You can think of it as taking different modes of transportation to your holiday destination. This might get a tad technical but could save you thousands in the long run so bear with me.

What method should you use?

DON'T: Take an Automatic Premium Loan (APL) as a means to go on a premium holiday. This is essentially a loan that is automatically taken against the cash value of the policy to pay your premium in the event the policy was about to lapse due to no payment. The interest you pay on this can be as high as 7%! This will undoubtedly deplete your cash value rapidly. I only suggest using this clause if all other methods of payment are exhausted.

DO: If you find yourself in a situation where you cannot pay for your insurance premium you should first ask your insurance consultant about your options. Insurance companies usually pay out cash bonuses every year. This cash bonus is reinvested into you policy (unless stated otherwise) and forms part of your Cash Value. Cash Value is the amount of money you get if you choose to surrender the policy. The great thing about this is that after a few years you could have accumulated a substantial amount which can be used to offset future premium payments. This is NOT categorized as a loan and so its almost like using money from your own savings to pay for the premium.

I hope this has given you some clarity regarding APL and prevented you from falling into its trap.

Have You Purchased A Car Too Big For Your Wallet?

Yesterday I'd shown how much interest we pay when taking a home loan. Today will talk about car loans. As an illustration I'll take the Honda City (since I recently test drove one).  You can substitute the figures I've used with the ones of you own car loan. Step 2 shows interest paid on the car. I've added other steps just to show the method to calculate monthly payment.  

Car Price (without insurance): RM88 000

Down Payment: RM10 000

Loan Amount: RM78 000

Loan Tenure: 9 years

Interest Rate: 3.95%

1. Take the loan amount and multiply it by the interest rate. 

     RM78 000 x 3.95% = RM3081

2. Take the answer from step 1 and multiple it by the loan tenure.    

     RM3081 x 9  = RM27 729 

3. Take answer from step 2 and add the loan amount. 

     RM27 729 + RM78 000 = RM105 729

4. Take answer from step 3 and divide it by the loan tenure (in months). 9 year loan works out to 108 months. 

     RM105 729/108 = RM978.972

We have deduced: 

Total Interest Paid: RM27 729

Monthly Loan Repayment: RM978.972

Actual Cost of Honda City: RM105 729

Car and home loans are very different. For a car loan the interest is calculate on a fixed principle amount (car price). Whereas for a home loan the interest is thankfully calculated on a reducing principle amount. 

If you were to calculate a home loan of RM300 000 with interest rate of 4.5% and 30 year loan tenure using the car loan method it will cost a fortune (RM705 000 to be precise). Compare this figure with the one in yesterdays post, where it was calculated that this same home loan of RM300 000 will "only" cost RM547 220.13 instead of RM705 000.  

So what can you do to reduce you car loan? The only thing you can do is take a smaller loan and thus reduce interest payment. Early settlement of a car loan will not help reduce the interest you're going to pay. 

Some financial gurus' follow this rule of thumb: Only take a car loan that you can afford to pay back in 3 years. If its more than that, you really are buying a car too big for your wallet.  

Stop Donating Your Hard Earned Money To The Bank

If you're thinking of taking a home loan to purchase a house/apartment, you should consider this useful tool called Home Loan Calculator. It's a very simple one in Microsoft Excel format. Drop me an email at totalcoveragesolutions@gmail.com with the title Home Loan and I'll send it to you.

As an illustration, I've taken a 30 year loan for RM300 000. The Base Lending Rate (BLR) is 6.3%. Most banks offer home loan packages that charge BLR - 1.8%. Needless to say this varies slightly from bank to bank. So effectively you pay about 4.5% in interest per annum.

Loan Amount: RM300 000

Interest Rate: 4.5%

Tenure of Loan: 30 years

With the Home Loan Calculator I can tell: 

Monthly Payment: RM1520.06

Total Interest Paid: RM247 220.13 

Total Amount Repaid: RM547 220.13

As you can see, for a loan of RM300 000 you end up paying almost RM250 000 in interest which brings the total amount of money out of your purse to about RM550 000. Thats is a huge sum of money to "donate" to the bank. 

The best way to reduce interest payment is to have a bigger sum of money ready as down payment thus reducing your overall loan amount. 

The other great way is to make lump sum payments over the years. You can give the bank instructions that this money is to be utilized only to pay up the Capital part of the loan and not the Interest portion. 

Put Your EPF Money To Better Use

Investing in unit trusts using the funds in your EPF might be a viable solution if you're looking for more flexibility and control over your investment strategy. It's a very simple process and you can invest in any funds that have been approved by EPF. 

Withdawal Eligibility Formula:

(Amount in Account 1 - Basic Saving) x 20% = Unit Trust Investment Amount

Are Your Insurance Monies Guaranteed?

There are a myriad of different life insurance products available in the market. But they all share something in common. It is known as the Sum Assured. Insurers can promise the sun and moon in investment returns but at the end of the day only the Sum Assured is absolutely guaranteed. If you've ever wondered how an insurance company guarantees that you get paid when you make a claim, then read on. 

The Sum Assured is the minimum amount the insurance company will pay out when a covered event occurs. In Malaysia, Bank Negara has done an excellent job in ensuring that insurers have enough funds to pay out claims. This is done through the implementation of the Risk-Based Capital (RBC) Framework. 

Put simply, this means that insurance companies need to show that they have enough capital available to pay a claim in relation to the risk they assume when underwriting insurance policies. 

Under the RBC Framework, Capital Adequacy Ratio (CAR) is the method used to ensure that insurers are able to pay up claims. The CAR measures the adequacy of the capital available in the insurance and shareholders’ funds of the insurer to support the total capital required (Source: Bank Negara Malaysia). 

In Malaysia the benchmark Capital Adequacy Ratio (CAR) is 130%. Here is some encouraging news: as of the first quarter 2010, the industry wide CAR stood at 240%. This means that insurers in the country are cautious and have allowed for a much larger buffer. 

Cost of Waiting

Many people are in the habit of putting off decisions they have to make today. Retirement planning is one such decision that is shoved aside until retirement age is nearing. Ever wondered what putting this decision away is costing you?

Illustration

Rachel and Tara are both 18 years old. Each used a slightly different investment strategy to accumulate an investment fund at age 65. Let's assume an investment compounding growth rate of 10% per annum.

• Rachel starts investing RM1000 annually from age 18, continued this for 10 years then stopped investing. 
• Tara waited 10 years before investing RM1000 annually and continued this for 38 years.

In the end,

• Rachel had invested RM10 000 and her investment is worth RM655 617.
• Tara invested RM38 000 and her investment is worth RM441 536. 

Time is an important factor in any investment. Rachel's money had a longer time to grow because she started investing at a younger age than Tara. Eventhough Tara invested more money at a later age, her money didn't have the time to utilize the magic of compounding interest.

What is your Economic Value?

How much should I insure myself for? A simple guideline is to calculate your economic value. Your economic value is the amount of income you will bring in during your whole life. 

Illustration

Alvin is 25 years old and earn RM36 000 per annum. Lets assume he works till 55. Ignore inflation and increase of salary for now. 

RM36 000 x 30 years = RM1 080 000. 

It can thus be concluded that Alvin will earn at least RM1.08 million till retirement. This is his rough economic value. Insurance is meant as an instrument that protects this economic value. If for example Alvin is diagnosed with cancer at 48, his earning capacity might be in jeopardy. Insurance will then step in to compensate him for this loss.  

He will not be able to work and bring in the 1.08 million he is capable off. In actual fact insuring oneself for RM1.08 million will be too expensive for the majority of us. However, it remains a good method of measuring how much you are worth economically and how much you stand to lose if an unfortunate event happens to you.

  

Simplifying Insurance

Financial instruments are often times so complicated that even the "experts" don't seem to know whats what. Insurance is one such instrument which is shrouded in a mist of confusion and misinformation. 

The simple aim I had when starting The Insurance Cafe was to make insurance accessible to the everyday man. Being in the industry myself has given me a good insight into the inner workings of insurance. I intend to share this knowledge in the hope that you gain a better understanding and apply the principles learned when you decide to insure your life. If you have any queries, feel free to email them to me and I shall do my best to answer.

I believe that insurance is an irreplaceable tool especially in today's world where financial cost and obligations are happily rocketing to the moon whilst incomes are breathlessly trying to keep up. 

Simplicity is the ultimate sophistication ~ Leonardo DaVinci