insurance

Should I consider buying an annuity insurance for my retirement?

Annuity is an insurance product that insures your income for life or a certain period of time. Annuity insurance used to be quite popular in the past used for retirement planning. Life insurance companies will collect lump sum or a series of installments from the insured and help them to invest. In return, the life insurance companies guarantee the fixed regular income for a period of time to the insured. In this article, we will discuss the pros and cons of an annuity insurance.

Pros:

Annuity insurance is good because the income is guaranteed for a period of time during retirement. Some annuity products will provide life time guaranteed income. Hence, it provides certainty of income during retirement life. The income is kicked start after certain years upon purchasing the insurance policy.

Comparing annuity insurance with normal investment, the return of annuity insurance is certain. There is no need to worry about market volatility and hence the retiree has the peace of mind on the market movement.

Cons:

Annuity insurance is a type of insurance and hence there are various costs involved, i.e. insurance agent commission, administration charges, insurance cost, fund management cost, etc. The return will not be high compared to pure investment scheme.

Annuity is suitable for people that cannot save regularly, no idea on how to invest or very afraid on market volatility. It provides a good solution to help people to save and withdraw retirement income systematically. The regular draw down feature of the annuity will prevent people withdraw excessively and finish off their retirement fund just few years after retirement.

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Work harder and longer for leaving a legacy?

There is an interesting article which shares that Japanese who wants to leave a legacy will work harder and longer. Those who do not leave legacy will work hard but not longer (read the article talking about this here).

I have a slightly different view to the above. Leaving a legacy for children does not need to work too much longer. Legacy can be built through insurance fund. If we want to leave a legacy using our own assets, it will definitely take longer time to accumulate. However, if we pay some fraction of money to purchase a large payout insurance policy, then, leaving a legacy to our children will be very simple.

See this example. John (aged 30) wants to leave RM 2 millions to his 2 children when he passes away. He will need to save and accumulate RM5,500 a month continuously for 30 years to accumulate RM 2 millions assets. Can John enjoy life after 30 years if he wants to leave all monies he saves and accumulates for his children? The answer is an obvious NO. What if he spends RM 1,500 a month to buy a RM 2 million insurance policy, his children will get the RM 2 million insurance payout when he passes away. If he can save RM 5,500 a month, he can use his remaining saving, i.e. RM 4,000 (RM 5,500 – RM 1,500) to enjoy his life and for retirement.

Do you need to work harder and longer for leaving a legacy? Not really – You just need to be smarter and choose the correct financial tools to help you achieve your financial goals. Don’t ever sacrifice your life especially your retirement life because of your children. You deserve to enjoy your life better because you work hard too!

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Saving insurance plan: is the return of saving insurance plan good?

Recently, I received a call from a bank mentioning a saving product which can offer me 20% guaranteed payout for the initial years if I save with them. No doubt, this is the feature of the insurance saving plan. Does the 20% payout (interest) sound too good to be true?

Well, a lot of people do not understand how saving insurance plan works. Let me illustrate using one of the sample from X company.

The above is a 5 years’ insurance saving plan. The client will need to pay RM 6,000 premium every year for continuous for 5 years (total premium paid is RM 30,000). The guaranteed cash payment from year 1 to year 10 will be RM 660 yearly (11% of the annual premium) while the guaranteed cash payment from year 11 to 20 will be RM 1,200 (20% of the annual premium).

Many insurance agents used the 11% and the 20% Guaranteed Cash Payment as the motivation for the clients to buy the saving plan as the “interest” is much more higher than the current fixed deposit. However, the truth is – the 11% or the 20% is based on the yearly premium of RM 6,000. At the end of year 5, the client would have already paid RM 30,000 (RM6,000 x 5 years). Hence the “interest” is not 11% (RM 660 / RM 6,000) but 2.2% (RM660 / RM 30,000). In addition, if the clients are receiving the guaranteed cash payment every year, at the end of maturity (after 20 years), the client will receive RM11,970 – RM 30,897 as the maturity benefit. Why it is a range and not the exact RM30,000 total payment paid? Because the final amount depends on the performance of the fund. Normally the insurance companies will invest the amount into largely bond funds for higher return than fixed deposit. Hence, at the end of maturity, the client is not guaranteed to get back the total payment paid, if he chooses to withdraw the guaranteed cash payment every year.

What if the client does not withdraw every year? Well, based on past record, the return would be roughly about 3% to 5% per year. It might be higher than fixed deposit considering the low interest rate currently. However, there is no liquidity of the premium paid. Client will definitely suffer loss if early surrender of the policy, i.e. before maturity date.

So, in term of return, saving plan is not something that generate high return. It might be worst than fixed deposit considering the paid premium cannot be withdrawn easily (without loss) before maturity.

In conclusion, one may ask – what is the benefit of this plan?

Saving plan provides liquidity of fund in case the death of the life assured. The saving plan is an insurance plan, hence, it will trigger immediate payout on life assured’s death to the nominee(s). Fixed deposit is not liquid upon the death of the owner. The amount saved in fixed deposit will be frozen until the grant of probate issued in this event. So, it is a plan to be considered in lieu of fixed deposit when one needs to pass down some money to the next generation without the need of will.
Saving plan is a forced saving effort which is good for retirement saving effort. Based on research, more than 50% of Malaysians have insufficient retirement saving. As early withdrawal will incur early surrender penalty, the money is not easily assessible to the payer. Hence, the payer is more likely to continue paying the premium and not easily withdraw the saving. The saving becomes part of retirement saving after 20 years.

So, with the above, understand your reason of buying. If you need liquidity during your lifetime, saving plan is not something that provides that. If return is important for you, you might consider investment instruments rather than insurance plans.

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If you have lost your job, can you claim any unemployment benefits?

You shall check whether you are eligible to claim the benefit under Employment Insurance System (EIS)! If you have contributed to EIS, you might be eligible for recent job loss.

What is EIS?

The Employee Insurance Scheme (EIS), administered by the Social Security Organisation (SOCSO), seeks to provide temporary financial assistance for up to six months to employees who are retrenched or have had some form of loss of income.

How to check eligibility?

You must be a contributor! Check your pay slip. If you are contributing, you shall have EIS as one of the salary deduction together with EPF, SOSCO up to RM7.90 per month.
You must have paid contribution for a minimum number of months within a specified period
Be unemployed under the definition of Loss of Employment (LOE):
1. Normal retrenchment and redundancy
1. VSS/MSS (Voluntary/Mutual Separation Scheme)
1. Closure of the company due to natural disasters
1. Bankruptcy or closure of the company
1. Constructive dismissal
1. Resignation due to sexual harassment or threats made in the workplace
1. Resignation after being ordered to perform dangerous duties that are not within the job scope

What is not considered as loss of employment?

Dismissal due to employee misconduct
Voluntary resignation
Retirement
The expiry of a fixed-term contract

What are the benefits?

Job Search Allowance (JSA) or Reduced Income Allowance – will be paid based on assumed monthly wage (cap at max RM3950), which is 80% for the first month, 50% for second month, 40% for the third and fourth month and 30% for the fifth and sixth months.
Training Fee – paid-for vocational training of up to six months.
Training Allowance – incentives for you to attend and finish your training.
Early Re-Employment Allowance – for JSA recipients to get back into the workforce.
Re-Employment Placement Programme – job search assisted by SOCSO.
Career counselling – job search assisted by SOCSO.

To apply, The EIS application can be made online

https://eis.perkeso.gov.my/eisport…/insured/appl/instruction or go to the nearest SOCSO office throughout the country including Sabah and Sarawak

For more information, please visit https://www.perkeso.gov.my/in…/…/employment-insurance-system. ************************************************************************

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7 Tips to Overcome Insecured Feeling of Losing Job

It is a few months into the COVID-19 pandemic. Because of the lock down, economy is slowing down, many businesses could not sustain and eventually shut down. This leads to job lost. In the coming months, more job loss is expected. If you are employed, the following tips might be applicable for you if you feel insecure of your job:-

Tips #1: Reduce insecurity by having more clarity in your cash flow projection

People feel insecure because they are unsure how long their cash flow can sustain if they lose their job. Hence, to reduce the insecurity feeling, one must project the upcoming cash flow with 2 scenarios, i.e. job lose in near future and pay cut in near future.

Find out exactly how long your cash flow can sustain, when cash flow will turn negative with different scenario. Once you have the clarity, you can then find the solution.

Tips #2: Adjustment to your emergency fund

If you have done proper financial planning, you shall have at least 3 to 6 months emergency fund. It is now time to make sure your emergency fund is adequate for 8 to 12 months to cater for this bad economy situation. It is time to look at your standby assets, i.e. your investments (either stocks or unit trust) to find extra monies for emergency fund. Make adjustment to these investment assets, make sure they are liquid for withdrawal if required.

Tips #3: Cut down unnecessary expenses

After your cash flow projection, if the negative cash flow comes too fast, you need to look at the outflow. Identify 3 to 5 top expense items. Cut down big expenses, spend only on necessary items, avoid buying luxurious items at this time unless you have big positive cash flow. Postpone any big item purchase.

Tips #4: Re-look at the loan commitments

Loan commitments shall be one of the big expenses. Before things are turning bad, take the chance to refinance some of the loan commitments so that the upcoming financial burden is lessen. Once your job is lost, it is hard to refinance anymore. Start doing this now if your cash flow is not stable.

Tips #5: Restructure your insurance premium

If your cash flow is projected to be negative very soon, call you insurance agent to enquire about the cash value of your investment-linked policies. Check whether your policies can sustain without paying for few months or 1 year. It is important to make sure your insurance policies are kept enforce during this different period to protect your family for any unforeseen circumstances.

If you have saving plan, you can consider using the unwithdrawn guaranteed cash payments as your emergency fund.

Tips #6: Up your skills

During MCO period, there are a lot of e-courses available online. Check out which one relevant to your job and take up some courses to up your skills. When you are better skilled, the chance of being made redundant is lesser. Even you lost your job, with better skills, you can find a job easier.

Tips #7: Getting 2^nd income stream

You are feeling insecure because you are dependent on single source of income. You shall start to find 2^nd income stream via doing some freelance jobs utilizing the same skills that you have. The upcoming trend for companies is to engage freelance rather than permanent employees to lower down the fixed cost. You can also seek opportunities to sell items online. For example, if you like to make up, you can consider selling make up (something that you know a lot and like using). In short, you must first have clarity on your cash flow. When you know you have enough to sustain for upcoming few months, you will feel more secure. When you have clarity, you know what the next step is, either to cut cost or increase income. You are then able to act accordingly!

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