Thursday, August 27, 2009

Insure for what ? or against what ?

General insurance is more straight forward, you are insuring your car, house, home content etc. But in life insurance, what does insuring your life mean ? What are you actually insuring for or against ?
  • Death - end of life
  • Disability - partially or completely unable to live a standard live
  • High medical fee
  • Accidents
  • Income
Death is not a problem actually. Everyone got to go eventually. If anyone is still fear of death then its just becuase his personal growth hasn't reached a mature level yet. But then again, NOT everyone must be mature. Living a whole life like a dump kid is still a life, no different than the smartest ass in the world. Either way, they should and acquire solid personal finance despite the differences.

Death is not a problem, but dying too early or too late is. If you live a purposeless life then dying early may be fine for you. But almost suddenly you will realize you do have purpose afterall at the very moment before you pass on and its too late for you to do any thing about it.

"Sorry Mum I am gone, I meant to say I love you. Here is your ticket to Dubai ..."

Dying too late is only a problem when you are incapable of substaining your life but yet you are alive. This usually occurs in 2 major scenarios; financially drain and health problems. So you use up your money, cann't buy any more Starbuick and you sit outside desperately don't know what else to do. Or you have been in coma for 15 years but your body is still going, lying there doing nothing yet doctor doesn't want to certify you dead. Else with a wealthy and healthy being, no one would complain about dying too late ...

"Hi Nurse, I may not be able to speak but here is your salary for massaging me, thanks !"

Disability is hard word to agree upon in common sense but in this industry, a person is considered disable when he couldn't perform the tasks majority of the people can. This is further percisely identified as losing 2 limbs (Total Permanent Disability) or diagnosed of Cancer (Critical Illness) etc. Your family and you may need some helps when you are 'disable'.

"Kids, I can no longer serve you ... here is your last sum of ..."

Ironically the more we know about our body (more civilized), the harder it is for us to fix it. More complicated systems are invented to cure more complex illness. Cost has gone up so high that the poor sick people wish they could share some medical fee with the healthy ones. Hence insurance is the best bet to the solution. If you are sick, wouldn't it be nice someone else is paying your bill ?

"Doctor, please hospitalized me or else I couldn't pay you ..."

Part of the deal to be human is that we don't know all. Things may happen very sudden and out of our expectation some times. The last thing we want is for a car accident to ruin our life totally. So just in case ... it wouldn't hurt as bad if there are some financial helps ...

"I lost my limbs, but at least I have 3 years to pick up new way of life without too much financial worry."

Some may have noticed that insurance is all about money. If you cann't transform what you need into numbers/money, then perhaps insurance cann't help. Then how about insuring the money itself ? Sure you can! Remember insurance is an example of business that is only limited by human's creativity, which is unlimited. So if you are ill and cann't go do labour for 3 weeks, your insurance could have paid you daily allowances.

There you go, these are the general area of coverage of personal life insurance ;

  • Death - end of life
  • Disability - (Totally Permanent Disable or Critically ill)
  • High medical fee
  • Accidents
  • Income

Sunday, August 23, 2009

Insurance, WHO is it for ?

If you don't have a specific goal, you probably don't need insurance. Would you buy car insurance if you don't have a car ? Would you buy house insurance if you don't have any property ? Will you buy mortgage insurance if you don't serve any loan ? Likewise, you should have a clear goal when you commit into any life insurance plans.

Generally there are two big categories; you are planning for other people or you are planning for yourself.

Insurance For Them
If I die earlier than I thought, I would want to make sure my parent, spouse and kids not to worry too much about immediate living expenses.

If I suffer from heart attack, I don't want my spouse to use up all his money to cure me.

If I am ill and cann't work for a long time, I want to make sure my kids still get paid for their pocket money.
Insurance For Me
If I lost my kidney, I don't want to use my own money for cures.

If I am hospitalized, I want to live in good care private room but I want other people to pay for that.

Generally you can lump some reasons together to buy an insurance but it should sperate these 2 categories. If one of your insurances is for you yourself AND also your family, most often you will use up the amount and still leave nothing to your family.

Typical under-insured cases occur in disability and illness. When you are diable or critically ill, should you use the insurance money to cure for yourself or should the money be left for your loved ones ? If you care about your family, most of the time they will use the money on you instead. Like wise, may be a simple small cure can be done with your condition but all of your family members want to keep the money with themselves. Either way, you should be very clear and seperate your insurance plans for others or for youself.

This is especially important in overlapping coverages like accidents, followed by permanent disability and critical illness.

Death pay out is pretty for other people while medical plans are pretty much for ourselves.

Thursday, August 20, 2009

Size does matter in mutual fund selection

It was mentioned before that when choosing which mutual fund to invest in, it is more important to choose the fund manager rather than the funds. However, most of the times the fund manager is not a single person. In most established mutual fund businesses, the fund manager itself is a team of people. Although sometimes there may be a single person making all the investment decisions but as time goes, business expands, number of funds to manage increase and that person will eventually need to delegate, either to a system or other people.

So how to analyse the fund manager then? Well, in that case the fund manager is actually the company, so we analyse the company itself.

Investment is a money game. You use money to earn more money. If you have the right strategy and little money, you would probably make some money. But if you have a lot of money to start with, you probably make so much more when your investment decision is right. Earning 100% from $1 gives you $2, but earning 100% from $100 gives you $200. The earn ratio is the same, but it is a huge difference between $1 and $100 ...

When you make a mistake losing all your money, you are dome. But if you have more money, you can apply money management so that you have some reserve funds to try again, especially to cover your previous mistakes. So more money gives you more number of investment trials.

As mention before, the higher amount usually also implies lower fee in most investments. You can buy stocks with $100 but your cost can be as high as 8-10%. But if each of your transaction is above MOTS : Minimum Optimized Trading Size ie. $20,000 then your fee is lower than 1%.

So Size Does Matter and the primitif requirment for a fund manager to perform is to have a large sum of capital.

In order to keep mutual fund as a passive investment tool ie. simplest decision making, we can simply pick the largest mutual fund company to invest in. In Malaysia, its has been deadly simple in this aspect, Public Mutual is not the obvious choice but the only choice when size is concern, too bad.

According to Liper Fund, as of 22 June 2009 these are a total of 68 millions of unit trusts managed in Malaysia. The fund sizes managed by various Malaysia Unit Trust Management Companies are as followed;
28 millions Public Mutual
8 millions AmInvestment and CIMB
3 millions OSK-UOB, Prudential
2 millions HLG, Hwang-DBS
1 millions ING, Pacific, MAAKL
So the truth of using mutual fund as the highest return passive personal finance tool is as simple as buying Public Mutual every month automatcially using a Standing Instruction ie. apply the DCA - Dollar Cost Averaging technique. This recommendation has been true for the past 10-20 years and most likely to be continue correct for the next 5 years.

To further show the confidence on this recommendation, anyone who has had a Public Mutual fund with DCA applied. If you are still NOT happy after 3-5 years, contact me for a potential total buy out of all your investment units.

It will take a while for 8 millions to catch up with 28 millions. However, not impossible. If you have been watching all the mutual fund companies growth for the past 10 years like I have, the growth of OSK and Prudential are really significant.

If for whatever reason Public Mutual is NOT an option for you, the other choices following this same argument would be CIMB from the banking industry and Prudential from the insurance industry. While CIMB's size stands side to side with AmInvestment but Prudential is way ahead of other insurance oriented mutual fund companies.

How about which funds to buy ? Well, following this same argument, we should buy the largest fund size funds. And that usually means NOT the NEW funds. Most of the older funds have bigger fund sizes. Believe it or not, some of the recommendations based on performance here are actually some of the oldest funds too.

Tuesday, August 18, 2009

Secure Future Income

Insurance can be a long term commitment so it could be very costly to commit into one without having a clear goal in mind. Each of the insurance you own should have a meaningful purpose, else you may not get back what you have sacrificed for. One of the purposes for buying insurance is Income Replacement.

As straight forward as it may sound, there is NO standard way of calculating how much is needed. Below shows one example ...

You are 25 years old and earning $2,000 now. If you want to secure that income up to age 55, that is 30 more years to come. Linear sum would be 2,000 x 12 x 30 = $720,000. If you also think you can get an average of 5% increment every year, then your total future income is about $1.6 millions.
If these numbers seem big to you, then perhaps your personal finance consultant or even yourself have been misleading yourself in your needs assessment. Calculation above isn't exactly rocket science.
If you have set a 10% budget or $200 per month, then what you are looking for is to buy $300 insured value with your $1. ( $720,000 / $ 200 / 12 months = $300 ). This pretty much mean your only choice is Group Term Insurance. Within the same budget, other types of insurances may only provide an insured amount of $100,000. Which is less than 14% of your $720,000 needs.
The simple and straight forward part of insurance consideration is just that, you should get a Group Term Insurance for this purpose. However, should you still not satisfy with that ... you may analyse further ... into the no-that-simple or the fun part
Your income replacement needs is actually reducing as the years go by. For example, 10 years later, you would have already earned some of your income and your needs from age 35 to age 55 is only 20 years or $480,000, no longer $720,000. Likewise, when you reach age 45, your need will reduce by another one third. According to this, a Reducing Term Assurance may be suitable too ... which is also very cost effective.

If $720,000 is still not an affordable sum, you may need to re-assess your needs ... before simply limiting it.

Why do you want to secure your future income? Is it because you worry about your parent's living expenses ? If yes, how much do they really need ? If it is NOT $2,000 a month then perhaps you should secure your parent's future living expenses and not really the whole of your income.

Or are you just planning to maintain your life style? If yes, then you most probably do not need to pay income tax and EPF with your insurance payout. Hence that may comes up to about 15% saving. So intead of $720,000 you just need $612,000 for this purpose. Like wise, what exactly is the life style you are trying to keep ? Are any part of your current income form another part of saving ? Is that saving a part of the lifestyle you want to keep ? If not, then you may further reduce the sum of this need.

If whatever amount you come up with after re-analysing your need is still HIGH, then perhaps 30 years is too long a plan for you. You may want to secure your next 10 years income first. So to secure your income up to age 35, its only $240,000. With the clear concise mind that your age 35 to 55 is NOT secured. You better work something out before you are age 35 ...

Lastly, don't be confused by the dualism. Insurance can be an option but securing your future income does NOT necessary have to have insurance. ie. its not the only way.

The whole idea of you securing the income is that you are assuming the income needs to be secured when you stop working. In another words, your current income is an active income. You work you get paid, you stop payment stops. If future continous income is important to you, why don't you start by focusing on getting passive income instead ? That way, no matter if you are here or there, income keeps coming and you don't need to pay extra to secure any of it ...

don't forget Personal Finance is NOT all about money, sometimes it just takes a little bit of creativity ...

Sunday, August 16, 2009

No Claim Bonus in Hospital and Surgical insurance ?

Insurance is one of the very few "Personal Finance" tools that is specifically cater for our personal needs. Hence, as soon as a new need exist in the public, insurance companies will rush toward satisfing that needs. Sometimes insurance companies get very innovative in creating needs and therefore capture more market share.

NCB or No Claim Bonus has been a common term in car insurance. If you never make any claims from your car insurance, your next year's premium is likely to be deducted up to 55%*. $2,000 vs $900 is a huge difference. This is to encourage people to dirve safely and not the other way around ie. drive like Formula 1 on the street since I can get a new car anyway should anythings happened ...

On 2004, Dutch goverment started to introduce the similar NCB on health insurance. They did that so that their people would not abuse the insurance payout and therefore the insurance companies would not use that as an excuse to increase premium until a rediculous high level.

On 2005, Prudential quickly adopted that strategy.

As for Malaysian who has been keeping an eye on health insurnace / hospital and surgical plan / medical plan, most have realized that Prudential Malaysia has also introduced NCB on their health insurance. Typically it says you get back RM 500 every year if you didn't make any claim. PruHealth can only be a rider within one of the investment link products by Prudential ie. NOT a standalone plan.

Lets review this new growth ....

Introducing NCB in health insurance in general is a great move. Basically the whole idea is to encourage you to take good care of your health. You should eat right, move right and live right. Having a handsome health insurance is NOT an excuse to simply commit sins to your health.

Every time when a new great idea is introduced to the market, it is usually not mature. It will take a while before the idea can cover all concerns and all areas. This NCB on health insurance is no exception. The key difference shouldn't be too hard to be noticed. NCB on car insurance may starts with 20%* and then grows every year until it reaches the maximum deduction. PruHealth is only constantly deducting RM 500 every no-claim-year. So unless PruHealth can increase its deduction on 2nd year onward, it will still fail to capture its insured royalty.

All this while, life insurance and general insurance (ie. car) have been managed seperately. Life insurance systems are totally incapable of calculating subsequent years deduction like MRTA or car's NCB. Hence, either Prudential is incapable of coming up with a system that is exactly the same as car's NCB mechanism or they purposely leave it as the room for improvement when competition starts to come.

Either way, it means it sounds great to the insured but it is NOT as good as it should yet. In other words, it will only gets better in time to come.

What does this NCB on health insurance mean to the prospects ? Well, its actually nothing new. Health insurance plans have been paying insured yearly money for whatever reasons or excuses they can come up with. This is especially obvious in lady's insurances. You are paid RM 200 to RM 2,000 yearly so that you can do your medical check up, cover your normal clinic visits etc. So this RM 500 payout to you is just another form of pay-back from your higher premium.

This is why the whole idea is currently built inside an investment link plans. Once you have an investment link plan for more than 5 years, it is most likely the investment return itself can cover all the other 'costs'. But should they do NOT, you are still liable to top up to the plan so that your coverage stays the same. As in the worst case scenario is that you have to add RM 500 to your premium so that you can get paid RM 500 by year end if you didn't claim. Ofcourse this may exagerate but this is just to illustrate the idea.

Should you consider this plan ? Well ....

The new NCB is just a annual pay back, so if you never have any insurance plans that pay you back and if this premium is not too high, you may try this. Its a nice feeling that someone is paying you some money every year. But if you are one of those who believe whatever they pay you is from your own pocket anyway, then you probably shouldn't join this plan for this reason.

One of the key strengths in Prudential is investment link products, so if you believe Prudential can make the right investments and subsequently maintain your portfolio well, then despite NCB on PruHealth or not, you can leave part of your life plan to them. On the other hand, if you have been a successful investors yourself, you probably would not choose this option. ( Just a sharing, most people who think they can do better than the industry usually ended up DID NOT ).

There is also a 'life stle' part on PruHealth which pretty much is a cross marketing tool, so that shouldn't affect your decision too much unless you want to rely on Prudential to assit on your future life style ... ( not a bad option if you never thought of such thing anyway )

* 55% may not be the maximum No Claim Bonus for cars, expert in this area please comment, thanks !

Monday, August 10, 2009

Where does Insurance fit in MalPF ?

This site has avoided talking about insurance long enough, lets face it and see why.

It was hinted before that insurance is originated from gambling but with a good deed instead of a bad one. It was started from greed wanting more money out of less money and eventually evolved into a need base statistical payout.

Despite its history or industry evilness, at personal level, one can use insurance to immediately secure his future asset. Especially when the unexpected and uncontrollable events happen. This is useful when you have a goal to achieve in life.

The summarized concept of insurance can be found here, basically it says buying insurance as protection is good ( this will work for most people ) and selling insurnace for income is even better ( this may only work for some people only).
However, in 21st century, insurance is NO longer JUST about protection. Today's insurance is ALL ABOUT portfolio. And A personally built portfolio is the solution to all your personal finance needs.

Insurance is the OLDEST and MAIN personal finance tool
that helps you manage your personal finance portfolio,

unlike others who are mainly focusing on specific products. This is further supported by industry practice where insurance agents do NOT usually promote Term Insurance.

So the reason insurance cann't even make it to the MeM wealth pyramid is because

insurance itself can be the whole pyramid itself,
NOT just a part of it.

By now you probably already know that it costs
. ZERO to save money in Fix Deposit,
. 1-2% to invest in stocks and
. 2-6% to buy mutual funds

In insurance, you are paying 10% to 40% for the services you obtained. After all, "profesionals" working in insurance companies are "looking after" your whole Portfolio, not just selling you a product like the other 3 mentioned above.

In short, if you are LAZY and has NO interest to learn about personal finance, then just buy some insurances. You do nothing else and just hope the insurance will take care of everything for you. Thats what they "should do" for what you paid for anyway.

So ? Is that it ! After going one big round after one whole year during this anniversary, all this blog is about is to ask people to buy insurance ? ( what a buster ! isn't it ? )

Well, the answer was already given. If you are Lazy and has NO interest to learn, then its a YES to you. Else keep reading and see if there are more to it.

Other related insurance topics:

Do you like or hate insurance ?

Sunday, August 9, 2009

Tick Size has NO effect ?

I am actually caught by surprise that the KLSE new tick size article received quite valid challenges. When I first hinted tick size is important for speculators, almost no one bothered so I was assuming there are no stock investors readers. Basically the argument is that tick size does NOT really affect stock investment.

For example if we buy 200 units stock at RM45. Brokerage is 0.1%, Clearing fee 0.03% and stamp duty RM 1 for every RM 1,000. The total you pay would be RM 9,020.70

Below chart shows how much you earn when the price move up and down in the old tick size system. If the price goes down to RM 44.50 (2 steps down), you would get back RM 8,879.43 or a lost of 1.57%. On the other hand, you earn 0.64% when the price goes up to RM 45.50 (2 steps up).

Below is another chart showing how much you earn in the new tick size system. As you may see, you lose and earn the same as in the old tick size system, ie. lose 1.57% @ RM 44.50 and earn 0.64% @ RM 45.50. All the new tick size system does is to add more points in between.

So tick gap size doesn't really affect investor's return. It is TRUE as long as you are looking at it as a value investor.

It was mentioned before that some people like smaller tick size while some others like it bigger. So there will also be cases where tick size is NOT important, like wise there are also scenarios where tick size becomes critical.

Above analysis is assuming we don't know anything about the stock so each step price up is the same as down. However, in real life we invest into stock for a reason, sometimes we even have a target price. For example, we buy the stock at RM 45.00 with the expectation to sell at RM 45.50. So when situation goes our way (UP), the tick size doesn't really matter as shown above.

However, sometimes it may go opposite with your plan. In old tick size, the next down step is RM 44.75, causing a lost of RM 91.34 in comparison to your initial planned 2 steps up profit of RM 57.47. In new tick size, it will go down in smaller steps ...

RM 44.98, causing a lost of RM 45.39 then
RM 44.96, lost RM 49.39
then lost of RM 53.38
and finally the 4th step down causing a lost of RM 57.38. Almost the same amount as the initially expected profit.
... then at 13th step down, a lost of RM 93.33, equivalent to old tick size 1 step down lost.

So if you cut lost in old tick size, you would have lost RM 91.34, that would be your total cost in this investment. The Win Lost ratio is 1 to 2.

In new tick size, you are given more choices. You could ignore the choices and cut lost after 13 steps down in which this smaller tick size will have no effect to you. You can also cut lost at the 4th step down if you want to set your win lost ratio at 1 to 1. Or in extreme case, you cut lost immediately when the price goes opposite and you think your initial assessment was wrong, your RM45.39 lost is almost half of RM 91.34 in old tick size.

In summary, the profit taking plan can remain the same in both bigger and smaller tick size systems. But cut lost strategy can be applied more dynamically in a smaller tick size system. Cutting lost can be viewed as cost. Hence in smaller tick size system, cost can be reduced ( by 50% in above example ). The actual cost saving factor would depend on your investment strategy, hence its not a DIRECT cost saving but a strategical one.

All these smaller steps have translated into more choices, and these choices allow you to apply investment strategy more dynamically. So far, most arguments are quantitative based. There are also qualitative or psychological effect. For example, in a smaller tick size environment, you are most likely get into the investment vehicle more often since you know you can get out of it easier and faster anyway when you were wrong. You may be less afraid and making more bold decisions, faster and more of them. You can learn faster with less tuition fee, which eventually improves one's decision making skill.

Full details of the data used ( best viewed with screen width > 800px )

Thursday, August 6, 2009

How much did you earn in 2008 ?

These are not company nor business income, how much did you personally earn in 2008 ?

Lim Kok Thay from Genting earned RM 114.95 millions in 2008. That is 9.58 millions a month. If he worked 30 days a month then he earned RM 319,305 a day.

Lee Shin Cheng came next earning RM 14.15 millions from IOI Corp and RM 8.6 millions from IOI Property