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Fundamentals of Banking, Insurance & Financial Products

Banking products and services

A bank is conventionally a place to safely keep their money, or to go when there is need for a loan.  Everyone should also know that in return for keeping your money, banks will typically pay you interest, and when you take a loan from them, they will charge you interest.  The difference in interest, known as the Net Interest Margin or NIM is one of the ways banks make money.

Most people also credit their monthly salary into a savings account, though these accounts tend to pay very low interest, generally only 0.05% per annum. However, if you are keen on earning better returns, banks offer a wide range of products and services designed to make managing your money a bit easier.

From car loans to credit cards, there are plenty of banking services you may need at different stages of life.  And with digital options, you can access many of them right from your phone or laptop.

Fixed deposits (FDs)

Possibly the safest place to park your money and earn a better rate than that which is paid in a savings account is to open a fixed deposit (FD).  The interest rates in 2023 are much better than a year ago – you could earn up between 3-4% depending on how long and how much you deposit.  Typically, the amounts start at S$1,000 and the periods are up to three years.

FDs are covered under the Deposit Insurance Scheme which guarantees the money in your bank up to S$100,000 per bank per person.

However, note if you withdraw the money before maturity there is usually a penalty, and you may not receive the proportionate interest.

Structured deposits

A structured deposit is an investment product, where the returns are dependent on the performance of underlying financial instruments such as market indices, interest rates, foreign exchange, or a combination of these.

These therefore offer higher returns than FDs but carry more risk and are not covered by the Deposit Insurance Scheme.  Minimum amounts usually start around S$20,000 and the tenor can be a few weeks to several years.

If you are considering a Structured Deposit, make sure that the time frame fits with your investment horizon and that you understand the product thoroughly, especially all the risks.  Note also that like fixed deposits, there are penalties for early unwinding or return of your capital.

Regular Savings Investment Plans

Banks nowadays offer regular savings investment plans where you set aside a monthly sum regularly from as low as S$100 and the money is invested on your behalf, depending on your risk profile.

By making fixed investments regularly regardless of the market conditions, you automatically buy more units when prices are low, and fewer units when prices are high.  So over time, the average cost of your investment could potentially be lower than a one-time lump sum investment.  This is known as dollar cost averaging.

The money is usually invested in exchange-traded funds and unit trusts.  The appeal, therefore, is that your money goes into diversified portfolios without you having to do much research.

Insurance Products

Insurance is primarily for protection, so if that is your priority, then it would be best to buy term life products.  These are the cheapest as the premiums you pay go towards pure protection with no investment component.  Because the objective is only protection, these types of policies are known as “unbundled’ products.

However, insurance companies typically also offer investment-type products on top of protection, which means that the premiums will be higher than term policies because there is an investment or savings component included.  These are known as “bundled’ products.

Whole life insurance

Whole life policies are bundled products that cover death and total and permanent disability.  They will cost more than term insurance as part of the premium is invested in a pool known as the participating fund, or par fund for short, to build up cash value.

Participating whole life policies share in the profits of the company’s par fund. Your share of the profit is paid in the form of bonuses or dividends to your policy. When you make a claim, bonuses or dividends which have been declared will be paid in addition to the sum assured.

Non-par policies are not entitled to any profits that the insurance company makes, in other words the policyholder does not participate in the performance of the par fund.

The sum assured is guaranteed.  Depending on the policy contract, it is paid when the policy matures or when you pass on.  You are typically not entitled to any non-guaranteed benefits.

Depending on your product's features, non-par policies may not have any cash value (surrender value) if you surrender your policy.

If it does, it is important to know how much you would receive if you decide to cash in your policy as this may be less than your total premiums paid to date.

If it does not, you may only receive a refund for any unused premium should you surrender your policy.

Endowment insurance

Endowment policies are similar to whole life policies as they are bundled products which typically require higher premiums as they provide both investment returns and protection coverage.

They are often marketed as a savings plan to help you meet a specific financial goal, such as paying for your children’s education, or building up a pool of savings over a fixed term.

But unlike deposits, you may not get back what you put in.  A part of your premiums goes towards insurance coverage, while the rest is invested and subject to risk.

Like whole life policies, endowment policies can be participating or non-participating.  Bonuses projected by a participating endowment policy are not guaranteed and may fluctuate, depending on the performance of the par fund.

The difference between whole life and endowments

The main difference between whole life and endowment policies is the time frame.  In a whole life policy, there is no period of maturity as it is payable on death, but an endowment policy has a maturity period, usually 10-20 years.

Endowments typically have high monthly premiums — the shorter the endowment term, the higher the premiums — while whole life policies often have relatively lower monthly or annual premiums.

Investment-linked insurance policies

On top of whole life and endowment, insurance companies also offer investment-linked policies or ILPs for short.  These are also bundled products as there are life insurance and investment components, but the difference is that unlike whole life and endowment policies where the insurance company manages the par fund, for ILPs it is the policyholder who has to decide which sub-fund to invest in.

In other words, when you buy an ILP, you have to decide which unit trust to buy. But do note that some ILPs are marketed against pre-selected funds. Your premium is then used to buy units in the selected unit trust, then some units are sold to pay for protection whilst the rest remains invested.

While you are paying the same monthly premium throughout the life of the policy, the cost of insurance typically increases year on year (as you get older the risk of death, disability and illness increases).  This is even if you maintain the same coverage (i.e. sum assured).

This means that more units may have to be sold to pay for the insurance charges, leaving fewer units to accumulate cash value under your policy.

If you have a combination of high insurance coverage and a poorly performing sub-fund, the value of your units may not be enough to pay the insurance charges. You will have to top up your premium or reduce the coverage.

Of course, you can switch unit trusts to one that you think might be a better performer but there may be switching fees involved.

ILPs usually do not have any guaranteed cash values.  Hence, you can potentially lose the entire value of your investment.  Stated differently, ILPs offer higher returns but come with greater risk than endowment or whole life products.

If protection is your main concern, or if you are a conservative investor, then perhaps term policies or whole life or endowments would be more suitable.

Credit Counselling Singapore

Published 20 October 2023.