Riding out the financial crisis

Chia Ti Lik

Year 2008 is a year of change, of forced consolidation and rebirth.

Out of university in 1998, I entered the workforce in 1999 fresh with memories of having to work part-time throughout my practice law course. The economy was still feeling the effects of the Asian financial crisis.

Still reeling with pessimism and anxiety of the unknown, I structured my financial life around life insurance policies that I thought would give me protection and future income. The result was low liquidity which mandated low expenses on my part.

Aiming to have low expenses was itself noble and I had long given up dreams of a big house and a flashy car. I did, however, manage to pamper myself a little with my hobby with audio systems which led to a further depreciation of the contents in my wallet.

Through these disciplined times, I carried the faith that life may be austere now but my retirement should tend towards being easy and comfortable. Through the past 9 years, in good times and bad, I kept the faith and stayed the course.

Until now, that is.

Life has its way of making plans fall apart. Over the past weeks, I watched the subprime meltdown unravel. Not being a risk-taker myself, I was never comfortable about over-stretching my financial commitments and was spared the heartache of losing money in risky financial purchases. But my relief did not last very long.

I had expected property prices to fall – and they did. I had also expected stock markets to fall – and they did. But I never expected banks all over the world to fail – which they did one after another, relying on their governments to prop them up. As the crisis developed, it became clear that even insurance companies would not be spared. That was when alarm bells rang for me.

The Singapore Government’s move to guarantee deposits placed with local banks till 2010 did not reassure me. In fact, it had the opposite effect. In life, the bank often plays the role of the lender and its customers, if they are borrowers, need to guarantee the money that they borrow.

In the current situation, it’s the other way around. The banks now need to guarantee their customers that they will have money to pay them back. Why the need to guarantee bank deposits unless something is very wrong within the financial system?

Then the world’s largest insurer AIG had to be bailed out. What occurred after the bailout disgusted me. The executives of AIG chose to spend the emergency funds extended to them by treating themselves to a luxury spa, racking up a bill of hundreds of thousands of dollars.

The reality hit home. If the insurer’s top executives care more about their own luxury than the company’s future, how safe is our hard-earned money placed with them?

The attractive figures of projected returns of the policies are meaningless for they are not guaranteed. Would I want to risk my capital merely for a chance of a non-guaranteed return in some far off future time especially in this present climate of uncertainty?

I accepted the wise advice of a friend and did what was hitherto unthinkable – I surrendered my life insurance policies.

This was not an easy task. I had to visit the insurer’s office three times. This was strange for me because I had invested much time consulting and studying their products. I knew the amount I invested in the policies and twice I backed out of surrendering them.

On my third visit, I succeeded by reminding myself that my purpose was to insulate myself from the global financial rout and cut my losses should those entities collapse – the way Bear Sterns, Lehman Bros, Washington Mutual etc did.

Will more banks collapse? Nobody really knows. But in the backdrop of this financial climate, as long as I cashed out, my money would be safe and I would not be placed at the mercy of the financial system should the worst happen.

Thus, my initial round of giving up my policies netted me a measly S$20,000, suffering capital loss on the premiums paid over the years, loss of interest on the same and the opportunity cost. On hindsight, I may have been better off depositing my money in the bank rather than buying life insurance but I console myself that I did benefit from being protected during the years that the policies were in force.

Having cash at hand and in my hands, I felt I had recovered a little more control over my life and influence over my own destiny. I would use the cash to redeem the mortgage on my flat and seek to be debt free and in essence consolidate my assets for simplicity in management.

And I can start anew and prepare for the changes that will come. One needs to be ready.