Money Sense

I was reading last month's Her World during my foot reflexology session when I came across a very sensible article on financial planning for women. Do get your hands on it if you can.

On the other hand though, I warn you to read financial articles in the media with a keen eye for analysis.

For instance, there is this Missy who writes financial planning articles for our national paper (hint: weekend column) who is a zealous promoter of "buy term, invest the rest".

For your information, "term" refers to the pure type of insurance (also the cheapest) that you pay and pay for a certain period of time for the death protection and never get your money back. It has no cash value.

The idea is that participating insurance (the type that yields you some returns, unlike term insurance) gives returns that are too low. Might as well buy the cheapest type of insurance (term) so that you can invest the rest of your money in investments that may (operative word = "may") potentially (yes, "potentially") yield you much higher returns.

Many educated Singaporeans are heeding this advice like it's an ephiphany straight from the Bible. And they like to think that they are the enlightened intellectual smart enough to realise this. And hey, it's straight from our national paper, you know!

Now, let Karen tell you why she thinks this is a very idiotic idea for financial planning.

You might have caught on it already. Of course investments will yield you higher returns. But I warn that the reverse is also true.

Buying term and investing the rest would mean that you are putting a lot of yourself out there to be slaughtered, should the market turn bearish.

One of my colleagues illustrates it best.

Imagine an economy downturn. You lose your job. Your stocks, unit trust, property prices all plummetted. Since you are fully invested, your CPF-OA now is empty and money is not going in 'cos you lost your job. You have to pay your housing loan in cash. You have to pay the monthly bills in cash. You have to pay your parents in cash. And if you have family of your own, and you have a car... hallelujah! And oh, your term insurance stopped because you can no longer afford it, even though it's cheap.

If something were to happen to you in this instance, imagine how nasty this would be for your dependents. They are stuck with your debts, and possibly has no means of sustaining their lifestyle without making drastic changes. Your investment assets are useless since they are worth a lot less during a down market and you can't dissolve them without making a major loss. And there's no insurance payment for your family ... because remember, you stopped your term insurance 'cos you can't afford it, and you are consequently not covered. Not covered, no compensation. And unless you died instantly by jumping into train tracks, there're probably mounting hospital bills too.

Like I said, hallelujah.

And the same newspaper published an article not long ago stating that major cancers and heart problems are hitting more people in their 30's ... so I'm not exaggerating the above scenario. It can be very real.

Still think "buy term, invest the rest" is a good idea?

The thing is, buying term and investing the rest hinges a lot on the assumption that life is a bed of roses and investing for a profit is a certainty. But we all know it is not the case in reality.

You are better off getting a more expensive insurance product that can accumulate cash value in itself. Better still, get one which you can withdraw emergency funds to tide you over bad times and leave enough value in it to be deducted such that the insurance coverage continues even when you stop paying for them.

And the fact the Missy from ST always forget to account for is that a policy with cash value is often about $30-$100 more than your term insurance, depending on the amount of coverage you want. That implies that for a young executive with a budget of $100-$200 per month, you are talking about diligently investing $70-$100 cash (that you saved from buying a term insurance instead of a traditional one) monthly to ripe high profits. I don't know how feasible this scenario is because we all know that the tendency is that the money will go somewhere else -- a nice dinner at Lawry's, a new pair of shoes, hangbag, whatever. It is idealistic to think that young Singaporeans have the discipline and the time to put this small amount of cash into investments, anyway.

In any case, Karen do believe in making money through investments. But Karen also believe in doing it the kiasu-kiasi way, that is to say, cover your head and backside before putting your head out there to be chopped (or not). Fact is, we'll never know what'll happen tomorrow. It pays to always approach financial planning with the worst-case scenario in mind.