Financial plans can help you achieve your goals faster, be it accumulate savings, secure insurance coverage or growing investments. But it’s important not to rush into signing or worse, get pressured into it. This is because signing up a new financial plan requires commitment.
By aligning your objective to your financial plan, you will stick to it better. Before taking up a new plan, ask yourself these five questions.
1. What’s your objective?
The first thing to do when you sign up for a financial plan is to be clear of your objective. Are you seeking to grow your wealth? Or get all-rounded insurance coverage?
We are all unique. Aside from having different risk appetites, we also may have different budgets and goals. If you’re unsure of where to start, write down some simple financial goals that you would like to achieve. Try to brainstorm in terms of what you want to achieve in 5 years, 20 years, and in retirement.
Maybe you want to quickly accumulate some savings to save up for your emergency fund, or you could be looking at raising money for your kid’s university fees. Or, you might be thinking of saving long-term for your retirement. These goals need not be fixed, but they provide some guidelines as to how much you need to put aside for your financial plans in the near to long term.
There are three types of financial plans you could look into for a start.
A. Life insurance coverage: Term life vs whole life plans
Whole life insurance insures death as well as allows you to accumulate long-term wealth. Such plans have higher premiums, but the coverage lasts for a lifetime or until a full claim. Whole life insurance plans also have a multiplier benefit. Depending on the multiplier, the cover can go up to a few times of the initial sum assured. Multipliers end after a certain age, however, but provide reassurance until your retirement. Whole life is therefore suitable for someone who is looking for lifetime insurance coverage and long-term wealth accumulation.
Term insurance is an affordable way of adding more coverage to your life insurance coverage, compensating you and your loved ones in the event of death. But the caveats are that the coverage is usually for a fixed number of years and there is no cash value accumulated over time. Additionally, the premiums will increase upon plan maturity due to your increased age. Term life insurance is thus great for the budget-conscious, who is knowledgeable about how to generate wealth via other financial products.
Whichever you are comfortable with, a life insurance policy is one of the first plans you should get. Then, ensure that you have plans covering hospitalisation, early critical illnesses, critical illnesses, total permanent disability and death. We go more into each type in this article: How Much Of My Monthly Income Should Be Spent On Insurance?
B. Steady wealth accumulation: Endowment plans and retirement annuity plans
Two types of insurance policy that help you to grow your money are endowment plans and retirement annuity plans.
Endowment plans are great for stable growth. They offer interest rates that are higher than regular savings plans and instill discipline when saving. Look for plans that at least offer principal guaranteed when it matures. Some of these plans also allow you to withdraw when you hit certain milestones. We see that such plans are great for short to mid-term financial goals, such as saving up for a Europe trip in five years, or putting money towards your child’s university fees.
Retirement Annuity Plans are meant for long-term wealth accumulation. As its name suggests, they are meant for retirement savings. The compounding returns of an annuity plan can help you earn back your initial principal sum a few times over. The financial returns are typically guaranteed. Do note, however, that such plans require you to lock in your funds until the payouts commence in retirement.
While endowment plans and retirement annuity plans are designed for slow and steady wealth accumulation, there are instruments designed for high financial returns. Of course, they also come with higher risk. Such plans include unit trust funds and investment-linked insurance policies.
High-risk financial instruments do not offer capital guaranteed, so there is a possibility of losing your money. Make sure that you are fully aware of the risks you are taking with your money, when purchasing plans like these. Speak with a financial adviser to clarify any doubts.
Unit trust funds allow you to choose a basket of assets, and the cost is cheaper than individually owning securities. You can select funds that are pure stocks, equities and bonds, pure bonds, or short-term government and investment-grade securities.
Investment-linked policies are mixed products with life insurance coverage and investment components. Basically how it works is that the premium that you pay is used to purchase units in an investment-linked sub-fund. Then, a portion of the units purchase are used to pay the actual premium, while the remaining stay invested. Take note that mortality and insurance charges will rise with age.
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2. What’s your budget?
Ensure that the plan is within your budget. Tally the fees and charges, including recurring costs. Not being able to afford the plan within the stipulated period may cause you to lose money when the plan lapses. That being said, getting suitable financial plans early is better than late, since you can benefit from the effect of compounding interest.
Other things to consider include fees and charges as well as the various payment options, which all affect your overall financial outlay.
Fees and charges
Every insurer charges fees and charges on insurance or investment plans, such as front end loading (buying costs), back end loading (selling costs) and distribution costs. It’s how insurance firms make money. Read the benefit illustration so that you are aware of the fees.
Particularly, investment-linked policies have a mortality charge, which is not indicated in the benefit illustration. It increases as you grow older, hence, if you only have ILPs, you’d have to boost your coverage when you are older.
Investment products may also have a sales charge ranging from 0.1% to 5%, as well as a yearly fee that allows you to switch funds and manage your investment portfolio. There are platform fees and management fees as well.
Usually, financial plans allow monthly, quarterly, half-yearly or yearly insurance premiums. If you can afford it, go for annual premiums as you typically enjoy discounts. The exception to this rule are investment linked policies. For investments, paying premiums on a monthly basis allows you to benefit from dollar cost averaging.
If your financial budget allows, aim for a short premium term, while allowing a long period for the financial plan to mature. You compress the payment and the money has a longer period of time to compound, giving you higher returns.
3. Are your plans competitive?
There are many financial products in the market and insurers are constantly innovating and trying to outdo each other. Sometimes, a branded product could be more expensive due to marketing costs. On the other hand, a cheap plan may have overly stringent terms and conditions, which may cause issues when you are trying to claim.
Did you know? Annual premiums for insurance policies can vary by as much as 15% across insurers for the same amount of coverage. Plus, the difference in financial returns can go up to 35% for the same amount of premium paid.
As for investment products, the annualised returns between two different unit trust funds with similar investment objectives can vary by up to 5%. Each plan also has different fees and charges, which will cause your overall returns to differ.
So, always compare between insurers and policies in terms of premiums, coverage and claims process. Don’t be afraid to consider a few brands.
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4. Do your plans work with each other?
Before getting your new plan, look at what you already have existing. Does your finance plan help you to plug gaps? Are there overlaps?
Aside from ensuring you get the best value, you also must see where the plan fits within your overall financial portfolio. Two basic financial goals would be to get essential coverage and diversify investment products.
5. What are the best and worst case scenarios?
No one wants to imagine themselves encountering a mishap, getting disabled or worst of all, die. But the point of buying insurance is to protect yourselves and your loved ones in such scenarios. That’s why it is important to ensure that the sum assured for each insurance plan makes sense and provides sufficient compensation during times of need. How to calculate how much you need? We go into it in detail in this article: How Much Of My Monthly Income Should Be Spent On Insurance?
For investment plans, the terms that you have to get familiar with when you purchase are “effective rate of return”, “guaranteed returns” and “non-guaranteed returns”. Look at the benefit illustration and understand what you can get in the worst case scenario and how much you can gain in the best case scenario. Investments always come with some risk. You just have to be informed.
Typically, plans that stable growth have lower risk. Plans that allow you to grow wealth quickly are high-risk — meaning that it is possible to lose all your money. Diversify and spread the risks by buying different financial instruments that complement each other.
Need help choosing the best financial plan? Speak to our financial adviser who can give clarity on your benefit illustrations.