Wealth Accumulation – Using These 3 Types of Insurance as Savings Solutions
This year has been something else, with new challenges posed by Covid-19. With a partial lockdown in Singapore and the rising number of people being infected with the virus every day, it has not been easy for most of us.
However, it is not a time for us to go into “hibernation mode”. While things are slowing down, we need to remind ourselves that the world is still turning, with new developments happening every day. It makes sense to welcome digitalization, to ready us for the new challenges to come, post-pandemic.
For a start, here are some things that you can do to help you get up and running immediately:
1. Make a Plan
During this Covid ‘season’, I have learnt from my clients and friends that they have reduced their spending in view of the uncertainties ahead. While it is good to be prudent with our expenses, it is also important to review what savings strategy we have adopted and can look to adopt during this period.
2. Embrace Technology
By now we have all experienced the wonders and necessity of technology, in the forms of online meetings via Zoom/ Microsoft Team, online lessons for Home-Based Learning, or simply as a means to stay connected to friends and loved ones. Looking at the direction the world is currently heading, it seems inevitable to ultimately embrace technology, and utilize it to further enrich our lives. Just be sure to regularly check for viruses and update your passwords!
3. Find a Structure That Works for You
All of us are living in a complex world right now, with even more complex financial pressures. In order to find simplicity, it is advised to first discover a structure that you can follow to lead you where you want to grow. Associating yourself with the right people or system that can offer proper direction and structure will set you on the right path.
Once you have gotten yourself organised, you will have to keep a lookout for the bigger financial picture and how it might impact you.
While discussing the impacts of Covid-19, one cannot leave out the repercussions it has had on our economy. Many have been speculating whether the slight recovery in the markets is a real recovery and will continue to grow, or if it is just a dead cat bounce. I shall not dwell too deep into the above, but I am certain that the way the world will function may be drastically different from what we are used to. This is due to a few key reasons:
1. The Rising Unemployment
Amidst this pandemic, many employers have had no choice but to lay off their staff. In the U.S. alone, unemployment rates have drastically risen to 6.65m in the month of April 2020 (Week 2), compared to their weekly average of 0.35m for the past 50 years. In Singapore, the Monetary Authority of Singapore (MAS) has stated in their monetary policy statement that “the resident unemployment rate is expected to rise and wage growth ease”. They expect to see increasing unemployment rates and a drop in number of pay rises this year, as our economy sinks into the worst recession on record.
On a personal note, I have experienced people around me getting a pay cut and being asked to take unpaid leave indefinitely. (If you are one of those affected, please follow IG account @financefool or the news to keep yourselves updated on the latest government announcements on subsidies and help that is provided).
Looking at the trend of the virus and how it has surpassed SARS, unemployment claims are undoubtedly predicted to remain high for the upcoming period and economic recessions might be too deep to expect a quick recovery.
2. Continued Bad Corporate Results
Covid-19 has no doubt bruised many businesses and as it has just begun to spread out of Asia in late Feb to Early March, countries are just starting to feel the impacts that this virus has carried along with it. Many businesses have no choice but to cease operations, travel and airline industries are also badly impacted.
Locally, businesses are forced to close or move towards online delivery platforms. However, a handful of other companies many have not yet reported their financial results during the Covid-19 period, but investors do not doubt that there is more bad news to come. The only question that remains is “exactly how bad is bad”?
3. Economic Impact Expected to be Worse than 2008 Financial Crisis
The economy is a cause of concern as we see Singapore’s Ministry of Trade & Industry (MTI) already reducing our GDP growth forecast to -0.5% to 1.5% after the decline in the first quarter of 2020. With no end to this pandemic in sight, we will have to entertain the possibility of a greater recession and that the worst has yet to come.
After the federal reserve cut rates, banks in Singapore have also lowered their loan rates albeit slightly. We can see that fixed deposit rates have also dropped from an average of 1.6% to an average of 1.2% as on April 2020.
As such, it would be advisable to start looking into saving instruments which are able to provide satisfactory guaranteed returns. Interest rates are currently lower than usual, and it will take some time for a majority of businesses to recover their losses & kickstart the economy once again. How some insurers have responded to this is to lower the guaranteed yields of their products. This is also a side effect to the decreasing interest rates & market fluctuations. However, right now is also a good time to start reviewing your portfolio and adjust your financial plans if needed.
Using Insurance Solutions to Save
We can begin considering and looking into different conservative saving solutions available to us, however, in this article I will be addressing just three of them; 1) Traditional savings plans, 2) Retirement plans, and 3) Savings plans with a lifetime income payout.
1. Traditional Savings Plans
These are savings plans which provide a lump sum benefit at the end of the selected maturity value. You simply set aside a regular savings amount for a set period, and let the plan continue to compound the interests with bonuses declared by the insurer. Such plans have 2 components, Guaranteed Returns and Non-Guaranteed Bonuses which are declared on a yearly basis. Once the bonuses are declared, it gets locked into your plan and becomes guaranteed.
There is also an option to have the flexibility of withdrawing the money from the plan up to a certain limit per year. However, do note that plans with such a benefit would yield a slightly lower return as compared to a plan that does not.
2. Retirement Plans
Before a certain age, we have most likely not given a second thought about our retirement. It is something that is incredibly important but easily over-looked amidst the struggle of climbing the career ladder, starting a family & enjoying life’s little moments. However, when planned in advance, we actually get to save large sums of money in the long run, due to the fact that we have more time for accumulation. For instance, a person plans to receive a $500 monthly income stream would have to set aside more money if he/she were to start saving at a later age. Below is a simple example:
Click image above to enlarge
Not only does the younger person set aside a much lower amount of savings to plan for the same amount of retirement income as compared to an older person, the total returns can be more significant as well.
As there are many types of Retirement plans available, it is important to choose one that fits your purpose well.
Like the Traditional Savings Plan, we can set aside a fixed amount of yearly savings for a set period of time and decide on the age when we want to receive the payout. Some plans allow for a change in payout age while some do not. The payout period can be customized to pay over 10 years to 30 years. Overall, Retirement Plans give slightly higher total returns, however, the holding period is also longer than a Traditional Savings Plan.
3. Savings Plan with a Lifetime Income Payout
Many a time, people do not require the funds that mature from their savings plans immediately and wish to remain invested in the plans. However, that is not possible with a Traditional Savings plan with a fixed tenure. Hence, there is a new type of savings instrument introduced with no maturity date, where you get to keep the plan for as long as possible. This also opens the possibility of transferring the plan to your future children (below 18 years of age) at any point in time. This can serve as a gift by providing your children with a lifetime savings without them having to pay anything.
Savings is always a positive thing and we should always ensure we have sufficient funds for rainy days like these. However, saving using different solutions could help us achieve a good balance of growth to our portfolios & can even help us reach our goals earlier! The important question is, which savings plan is the most suitable for you?
To help you get started, you can use this Trivia Questions for Insurance Savings Solutions as a good guide to help you understand which solution would work best for you.
Before I end off, here is something meaningful that I have been telling many people around me: “In such times of uncertainty, perhaps it is time to create some certainty”.
Article by Andrea Loh
The writer is a Financial Services Manager representing GEN Financial Advisory