Thursday, March 09, 2006

How to give to your adult child

A woman in her mid 50s wanted to pass some of her wealth to her adult child. But she does not want to give a lump sum as the child may spent the money.

I suggested to buy an annuity for the child. The annuity will make an annual payment for a certain number of years. The payment can start from a certain date in the future.

She thought that this was a good idea. It did not occur to her.

The annuity provides a return of 3% to 4% per annum, guaranteed. It is tax exempt.

She originally wanted to buy a property and give the rental income to the child. However, this may involve some knowledge of how to look after the property and to find tentant. It may be too troublesome for the child.

Get an affordable medical plan

If a male aged 25 buy an expensive medical plan, he has to pay a total premium of $57,600 in premium up to age 80 based on current premium rates.

The total premium may increase in the future, as the premiums are subject to revision.

If he buys Incomeshield with corresponding top-up rider, total premium is only $40,100, or 31% lower.

The coverage under both plans are largely similar.

Tuesday, March 07, 2006

Inadequate life insurance

The average amount of life insurance per breadwinner is $37,000. This is inadequate.

Each breadwinner should aim to have 3 to 5 years of earnings to take care of the needs of the family in the event of premature death. As a guide, they should aim to have a sum of $100,000 in life insurance.

Many people find it costly to insure for $100,000 in an endowment, whole life or dread disease policy. The premium is too high.

The current amount of life insurance probably reflect what they can afford to spend for a traditional life policy.

I suggest that they should take a personal accident or term life policy to make up the difference. The premium is quite low, as it is intended solely for protection.

Reverse mortgage for HDB flats

We have been offering reverse mortgage to private property owners since 1997. HDB is now allowing HDB flat owners to obtain reverse mortgage from us.

We will be the 1st insurer to offer Reverse Mortgage for HDB flat. We hope that older HDB owners will be able to benefit from this .

The key features are as follow:

Eligibility for all flat owners of between 70 to 90 years of age
HDB Flat must have at least a remaining tenure of 50 years at the end of the loan period

Competitive effectove interest rate - at 5% pa (for promotion period)

Loan Quantum - up to the total projected loan not exceeding 70% of the total projected valuation of the property.

Loan Period - Up to 20 years OR 90 years of age OR death, whichever earlier

Reverse mortgage for HDB flats

Here are the tentative terms, subject to modification.

1. Eligibility

All flat owners from age 70 to 90, who has no and small outstanding loan on their HDB property. The lease at the end of the loan period should be at least 50 years
Borrower must be our life policyholder for at least 1 year. For non-policyholder, borrower can take up a life/personal accident policy

2. Tenure of loan - age 90 or death, whichever is earlier subject to 20 years term.

3. Monthly drawdown

Below is an illustration of the maximum drawdown per month (assuming upfront fees of $3.5k):

FlatType PropValue Monthly Payout

3-room 160k $200-$230
4-room 240k $320-$360
5-room 320k $430-$490
Exec apt 480k $660-$750

Monthly payout should not fluctuate greatly and should be for 20 years or up to age 90 years.

For someone who enters at age 70, the monthly drawdown is 0.2% of the property value at the time of taking the loan. The borrower can opt to receive a lower amount. NTUC Income is allowed to vary the monthly payout in accordance to the value of the property.

4. Lump sum borrowing

At the start of the loan, the owner can take a lump sum of up to 5% of property valuation – once off. This is mainly intended to help borrowers settle other debt he/she may have run up at much higher interest rate.

5. Mechanism of the reverse mortgage

a. Loan repayment

The loan is not repayable until the oldest borrower have died or moved out of their flat. The total loan outstanding including interest must then be repaid.

If one of the borrowers dies, or needs to go into medical or care facility, monthly drawdown amount will not change. The other borrower can carry on living in the HDB property as before.

b. Property value fluctuation

If the HDB property increases in value, it will allow the monthly drawdown to be extended for a longer period, and leave a larger balance to be passed to the beneficiaries. If the flat decreases in value, NTUC Income may cease the payout if the outstanding sum exceeds 70% of the value of the property.

c. Early repayment

We allow the owner to sell the flat at any time and repay the balance of the loan without penalty.

If the borrower downgrade to a smaller HDB flat, the RM loan have to be repaid in full or repaid in part if the smaller HDB flat is under RM financing, depending on the situation.

6. Counseling and financial advice (Mandatory)

This is to ensure that the borrower understands the working of reverse mortgage, and how it serves their needs. The borrower must be made fully aware of the features and risks, including:

personal counseling, as each borrower’s financial situation is unique
access to advice on their legal rights - Eg: home may not be left to heirs.
a reverse mortgage is a long term commitment and not for short term cash needs
advise on the consequences of repossession and on other income alternatives, such as downgrading to a smaller flat, or home-stay arrangements

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