With markets swinging about as they do these days, it is natural for
some investors to focus on spotting winners and try to pick the perfect
entry and exit points. But growing your wealth is more than just a
function of maximising stock returns in the shortest time possible.
Managing outflows, especially unexpected ones, and steady wealth
accumulation over the long term, are equally important to the planning
and pursuit of any significant financial goal.
The
increased market volatility that we are experiencing is reason for many
investors to fret over their portfolios. Yet, while prudent management
of these monies is essential, it would be a mistake to overlook a more
basic building block for growing wealth. As much as you would hate to
see the value of your portfolio fall by 20 per cent, the hospital bill
resulting from an unexpected major illness or the loss of income due to
an accident-caused disability can severely disrupt your financial goals.
For instance, you may have to liquidate your investments
to pay for treatment and other basic needs. This is why it is critical
to ensure that you have some basic
insurance in place, which will allow
you to continue working towards your investment goals even if something
catastrophic happens to you.
Strengthen the backline
A simple
term policy is an affordable way to begin. Those in their
20s, who have just started work, may find this option most palatable as
desired cover can be obtained inexpensively. For some, a term plan may
act as a liability cancellation policy so that the family is not saddled
with the burden of repaying the outstanding mortgage on the family home
in the case of the policyholder's demise.
While term plans
can be bought with additional cover for critical and terminal
illnesses, conventional whole life policies provide greater flexibility,
offering optional protection for eventualities like disability and loss
of income. These additional covers, called riders, can be added and
removed at will.
Whole life plans may be constructed so
that payments are accelerated during your working life to allow you to
enjoy premium-free cover after
retirement. Perhaps, the biggest
advantage that whole life plans have over term plans is that they can
serve also as a tool for wealth accumulation. Part of the higher
premiums collected in whole life plans are invested in the insurer's
participation fund, resulting in steady returns that can be cashed out
as needed.
Consumers should note that whole life policies
are designed to accumulate value over the long-term, so the cost of
surrendering the policy early, particularly in the first few years, is
very high as premiums mostly go towards paying for the cost of
insurance.
Sure and steady progress
There are insurance products that go further towards the goal of
wealth accumulation.
Endowment policies may not be new, but unlike the
30-year tenures of old, durations these days can be much shorter if you
haven't the patience or if you have started your retirement planning
late.
Endowment plans are gaining wider acceptance here as
more Singaporeans realise the place of steady, low-risk investments when
it comes to their
retirement savings. In deciding on an endowment plan,
it is usually helpful to link it to an objective, which will help
determine what the most appropriate tenure is. For example, a
25-year-old executive may find a 10-year plan appropriate if he is
planning to use the payout to help pay for a condominium at age 35.
For investors who prefer the convenience of an all-in-one
solution, investment-linked policies cover both wealth protection and
accumulation needs. You get to decide the balance between protection and
investment, and you get more say about how your money is invested.
Potential returns are higher, as you may choose to invest in unit trusts
that adopt a more aggressive stance than the insurer's typically
conservative participation fund. But along with that is a higher chance
of incurring losses should your investment strategy prove unsound or
unbalanced.
Pass it on Finally,
insurance can help in
legacy planning. A
universal life plan is a
single premium policy that can help you pass on wealth to your children,
with a guaranteed rate of return on the money invested. If you plan to
leave S$3 million to your children, you can take out a
universal life plan with a sum assured of S$3 million for a fraction of the amount. The
sum assured of the universal life plan is guaranteed, so you can be
assured that your children will receive the bequest you intended for
them even if you pass on early.
If you choose to manage
and invest your funds on your own instead of buying a universal life
plan, there is a risk that your bequest to your loved ones will fall
short of the S$3 million you intended for them, as the amount will be
dependent on the market value of your investments when the bequest is
made.
There is no denying the allure of taking a punt on
the market, but neglect not the basic foundations of financial planning.
Insurance is a crucial building block in achieving your financial goals
and with recent innovations, it can even offer solutions for more
advanced needs.
Shrikant Bhat is head of wealth management at Citibank Singapore.
