I have had a life insurance policy for six years for savings. Should I cancel it next year or keep it going until maturity at 21 years? I think I can make higher returns with a different investment, but should I be concerned about risk?
_ MMANSWERED BY...Teera Phutrakul, CFP, Chairman, TFPA Essentially there are two components to a life insurance policy: protection against unexpected loss and an investment component. While there is no one answer to how much protection is enough, one rule of thumb is to buy life insurance equivalent to five to 10 times your annual gross income. That would mean a person making 2 million baht a year should have anywhere from 10 million to 20 million worth of coverage or more.
As for the investment component of your policy, you need to look at the cash value or surrender value, which is the amount available in cash upon cancellation of the policy (usually a whole life policy) before it becomes payable upon death or maturity. If you feel strongly that you can make a better return from another investment than your insurance policy can offer, then go ahead and cancel.
However, you should not overlook the protection aspect of the policy. One compromise is to buy "term life" insurance instead. This will give you the protection without the investment component. The premium will be cheaper too.nnnWhat is the difference between a Long Term Fund and Retirement Fund? I have invested in LTFs only in the past because they can be sold after five years. I'm not sure if I should invest in RTFs also.
_ MontriANSWERED BY...Teera Phutrakul, CFP, Chairman, TFPA When investing in these tax-deductible mutual funds there are three major factors you need to consider:
- Tax Deductions: Both LTFs and RMFs offer generous tax deduction benefits: 500,000 baht or a maximum of 15% of your gross annual income for each type of fund, but the limit on RMFs also includes other provident fund contributions. So if your cash flow permits, I would recommend that you maximise your tax deductions by buying both types of funds.
- Time Horizon: The letter 'L' in LTF stands for 'Long' Term Equity Fund, and the 'R' in RMF stands for 'Retirement' Mutual Fund, so in either case you need to invest for the long term. With an RMF you cannot cash out until age 55 at the earliest, but for an LTF you can cash out after five years. Ideally you should not cash out until you need the money.
- Investment Performance and Total Expense Ratio (TER): Quite often, investors in these funds do not even look at the TER because they are only interested in the tax-deduction aspects of the products. But this is where long-term performance will suffer due to excessive fees.
Let's say for example that you have 100,000 baht to invest in three mutual funds with total expense ratios of 1%, 2% and 3%. Let's also suppose that all three funds enjoy the same annualised return of 6.5%. By the 30th year, the fund with the 1% TER would have grown to 500,000 baht while the fund with the 3% TER would have grown to only 280,000 baht.
By comparing the TER of the Retirement Mutual Funds (RMF) that are sold in Thailand and their equivalent counterparts in the United States, 401(k) plans, I am astonished at how expensive our RMFs are. For example, the TER of an equity 401(k) plan would typically be 0.8%, whereas in Thailand local investors would pay 1.8% on average for an RMF. So bear this in mind and whenever possible go for low-cost index funds.
I wonder how I can get out of this debt cycle? I have been stuck in debt from three credit cards for five years. A bank finally filed a lawsuit against me, for which I didn't show up. Now the court has ordered the bank to deduct more than half of my salary every month for about two years since April. The problem is I have a mortgage to pay as well as other essentials. I think I need to ask the bank to compromise with me. But which liability is the best one to negotiate: credit card or mortgage? Please advise.
_ Thanongsak
ANSWERED BY...Wiwan Tharahirunchoti, CFP:You shouldn't have waited for the court to make a ruling. The credit card debt would have been easier to negotiate before the court made its order. I suppose you have repaid some of the mortgage loan, so there should be some room left to draw an additional amount.
You should use the mortgage credit to pay off your credit card debt. Since the mortgage loan has collateral, the interest rate will be much lower than the credit card loan. I suggest you negotiate with the credit card company about how much it would be willing to take if you settle the debt at one time.
I believe the new monthly payments (to repay both loans) will be much lower than the current amount you have to pay. Good luck!
The Thai Financial Planners Association is the Certified Financial Planner (CFP) trademark licensing authority in Thailand. It is a self-regulated, non-profit group of financial advisers and experts from various organisations set up to give advice to investors. Questions can be submitted to them at wealthcare@bangkokpost.co.th or on its web board at www.tfpa.or.th