Pay your shield plan with cash instead of Medisave ??

[icy_cool]

I just have this crazy idea and want to run it by some of the forummers here to see if the idea is reallly crazy...

Alot of us pay medishield and eldershield + supplement using the medisave, the reasoning being medisave is something we cant touch, so see no evil, feel no evil.

The current contribution ceiling to medisave from 1st july 2010 onward is $39500. Once the ceiling has been reached, future contribution to medisave will be transferred to the CPF SA. Both the SA and MediSave earns an interest of 4%.

The general population of singapore like to park their money in normal saving account earning the miserable 0.25% - 0.45% per annum. The slightly more savvy will be parking money in FD which still pales in comparison to the 4% above.

If most of us use cash to pay for the various shield plans and let medisave to grow, the ceiling will be reached quickly, Once the ceiling is reached, you will see the CPF SA account grow at a faster rate (from more contribution and the compounding interest of 4%) By the time you reached age 55, you will have a better nest egg to retire compared to the general population who pays for all the shield using medisave and let the money grow at normal saving account or FD.

Does it sound crazy? or too goo to be true?

[newbie_george]

hi icycool, let me be the first person to express my views here.

I like the way u think, as u explore the unexplored. u could be a truly creative person in ur field of work.

I still prefer the use all medisave first, than your idea, because of the following reasons:

I shall explain the nonmonetary reasons first because it is simpler, followed by mathematical reasons.

Non-monetary reasons
1) Firstly, we cannot confirm we definitely live >55. Yes, the life expectancy is 70s. The basic reasons for insurance is to cushion any unforseen touchwood circumstances. But your idea already attempts to assume u live >age55.
If you already assume that u live >55 healthily, then why buy insurance in the first place.

2) Goverment reasons.
Our CPF has undergone numerous numerous changes, such as topups, minimum sum, medisave, etc etc... Almost every year their CPF scheme changes. And everything is ever changing. With the goverment loosing more money in temasek and GICs, it is not surprising that they will further raise CPF withdrawal age until you will never live to smell your money.
For the above reason, me personally just assume that my CPF is stuck forever ever after. Hence i don't feel any heartache if my CPF investments looses money.
--> Hence if i were to use your idea, i would never able to smell my CPFSA account with 4% interest.

monetary (cum mathematical) reasons
Now, lets assume the best possible scenario, where u lives up to age infinity. So in this scenario, while u say u r trying to pay the premiums of ur medical plans using cash and leaving your medisave untouched.. it is the same as u r trying to put these money (equivalent to your premiums) into a 4%fixed deposit box where the maturity of this fixed deposit is upon your withdrawal age of retirement.

However, assuming the equity return long term average (ya, ur age is infinity) is 10%p.a. I would say your 4%p.a. fixed deposit box only mature on retirement is far less superior than 10% equity.

Ya.

[Rommie2k6]

I just have this crazy idea and want to run it by some of the forummers here to see if the idea is reallly crazy...

Alot of us pay medishield and eldershield + supplement using the medisave, the reasoning being medisave is something we cant touch, so see no evil, feel no evil.

The current contribution ceiling to medisave from 1st july 2010 onward is $39500. Once the ceiling has been reached, future contribution to medisave will be transferred to the CPF SA. Both the SA and MediSave earns an interest of 4%.

The general population of singapore like to park their money in normal saving account earning the miserable 0.25% - 0.45% per annum. The slightly more savvy will be parking money in FD which still pales in comparison to the 4% above.

If most of us use cash to pay for the various shield plans and let medisave to grow, the ceiling will be reached quickly, Once the ceiling is reached, you will see the CPF SA account grow at a faster rate (from more contribution and the compounding interest of 4%) By the time you reached age 55, you will have a better nest egg to retire compared to the general population who pays for all the shield using medisave and let the money grow at normal saving account or FD.

Does it sound crazy? or too goo to be true?

It's a very well reasoned argument. BUT it lies on the faulty assumption that there is no changes to the CPF system till age 55. If you are nearing age 55 I think it makes sense. If you are a young person it makes no sense at all, because one cannot predict the changes to the CPF system. For all you know 20 years from now you cannot withdraw anything from CPF. Everything goes to the CPF con LIFE upon hitting 55. Never forget that CPF is not really your money because you do have control over it.

[icy_cool]

thank you for all the feedback, appreciate it.

[ghchua]

Hi icy_cool,

I guess you must compare with the right benchmark when looking at this. You are using short term savings account interest rate and short term FD rate to compare with CPF SA and Medisave account interest rate, which is supposed to be a long term rate. Yes, they are giving you 4%pa but your money is locked in until dunno when and it is not liquid.

To overcome this liquidity issue, many CPF members would have preferred to use their Medisave account to pay for shield premiums rather than cash.

[ttiatlen]

I don't find icycool's idea unreasonable. I subscribe to the same idea.

But valid as pointed out, there stands the risk of govt policy changes. Ultimately, it is still one's money, even if it is constrained. I view it as satisfactory - i.e. should one pass away early, the money go to beneficiaries. Important: Make the beneficiary nominations each time one marries, divorce or have kids.

As to why bother with insurance if there is an assumption that one lives beyond 55 ... there is only so far insurance can carry - i.e. mortality rates will start to make insurance prohibitive after 62. One has to think about if one lives too long. Hence CPF Life and whatever savings we can accumulate at relatively risk-free rates.

[DPSK]

annual premiums of shield plans are so cheap. how much can it grow if you let your medisave untouched

Not much!

[Independent_FA]

I like the idea but like DPSK mentioned the interest gain isn't much.

To sidetrack... I advise my client to use cash to pay off their house with the same reasoning. Take it as HDB is the bank paying the 'interest' when you sell off the flat. Leave your CPF OA to rot at 2.5% p.a. Theorically, all accept this is a good idea but practically no ones wanna do that

[makoshark]

I like the idea but like DPSK mentioned the interest gain isn't much.

To sidetrack... I advise my client to use cash to pay off their house with the same reasoning. Take it as HDB is the bank paying the 'interest' when you sell off the flat. Leave your CPF OA to rot at 2.5% p.a. Theorically, all accept this is a good idea but practically no ones wanna do that

People would rather hopethat they will make more than the 2.5% or they believe they can beat the 2.5%.
They don't see that making a consistent 2.5% from the reduction of the loan is a very critical success factor in reaching one's retirement goal.
They would rather take their excess cash and invest in a "balanced" portfolio which they believe would beat the 2.5% because they use historical data (which they assume will repeat themselves) or irrelevant american analysis.
And instead of paying down their loans to get the 2.5%, they go around hunting for "good" bond funds which generally don't do well.
I understand your

[Independent_FA]

I like the idea but like DPSK mentioned the interest gain isn't much.

To sidetrack... I advise my client to use cash to pay off their house with the same reasoning. Take it as HDB is the bank paying the 'interest' when you sell off the flat. Leave your CPF OA to rot at 2.5% p.a. Theorically, all accept this is a good idea but practically no ones wanna do that

People would rather hopethat they will make more than the 2.5% or they believe they can beat the 2.5%.
They don't see that making a consistent 2.5% from the reduction of the loan is a very critical success factor in reaching one's retirement goal.
They would rather take their excess cash and invest in a "balanced" portfolio which they believe would beat the 2.5% because they use historical data (which they assume will repeat themselves) or irrelevant american analysis.
And instead of paying down their loans to get the 2.5%, they go around hunting for "good" bond funds which generally don't do well.
I understand your

Thanks for your understanding

Many Sporean that 2.6% is the housing loan rate but they seldom think about the time you sell, CPF computes the ACCURED Interest which will be 2.5%+2.6%

[makoshark]

I like the idea but like DPSK mentioned the interest gain isn't much.

To sidetrack... I advise my client to use cash to pay off their house with the same reasoning. Take it as HDB is the bank paying the 'interest' when you sell off the flat. Leave your CPF OA to rot at 2.5% p.a. Theorically, all accept this is a good idea but practically no ones wanna do that

People would rather hopethat they will make more than the 2.5% or they believe they can beat the 2.5%.
They don't see that making a consistent 2.5% from the reduction of the loan is a very critical success factor in reaching one's retirement goal.
They would rather take their excess cash and invest in a "balanced" portfolio which they believe would beat the 2.5% because they use historical data (which they assume will repeat themselves) or irrelevant american analysis.
And instead of paying down their loans to get the 2.5%, they go around hunting for "good" bond funds which generally don't do well.
I understand your

Thanks for your understanding

Many Sporean that 2.6% is the housing loan rate but they seldom think about the time you sell, CPF computes the ACCURED Interest which will be 2.5%+2.6%

People need to understand that reduction in cost is money in the pocket.
And this money is guaranteed.
However wonderful their investments have been for the past X years, a serious crash (like the one in 2008 and the one next year) will wipe out all the gains.
And people don't see these borrowings as a leverage position in their portfolio.
They know the risk of margin trading because of the leverage effect but they don't consider the loan portion they are borrowing on to invest.
Either they have an irrational fear of leverage or blind to the housing loan leverage.
Maybe they are practising the "what I don't see can't hurt me" view

[Private Investor]

Another reason why people don't reduce their HDB loan as much as possible even if they have some excess in cash or in CPF-OA is that their housing loan is covered by insurance (HPS). That will mean that if one pass away say within the next 10 years, the housing loan will be paid off and the house will "free" for the surviving spouse.

If this theory sound?

[makoshark]

Another reason why people don't reduce their HDB loan as much as possible even if they have some excess in cash or in CPF-OA is that their housing loan is covered by insurance (HPS). That will mean that if one pass away say within the next 10 years, the housing loan will be paid off and the house will "free" for the surviving spouse.

If this theory sound?

What you suggest makes some sense but won't a term plan play the same role regardless of whether there is a housing loan or not.
So it is "cheaper" to just buy a term loan without having a housing loan, i.e., pay off early and "earn" the interest cost rather than have a housing loan and a mortage insurance.

[30++]

You may not notice that there is one small rules linked to shield plan.

If you use cash to pay premium, you have to handle all the claims yourself.
If you use CPF to pay, the system in hospital will have your record and will claim automatically.

Why I know? I have experience myself lo. So, now I shift to CPF for everyone in the family.

[newbie_george]

If you use cash to pay premium, you have to handle all the claims yourself.
If you use CPF to pay, the system in hospital will have your record and will claim automatically.

but if i m not wrong, no matter use cash or use cpf pay, it still go through as per the terms n conditions of the policy right?

[30++]

Yes. The T&C are the same. The amount you will get is the same. The premium is also the same. The difference is that if you pay by cash, you have more leg work.

So, if we assume the premium is $300 a year, the difference between CPF rate and cash rate is 2%, are you willing to pay $6 for the convenience?

[newbie_george]

hi 30++,

to me, the difference is quite negligible, or rather they r the same.

payment by cash, ownself submit claim manually
- fill in claim form.
- attach original final bills
- spend 26cents stamp + 1envelope , then spend some energy to the nearest mailbox, drop it in...

payment by cpf, automatic claim
- fill in integrated medisave claim form
- the rest, they will settle internally

to me, it is about the same.

[30++]

I just read somewhere that a typical problem of individual finance is that we spend too much time on small little things while spending too little time on big financial commitments.