This is a real case study for a young couple in their late twenties. Both of them are salaried persons and they were earning a combine gross income of $9,000. They were married with one son born just a year ago. They were still supporting all their parents. Hence, they had a total of 5 dependents.
They engaged me to conduct a comprehensive financial plan.
They had already applied for a Build-To-Order HDB costing $513,000. Their TOP was expected to be in 3 years time. I did a projection and found that after taking into consideration of the increased in CPF savings and the initial 5% down payment, they would still need to borrow $345,000.
They should take the maximum 25 years loan initially and reduce the period over the years using a method I taught them. I also advised them not to touch their CPF for short-term investments (equivalent to $142,350)
In terms of coverage for death, the needs analysis showed that they were overinsured. However, when I pointed out to them a fineprint which showed that Aviva SAF Group insurance does not provide any form of guaranteed renewability, they were shocked and unhappy. They instructed me to recalculate all financial needs analysis assuming the Aviva SAF Group insurance is taken out of the picture. The following was what I found:
|Name||Death shortfall||Critical illness shortfall||Disability income shortfall||Hospital & surgical|
|Person A||$223,030||$165,284||$4,900||To upgrade AIA HealthShield to Gold Max A|
I also found they had bought significant amount of Investment-Linked Policies which they could not understand. It seems their previous financial advisers did not explain those products clearly to them.
For the purpose of calculating children’s education, we assume two-child family.
The couple would like their children to study in Singapore. After some discussion, we agree to use the highest tuition fee for local university which is Medicine / Dentistry. My calculation shows that they need to set aside an annual savings (in nominal term) of $9,146.
I helped them calculate the projected retirement expenses. Using the expense method and drawndown approach, they are required to set aside the following:
|Person A||Person B|
|Additional savings required every year||3,411||$7,082|
|Lump sum investment||$15,000||$15,000|
I run through with them all the possible reflect they can claim. From my calculation, they would not need to pay tax the following year. No need to open any SRS account.
The couple has a combine net estate size of $1.5 million. I recommended and helped arrange for their wills to be drafted and ensure the creation of testamentary trust for their son and future children (if any).
Therefore, the following were my recommendations. I have also provided a comparison to what would be likely be recommended by a typical financial adviser:
|My recommendations||Common recommendations “free” advisers|
|Credit management||To borrow $345,000. Do not invest $142,350 in the CPF.||Borrow the maximum so as to invest everything in the CPF (otherwise no commission to earn).|
|Insurance||Recommended a life policy to cover the short-fall. Advised them not to terminate the Aviva SAF Group Insurance so soon.I also recommended disability income insurance for both of them.Helped one of them upgrade his AIA HealthShield to Gold Max A to get private hospital coverage.I also ‘took over’ most of their existing insurance policies because their advisers have left the industry.||Recommends an ILP of $100 per month of sum assured $100,000 for death, TPD and CI. Sum assured has nothing to do with the client’s shortfall due to no fact finding and easy to close. The ILP will lapse when old due to the high insurance charges.No advice given for disability income and medical insurance because commissions are too low and too troublesome to submit for underwriting.Cannot be bothered to upgrade the shield plan – too troublesome.|
|Children’s Education||Recommended them to invest $9,146 in unit trusts every year at 0% commission with no lock-in.||Use the ILP above because the ILP salesperson say it is used as a jumbo dumbo all 3 in one product.|
|Retirement planning||Recommended them to invest $30,000 (lump sum) and $800 a month in unit trust at 0% sales charge with no lock-in and no 'surrender' penalty.||Recommends $800 per month in ILP with a lock-in of 25 years with super high penalty if stop early.|
|Tax Planning||Recommends them to remember to claim all their reliefs.||No advice because no commission to earn.|
|Estate Planning||Help arrange for their Wills to be drafted an attested.||No advice because commission too low.|
|Initial cost||Financial planning fee (19.45 hours x 267.50 = $5202.88 )||$0.|
My fee for the above was based on 19.45 hours at a rate of $267.50 (GST included) per hour (in 2014’s rate). This would be $5202.88. Many young couple thinks that this is a large amount. But I want you to take a look at the kind of products normally recommended by ‘free adviser’:
- The free adviser tends to advice the client to maximize their loan so that they can use their spare cash in their CPF to invest.
- The free advice tends to recommend ILPs for insurance, education and retirement.
- The free adviser will not be bothered to take over all the life policies because there is no commission to earn for doing so.
- No advice given on how to save on taxes.
- No advice provided on how to have their Wills properly drafted.
If you are interested to know more about comprehensive financial planning, feel free to contact us at this link HERE.
Update (6 October 2014)
After more than 3 months, the insurance implementation was completed. There was some complication during the underwriting stage as one of the client have a pre-existing condition and a family history that was not in her favour. See this blog for more details: NTUC Income, Tokio Marine & Aviva inconsistent underwriting standards
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