Fixed deposit ends up becoming insurance or structured deposit

In a Bloomberg article "Fallen Soldiers' Families Denied Cash as Insurers Profit" dated 28 july 2010, it was reported that some insurance companies in the United States “pay” death benefits by holding in accounts not regulated by banking laws. Beneficiaries think that the monies are held in accounts like a bank. In reality, these accounts are only backed by the credit worthiness of the insurance companies. I called these “quasi banks.”

In Singapore, we also have our own “quasi banks” but of different nature.

In the past, it was easy to keep your money safely. You would go to the bank and deposit your money into it. You know that if the bank collapse, the central bank will come to its rescue – that is if you have confidence with the central bank. These days, it is almost impossible for the man-in-the-street to know what is going on. You walk to a bank to open a fixed deposit but you walk out of the bank buying a single premium insurance or a structured deposit. The worst part is that you think it is as safe as the fixed deposit.

Many financial advisers also offer insurance as solution to almost everything including “savings”. The words “saving-plans” have been abused significantly. People think that buying an endowment is saving. No it is not, it is an investment. The plain vanilla saving is simply to put money into a cash deposit or a fixed deposit. But these days, cash deposits and fixed deposits are discouraged both by economical and commercial factors. Low interest rate is driving people to put their money elsewhere. Commercially it is more lucrative to sell a structured product or an insurance policy. According to Life Insurance Association HERE, out of the $856 million life insurance payout, only $99 million or 11.6% were in respect of death, critical illness or disability claims. This is the strongest evidence to show that in terms of payout amount, 9 in 10 of such policies were NOT related insurance claims. What exactly are insurance advisers doing? Why aren’t they selling insurance products when they claim to be insurance persons? It is time to go back to basic.

If you want to save for raining days, put cash into cash deposit and fixed deposits. Yes, the interest is negative after taking into account inflation but these are raining days money. You are not supposed to earn a profit.

If the amount of money that you want to keep safely exceeds the bank insured amount, buy Singapore Government Bonds. Duration of the bond should meet your expected cash flow. Say, if you expect to use a large amount in X years for (say) children’s education, make sure that the duration of the bond is less than X years.

Cash deposit, fixed deposits and Singapore Government Bonds have low interest or none at all. But you are not supposed to earn a profit from these because they are safe. For profit, it will be the investments that you make. It is not necessary to put your entire money in investments. In fact, it is not wise to do so.

If you want to invest, go and buy stocks, unit trusts, exchange traded funds and bonds. But you’ll have to do the due diligent to ensure you understand these risks. You should never buy an ILP for investment. Some famous ILPs will cost you to lose nearly 100% of your first year capital. It is silly to invest in something only to know that you will definite lose your entire first year capital. However, if you already bought an ILPs, you should never terminate it but instead you must carry this burden for the rest of your life - unless you can get your financial adviser to pay you back your capital. Of course, this is not possible because you sign the most powerful document called the Benefit Illustration which has already disclose to you how exactly it works. But wait, why can't you terminate your existing ILP? See this link: Should you terminate your Investment Linked Policies?

This article also appeared on CPF's IMSavvy / IM$avvy website:http://www.cpf.gov.sg/imsavvy/blog_post.asp?postid=570731262-123-3117595910

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