This is part of a series of posts where I discuss the various aspects of health insurance. You are currently reading the main article that provides you with a complete overview of the contents included.

How It All Began

When I first started working, one of the first few things that my sister got me to do was to get myself some health insurance.  So within my first few paychecks, I sat down with a friend of hers who is selling insurance policies and started discussing about my coverage options.  I was mostly skeptical, and unwilling to shell out hundreds of dollars each month buying something that I cannot see, touch, nor feel.  Naturally, an hour’s conversation became a few more hours, and we eventually had to reschedule a few more sessions for me to get all the answers I needed.

I recall that we eventually came to a long drawn stale mate on buying investment linked policies versus buying cheap term insurance and investing the savings. Looking back now, I still feel that I didn’t ask enough, and being a skeptic by nature, I find it difficult to trust the person selling insurance when there is an obvious conflict of interest.  Very few sales person would actually tell you not to buy their most expensive product.  Nonetheless, I am still grateful to my insurance agent for his patience and support over the years.

Like many other things in my life, I wish I had a mentor to guide me through my decision process.  Someone who could highlight to me the potential pitfalls of my choices, and reason with me towards a more pragmatic decision.  In my discussions with friends around me, I come to find that I am not alone in this.  I still have many friends who do not have any form of health insurance, and are clueless on what it is all about.

To help them, and also to anyone who would be interested to learn more about health insurance, I would like to share with you the basics of health insurance through a series of posts covering the various coverage available, the types of policies, and guidelines on purchasing your insurance policies.

I do not sell insurance, so what I share here would be from what I learned from my many conversations with various friends who do sell insurance, and also from my policy contracts.  The knowledge shared here is by no means exhaustive, and is only meant to supplement your knowledge of health insurance.  I would recommend that you do consult a professional financial consultant before you purchase any policies.

Basics of Health Coverage

Insurance, by definition, is protection against the unexpected.  However, when we purchase health insurance, we do not really expect it to protect us against mishaps in life.  It cannot do that.  What it can do for us is to protect our assets, and to allow us to confidently face any medical needs that may be required in those situations.  The key point about health insurance is that it protects your assets, and as a result, protects your life style.

Forrest Gump: My momma always said, “Life was like a box of chocolates. You never know what you’re gonna get.”

Health insurance can come in many forms, with different packages, and pricing.  However,as different as they can be, the types of coverage offered by the various providers are mostly the same.  Specifically, health insurance can be broken down into 5 different areas:

1. Death
2. Total Permanent Disability (also known as TPD)
3. Critical Illness (or Major Illness)
4. Accident
5. Hospitalization

[P.S. I will be providing separate articles on each of the above 5 categories to give you a better understanding of how each coverage works.]

Each of them functions differently and protects you from the different surprises in life.   A friend of mine (who provides insurance) once explained that these 5 categories corresponds to each of your 5 fingers, and only when all 5 are functional would you be fully protected.

What Coverage Should You Get?

Once you know what options are available to you, the next thing you would be asking is what coverage should you get, and how much coverage is necessary?  What about coverage for your family?

I once met someone who asked everyone in the room who have purchased health insurance to raise their hand.  Almost all did.  He then asked those who knew what they wanted to do in life to raise their hand.  Not many did.  He then said, “You are all so young.. and yet you have made more plans to die than to live!”

To help you decide on this, you have to remember the key purpose of health insurance is to protect your assets, and as a result, protect your life style.  While we recognize the risks in life, and should take action to hedge against them, we should take note to do it within our means and not let the cost of coverage affect the quality of our life style.

Ideally, you should get yourself covered in all 5 areas.  However, depending on your situation, it may not always be a good idea to do so for cost reasons.  You need to first understand how each of the 5 areas can help in protecting your life style.

Some of the things you should consider are:

1. How much assets and liabilities do you have?
   Sum up all your assets and liabilities together, and you will get your net asset value.  If this value is negative, you will need to have enough coverage to make sure all your debts can be paid off when you are no longer able to generate income.  For example, my mortgage is insured with death and TPD coverage.  This will ensure my dependents and myself stay debt free, and still have a roof above us when the most unfortunate strikes!
2. Do you have any dependents that rely on your income? (Married with kids, or have parents / siblings to take care of)
   Get an estimation of how much each dependent needs from you on a monthly basis, sum them all up, and then multiply that amount by 12 to get a yearly amount. This would be the minimum amount that they would need to maintain their current life style on a yearly basis should you be unable to generate any further income for them.  Most insurance providers would recommend 10 years worth of coverage to provide for your dependents so that they have ample time to adjust to a life without you, and move on to generating income for themselves.  This 10 years is a ballpark estimate, and it would vary from people to people.  If your children are very young, then you might want to plan for more.  If they are already grown up and are able to feed themselves, then you do not need much.  Similarly for elderly, if you have other siblings who are well to do and can easily take on the extra cost of providing for your parents, then you do not need much coverage.  So you can see, your need for coverage is flexible and can change over time.  Generally, it would make sense for middle aged individuals to get more coverage when their income is most needed, then reduce them slowly over time when it is not so important.
3. Do you lead a healthy life style?  (Eat healthy food, and exercise regularly)
   Leading a healthy life style is key to living a long and happy life.  While it does not guarantee that you will be free from all illnesses, leading a healthy life style does help in lowering your chances of getting some of the major illnesses commonly insured.  It is worthy to note that those who lead unhealthy life styles, or work in hazardous occupations usually have to bear a higher cost for the same amount of coverage.  After all, insurance is a game of probability.  If your life style is less than ideal, it is recommended that you get some form of coverage (and improve your life style in the process!).
4. Do you or your family have any history of medical conditions?
   If you or your family have some history of  medical conditions, then there is a chance that it may also happen to you (if it does not already have), and that it may develop into something serious.  The reason why your family’s medical history would affect you is that part of your gene pool is common with your family, and a number of major illnesses has been found to be hereditary (passed down from parents to children).  Even if your immediate family is healthy, it might be worthwhile to do a little research on your relatives or family history.  What you find can help to give you a little preview of what may happen to you, and it is a good idea to prepare for that.  However, insurance providers may not always insure you, or they might add certain exclusion in your coverage should they find that you already have some pre-existing conditions, or if your family has a strong history of certain illnesses (for example, insurance providers may not cover you for an illness if all your immediate family members and relatives have the same condition).  Nonetheless, you should still speak with your insurance provider and try to get yourself covered as much as possible.
5. Does your employer provide you with group life insurance?
   Most corporations provide some form of health insurance for their employees nowadays as part of your employees’ benefits package.  You could be insured for any or all of the 5 categories, and you can use this to supplement your own health insurance.  Note that you should only use your employer’s coverage to supplement, and not replace your own health insurance.  You may not always be working for the same employer, and even if you do, your employee’s benefits may change over time without any need of your consent.
6. Do you have sustainable sources of passive income?
   Passive income, by definition, is income earned without your active involvement.  It is income you get even when you do nothing.  This is the exact opposite of your day job where you are paid only if you work.  Having sufficient sources of passive income will come in very useful when you are no longer able to work.  It allows you to continue to provide for you and your family, and thus helps in preserving your life style.  If your passive income is substantial, then you can probably afford to have lesser coverage (no longer need to have 10 years worth of coverage) as you and your family will continue to enjoy the same amount of income.  However, it is still recommended to have insurance for situations where an initial large sum of money is required to absorb the impact of an incident (such as requiring money urgently for treatment for 3rd stage cancer newly discovered).

To illustrate the above points, we can run through a simple case study.

John (31 years) and Jane (30 years) are married with a son of age 5.  Their family leads an average life style, with no significant health issues, nor family history of health problems.  They lead a happy life together, and enjoys exercising as a family on weekends.  Jane is a house maker and John is working in the automobile sales industry, and earns an annual income of $80,000 on average inclusive of commissions and bonuses.  John’s company provides him with death/tpd/accident insurance coverage of $100,000, and subsidizes both his and his dependent’s medical bills by 90%.  After deducting expenses, they are usually left with a little over $10,000 each year in savings.  They have about $50,000 in savings now, and the only debt that they have is their home mortgage with an outstanding loan of $100,000.

Working on the numbers,

Net Asset = $50,000 (savings) – $100,000 (mortgage) = -$50,000

Dependents’ Expenditure = $80,000 (income) – $10,000 (savings) = $70,000

In the unfortunate incident of John’s demise, Jane would have to start working in order to support both herself and her son in the long run.  In order to help make the transition smoother, John can prepare for about 10 years worth of cash for his dependents to adjust over time.

$70,000 x 10 years + $50,000 (to clear the outstanding mortgage) = $750,000

10 years would be an over estimation because it would more likely take Jane closer to 5 years to adjust.  The additional years of coverage would serve as a buffer to support junior’s additional expenditure needs as he grows up, and possibly even with enough to send him to the university.  Yearly consumption of $70,000 is also over estimated because it includes John’s current expenses.

Based on this, a possible coverage for John could look like this:

Death & TPD coverage: $750,000 (as calculated above) – $100,000 (company’s coverage) = ~$650,000

Major Illnesses: ~$100,000, to help absorb the initial impact of medical problems.  Can increase more if affordable but this can be rather expensive.

Accident: $70,000 x 5 years – $100,000 (company’s coverage) = ~$250,000, can be used to supplement death in the case of accidental death, but mostly because John is the only source of income in the family.  This covers incidents where John gets into an accident and is permanently but not totally impaired.  Accident coverage is usually cheap so you can increase more if you like.

Hospitalization: Optional, since John’s company already subsidizes 90% of all medical bills.  Otherwise, it is recommended for John to get a policy to cover 100% of his bills.

Should You Insure Your Dependents?

After you get yourself well covered, the next thing you should look at is coverage for your dependents.  Remember that the key point about insurance is to protect your assets, and your dependents depend on you and your assets for their livelihood, and to pay for any medical emergencies.  However, coverage for your dependents need not be as high as your own as they do not produce income, and thus do have any loss of income to replace.

Ideally, if cost was not an issue, you can consider insuring your dependents against all 5 areas.  But in reality, that is not pragmatic and may even put a dent on your financial health.  You should look at insuring the areas that would have the most impact on your family’s financial health should it happen, and weigh it against the chances of that happening.

Reviewing the 5 areas in descending order of importance for a dependent:

1. Hospitalization
   This is an important coverage to have as it covers for all your dependents’ hospitalization bills.  Your dependents are most likely to need this coverage compared to the rest, and may even need it more than once.
2. Major Illnesses
   Depending on your family history and life style, this can be helpful in reducing the impact of the medical bills.  The premium costs for the coverage can be rather expensive if your dependent is old.
3. Accident
   Dependent is assumed to be impaired in some way but should still be able to live life relatively fine (as opposed to TPD below).  There might be an initial cost as the dependent adjust to the new life.
4. Total Permanent Disability (TPD)
   While there is no loss of income to replace, a dependent who is totally and permanently disabled would continue to be dependent on your income, and their expenditure may increase if they require special care going forward.
5. Death
   Financial impact would be the funeral costs only.  There is no loss of income to replace.

Know Your Options

Over the years, there has been a lot of financial products coming up from the market that has made it difficult for consumers to assess which is most beneficial to their needs.  Insurance coverage may not always be providing just protection anymore, and may be coupled together with savings or investments.  To make matters worse, the insurance industry has become too focused on achieving sales target, and it gets difficult to trust insurance agents when their paycheck is directly co-related to the amount of sales they make (thus, a strong conflict of interest).  Which is why one good advice is for you to seek help from an independent financial adviser who do not get any commission from the products that they recommend.  However, if you have managed to build a close relationship with your insurance agent, do cherish it!

Some of the more common insurance products available in the market are:

1. Term
   Low premiums and usually covers Death & TPD; more coverage can be added via riders.  You do not get back the premiums paid out, and you should treat this as an expense instead of savings, as it functions very much like your car or home insurance.  Premium is fixed for the period of the coverage term (eg 5-10 years), and may change upon renewal.  Coverage for accidents, major illnesses and hospitalization functions the same way; as expense.  On a good year, your insurance provider may provide rebates on your premium.
2. Whole Life
   High premiums and usually covers Death & TPD; more coverage can be added via riders.  The high premiums paid is usually recoverable after a period of time (also known as the break even point).  This is usually in the range of 20 years or so.  On a good year, your insurance provider may distribute bonuses and add value to your policy.  A variation of this is where you are only required to pay your premiums for a fixed number of years (eg 15 years) and you are insured for the rest of your life.  However, the amount of premiums paid is much higher for the same amount of coverage.
3. Investment Linked
   High premiums and usually covers Death & TPD; more coverage can be added via riders.  The high premiums paid is invested via investment funds, some of which are managed by the insurance providers, while others are outsourced to other fund managers.  The cost of your insurance will then be deducted from the value of your investment funds over time.  In the first few years of your policy, most of your premiums paid are absorbed as commission and do not contribute into your fund.  There could also be additional fees for the maintenance of this policy.
4. Riders
   Functions as an add on to an existing policy by providing you additional coverage.

When it comes to deciding which insurance product to get, most people can be divided into two camps:

1. Those who prefer whole life and investment linked because there is a chance of getting back the paid out premiums.  In a way, a lot of people see this as a “savings” plan, but technically, it isn’t.
2. Those who prefer to buy cheap term insurance and invest their savings themselves.  You would have to be more financially savvy in order to do your own investments.

Questions To Ask Before You Purchase Anything

To wrap up, here are some recommended questions to ask your insurance agent / financial consultant before you sign on the contract.  If anything sounds unconvincing to you, then do seek out a second opinion!

1. What is the company’s history?
2. How is your agent compensated?
3. How much will your coverage cost now, and over time?
4. What are the exclusions?
5. Can pre-existing conditions be covered?
6. What happens when the policy expires?
7. What is the penalty for late payments of premiums?
8. How does a policy end?
9. How can claims be made?
10. How do claims affect your premium?
11. Will you be covered during overseas travel?
12. What happens if the agent leaves the company?

Thanks for reading, and I hope you find this article beneficial in giving you an idea of the health insurance you may need.  Let me know if I have managed to help you in anyway, and if there is anything you would like me to add to this article to make it even better for our readers!

 The key point about health insurance is that it protects your assets, and as a result, protects your life style.

No related posts.

You are reading a series of posts where I track my financial health over the months in the year 2013.  You can access reports for other months via the main article, or compare my progress against my goals for the year.

Capital Injection to Date: $46,000+$10,000=$56,000

Market Value (End of 2012): $50,743.43

Market Value (End of current month): $63,248.64

Dividends YTD: $1123 (Est $93.58 per month)

Profit YTD: $2505.21

Profit % YTD: 4.12%

Profit % Since Inception: 12.94%

Related posts:

1. Feb 2013 Report
2. Mar 2013 Report
3. Jan 2013 Report

1. Firms in Distress
   These are firms with high leverage, poor earnings, and on the brink of liquidation.  The call option value calculated can be used as the liquidation value of the firm.
2. Natural Resources Firms
   The call option value represents the value of the option on the undeveloped resources.
3. Firms with Patents
   Used mostly for start up firms, or high growth firms which derive a large part of their value from their rights to a product or service.

We will explore how we can use BSM with an example for each of the 3 firms.

Firms in Distress

Suppose you have a troubled firm that you’re interested to purchase.  The firm currently have negative earnings, but after discounting the FCFF to present value, you find the firm value to be $800m.  The firm have debts with a market value of $1,000m with a maturity of 10 years.  The corresponding 10 year treasury bond is 9%.  The standard deviation of the firm’s value is 20%.

In this case, the firm value is similar to the stock price when pricing an option.  The market value of the debt would be the strike price, since you will only profit if your firm still have value after paying off its debts (call option).   So plug in the following values, and you will get the call option value of $418m which is the value of the firm’s equity.

1. Stock Price=$800m
2. Strike Price=$1000m
3. Time to Expiry=10years
4. Risk Free Rate=9%
5. Volatility=20%

Since the value of the firm as a whole is $800m, but the equity value is only $418m, this implies that the current value of the debt is $800m-$418m=$382m.  The par value of the debt in 10years time is $1000m, so if you can calculate the interest rate of the debt as follows:

The default spread of the firm can also be calculated by deducting the risk free rate from the interest rate of the debt, which in this case is 10.1% – 9% = 1.1%

Natural Resources Firms

Suppose you are evaluating a oil property with an oil reserves of 100m barrels of oil.  The cost of extracting out the oil is $15 per barrel, but you can sell each barrel for $32.  Therefore, your profit per barrel is $17.  You estimate that once the reserve is developed, you’d be able to extract out 5% of its value each year for the next 30 years.  Assume a risk free rate of 8%, and oil price volatility of 30%.

Applying the Black-Scholes Model similarly, we get a call option value of $293m.

1. Stock Price=$17 x 100m=$1,700m
2. Strike Price=$15 x 100m=$1,500m
3. Time To Expiry=30years
4. Risk Free Rate=8%
5. Volatility=30%
6. Dividend Yield=5%

Firms with Patents

Suppose you are evaluating a firm with a patent on a new technology.  The firm have the patent for the next 10 years, and you find the present value of developing the technology for commercial use to be $9.7b with the cost at $7.5b.  Risk free rate is 10% and the volatility of the expected present values is 55%.

Applying the Black-Scholes Model similarly, we get a call option value of $2.37b.

1. Stock Price=$9.7b
2. Strike Price=$7.5b
3. Time To Expiry=10years
4. Risk Free Rate=10%
5. Volatility=55%
6. Dividend Yield=1/patent life=0.1

To help you with the Black Scholes Model calculation, i’ve prepared an excel spread sheet below for your use.  Just punch in the numbers as discussed above and you would be able to get the same answers.

Download Excel Spread Sheet – Valuation Using Real Options

Related posts:

1. Investment Idea: Undervalued, Low Debt, High Dividends

Lately, i’ve accidentally revisited Google Finance again and came to notice that the stock screener have now expanded its universe of stocks to include many more markets, including the Singapore market.  Great news!  I started to test out the screener and found it to be rather easy to use.  There are a number of commonly used filter criteria available for use, but, of course, does not include all of which i usually use in CapitalIQ.

When you find a stock that you’re interested in, and opened up the link, you will only be presented with the historical price, and not the financial statement figures as you would have for stocks in the U.S. markets.  Any additional information can be sourced from other information providers such as Reuters whose links are readily available on the company page.  So while the screener is a useful tool, the main bulk of the information will have to be sourced directly from the annual reports until the time comes when Google is ready to expand it’s universe of information once again!

https://www.google.com/finance#stockscreener

No related posts.

You are reading a series of posts where I track my financial health over the months in the year 2013.  You can access reports for other months via the main article, or compare my progress against my goals for the year.

Capital Injection to Date: $46,000

Market Value (End of 2012): $50,743.43

Market Value (End of current month): $53,048.87

Dividends YTD: $1123 (Est $93.58 per month)

Profit YTD: $2305.44

Profit % YTD: 4.54%

Profit % Since Inception: 15.32%

Related posts:

1. Feb 2013 Report
2. Jan 2013 Report
3. Dec 2012 Report

The OCBC Bonus+ accounts functions by getting you to first deposit an initial amount of $10,000.  After which, you’ll be given a 0.2% pa interest each month.  If you do not withdraw any cash for any particular month, you will be given an additional 0.2% pa.  If you do not withdraw any cash in a full quarter (3 months), you will be given a further additional 1.4% pa which adds up to 1.8% pa on those quarter months only.

So if you put in $10,000 and do not intend to withdraw any cash, you’ll get 0.4% pa for 8 months (non-quarter months), and 1.8% pa for 4 months (quarter months).  Do note that the % mentioned thus far are in per annum terms, so you’ll need to pro-rate it to 1/12 for each month.

The below table shows the breakdown of the interest given on a monthly basis assuming an initial deposit of $10,000.

At the end of it, you’ll find that your effective interest is only 0.87% pa which isn’t really as hyped up as the 1.8% pa so please do your calculations before you start moving your funds!

Eligibility

• Age 15 and above
• Singaporeans, Singapore PRs and foreigners

Related posts:

1. Review: Standard Chartered Bonus$aver
2. Review: Standard Chartered XtraSaver

You are reading a series of posts where I track my financial health over the months in the year 2013.  You can access reports for other months via the main article, or compare my progress against my goals for the year.

Capital Injection to Date: $46,000

Market Value (End of 2012): $50,743.43

Market Value (End of current month): $52,938.87

Dividends YTD: $1123 (Est $93.58 per month)

Profit YTD: $2,195.44

Profit % YTD: 4.33%

Profit % Since Inception: 15.08%

Related posts:

1. Jan 2013 Report
2. Dec 2012 Report
3. 2013 Reports

We next break them down into the relevant constituents for our manipulation.

Where

OCA = Other Current Assets,

PPE = Property, Plant & Equipments,

GrossDep = Gross Depreciation,

ONCA = Other Non Current Assets,

CL = Current Liabilities,

NCL = Non Current Liabilities,

CC = Contributed Capital,

RE = Retained Earnings

Note that:

 Depreciation Expense in reporting period

 Net Income – Dividends in reporting period

By rearranging the above equation to find the change in cash,

Lastly, we can further simplify the above into the below by grouping some components together.

Related posts:

1. How to Evaluate Revenue

A rising tide lifts all boats

 

Pre-Conditions for Economic Growth

1. Markets facilitate exchange and prices act as signals that equilibrates demand and supply
2. Property Rights govern ownership of factors of production and goods and services.  These rights are important to ensure that rewards resulting from the use of the resources in production will not be expropriated.
3. Monetary Exchange facilitates transactions and transfer of property rights

Economic growth takes place when individuals and firms produce goods in which they have a comparative advantage and specialise in the production of these goods and services.

For sustained economic growth, incentives must be provided to encourage the pursuit of 3 activities:

1. Savings and investment in new capital
2. Investment in human capital & labour
3. Investment in the discover of new technology

Hong Kong, Singapore, Taiwan and South Korea experienced remarkable economic growth over a 25 year period since the 1960s.

Lessons from the Asian Tigers:

1. Dramatically increased labour force participation
2. High savings rate
3. Substantial investment in human capital through government promotion of education
4. Stable governments
5. Outward-looking policies that encouraged exports
6. Free-trade policies that increases competition

How Social Infrastructure Affects Economic Growth:

1. Technology progress mostly dependent on development of human capital eg. education & training
2. High savings rate that contribute to capital investment
3. Moderate population growth rates
4. Free trade policies that open economy & force domestic business to compete effectively
5. Predictable economic environment through good fiscal & monetary policies
6. Legal system that defines & protects property rights & contracts

No related posts.

You are reading a series of posts where I track my financial health over the months in the year 2013.  You can access reports for other months via the main article, or compare my progress against my goals for the year.

SingTel declared dividend in the month of Dec, and paid during Jan.

Macquarie International Infra Fund declared a generous cash dividend of 5.75 cents per share to be issued in Feb.  Part of the dividend comes from the return of cash to investors as part of the fund closure.

Capital Injection to Date: $46,000

Market Value (End of 2012): $50,743.43

Market Value (End of current month): $54,075.11

Dividends YTD: $68 (Est $68 per month)

Profit YTD: $3,331.68

Profit % YTD: 6.57%

Profit % Since Inception: 17.55%

Related posts:

1. Dec 2012 Report
2. 2013 Reports
3. Feb 2012 Report