Free Life Insurance with BPI's Get Started Account

DEAR INVESTOR JUAN

Dear Investor Juan,

I have a question about insurance. I can't decide which of the two is a better option for my husband:

Option 1.Term life insurance for 2 million coverage with premiums in the table below

Option 2: BPI's Get Started savings account with life insurance (5x your adb maxium of 2 million). My husband has 100,000 at present which function also as our emergency fund.  I'm thaninking of putting in addition 300k so that my husbands coverage will be 2 million.

Do you think its better to just do option 1 and invest 300k in uitf? or choose option 2 meaning total saving 400k with 2 million life insurance,at the same time it will funtion as our emergency fund?

Please excuse my grammar and spelling as I have just given birth two days ago and in a hurry to write this as I would like to email you asap so to help me decide which option is better.

Thanks,
Maxine


Dear Maxine,

Thanks for your email and the very useful information that you have provided us.

The first thing I did was review the details and conditions for BPI's Get Started account. Everything seems to be above-board--it does offer free life insurance with no strings attached. The only possible drawbacks that I see are that only depositors who are 15 to 70 years old are entitled to free insurance and the minimum monthly balance of 25,000 pesos for ATM accounts (75,000 for passbook) is higher than other kinds of accounts, but these are not deal breakers, in my opinion. Also, like other savings accounts Get Started pays interest, albeit at a paltry 0.25%, but I'm sure other banks offer around the same rate.

Thanks for sharing your insurance quotation, it's really helpful especially for people who don't have any idea how much life insurance costs in the Philippines. While the annual premiums are not very high, they are also not negligible. So based on your options (which you formulated correctly, by the way), to get a 2 million peso insurance coverage on the first year, you can either pay 7,900 to an insurer or maintain a 400,000 deposit in a Get Started account. I understand your hesitation in choosing Option 2--keeping 400,000 in a savings account seems to be a waste since it can possibly earn more in an equity fund? But if you can justify keeping 400,000 as an emergency fund--which to me is completely understandable, especially if it's for your entire household--parking the amount in an account that provides extra benefits makes a lot of sense.

How much more value is Get Started providing anyway? Using your insurance quotes, maintaining a 400,000 deposit in the account earns 0.25% interest and insurance that is worth 7,900 for the first year. Which means that your deposit would effectively be earning 0.25% + 7,900/400,000 = 2.225% in the first year. Given the interest rate climate nowadays, that rate is comparable to yields on T-bills and time deposit accounts--but with Get Started you don't lose liquidity, which is a necessary feature of an emergency fund. So yeah, Option 2, most definitely.

For other readers who think 400,000 is too high for an emergency fund, just figure out the amount that is appropriate to you and deposit that in a Get Started account.

Finally, I make these recommendations based on the limited information that I have. If anyone knows comparable benefits offered by other banks, please do share the information with us.

BIR Clarifies Tax Exemption for Five-Year Investments

On December 11, the Bureau of Internal Revenue released Revenue Memorandum Circular (RMC) No. 81-2012, which includes supplementary clarifications regarding the tax exemption of long term investments as stated in the National Internal Revenue Code (NIRC) of 1997.

The memorandum cites a section from Revenue Regulation No. 14-2012, which lists conditions/characteristics required for the tax exemption of long-term investments:

1. The depositor or investor is an individual citizen (resident or non-resident) or resident alien or non-resident alien engaged in trade in the Philippines;

2. The long-term deposits or investment certificates should be under the name of the individual and not under the name of the corporation or the bank or the trust department/unit of the bank.

3. The long-term deposits or investments must be in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP);

4. The long-term deposits or investments must be issued by banks only and not by other financial institutions;

5. The long-term deposits or investments must have a maturity period of not less than five (5) years;

6. The long-term deposits or investments must be in denominations of Ten Thousand Pesos and other denominations as may be prescribed by the BSP;

7. The long-term deposits or investments should not be terminated by the original investor before the fifth year, otherwise they shall be subjected to the graduated rates of 5%, 12% or 20% on interest income earnings; and

8. Except those specifically exempted by law or regulations, any other income such as gains from trading, foreign exchange gain shall not be covered by income tax exemption.

RMC No. 81-2012 adds that for interest income derived by individuals investing in common or individual trust funds or investment management accounts to be exempt from income tax, the following characteristics/conditions must ALL be present:

1. The investment of the individual investor in the common or individual trust fund or investment management account must be held/managed by the bank for at least five (5) years;

2. The underlying investments of the common or individual trust account or investment management accounts must comply with the requirements of relevant portions of NIRC of 1997, as well as the requirements mentioned above;

3. The common or individual trust account or investment management account must hold on to such underlying investment for at least five (5) years.

So what does this mean for investors? What's clear is that investments in corporate and treasury bonds, even if held for 5 years or more, are not tax exempt. But according to my bank contact, it's not clear to them which particular securities "long term deposits or investments issued by banks" include. Additionally, the lower effective coupons (from taxes) may offset bond price gains from lower interest (due to the recent credit rating upgrade for the Philippines) enough to result in lower bond yields.

Armed Forces and Police Savings and Loan Association, Inc. (AFPSLAI)

DEAR INVESTOR JUAN

Dear Investor Juan,

Thanks for the insights on investment.  Actually, my wife and I are eager to invest with minimal investment.  I am having an AFPSLAI account which bears an annual interest of 18% which shall we say is good.  My question is, is it stable? Will it last for like 20-30 years? What’s your outlook on that.  We also invest in real properties pero paunti unti lng naman.

Now going back to investment, personally which do you prefer to invest in UITFs? BPI or BDO? Hopefully, by next week we can start investing in UITFs with your backing.

Thanks in advance.

Rian


Dear Rian,

Thanks for this opportunity to introduce our readers to AFPSLAI and its high-return deposit product. I think the 18% interest is justifiable since membership is very limited and the institution can earn more than that from loans and other services. Also, we have to remember that this is a savings and loan association and not a bank, so it's not covered by the same restrictive regulations and returns are not really comparable. In my opinion, the biggest risk with this institution is mismanagement, but since deposits are covered by PDIC, you should be fine as long as you maintain a deposit balance of 500,000 pesos or below.

Regarding other investments, I suggest you maximize your deposit with AFPSLAI (i.e., up to 500,000) before you invest in other instruments. In choosing between BPI and BDO, you can compare fees and/or
historical performance as I outlined in this post.

I hope I was able to answer your questions. Good luck!

Investing with Mixed Objectives

DEAR INVESTOR JUAN

Dear Investor Juan,

Hi! Man, I've just stumbled upon your blog and I'm hooked up to it in just a few minutes of reading! Anyways, me and my dad are looking for the best way to invest and so far of what I've read, MFs and UITFs are the best way to go with regards to returns and risks. I'm really new to investing and have no knowledge whatsoever regarding finance (Programmer/Call center agent here). What I want is to diversify our investments in the sense that we will have long-term, low-risk investments that will not be touched but also have high-risk, short-term investments that will allow us to get income on a monthly or a quarterly basis. Personally, I'm thinking UITFs, Retail Treasury Bonds and stocks. Though I'm also curious about the Equity Fund :D My dad is thinking of time deposit (Veterans has this promo where they also include health insurance, 1m will net about 5k a month according to their website) but we'll need to invest about 2m to get at least 10k a month for our needs (not even half of what we spend in a month). Though we can afford that investment, I personally don't want to put all our eggs in one basket. what do you think? thanks in advance!

Kating Kati na maginvest,
Niel


Dear Niel,

From what you're saying, you and your dad want to invest together and share one portfolio, am I right? That explains your mixed investment goal of achieving high growth, which is typically associated with younger investors like you, and periodic income, presumably for your dad's or the entire family's spending needs. So given your situation and needs, here's what I propose.

30% in an equity UITF

An equity fund, on its own, should be able to address your need for both growth and income: it has the best potential for high long-term returns among all commonly available investments, and its liquidity gives you access to income by redeeming units whenever you need or want to. In terms of risk, I still say it's better than picking individual stocks because you'll be investing in companies from different industries, although there's always a chance that unit prices will go down considerably with a shock or event that can affect the entire market, at any point in the future.

30% in cash

This is something I learned from Mark Cuban recently. Not only can you use an ample cash balance as a reliable cushion in times of financial emergencies, you can also use it to take advantage of attractive investment opportunities that become available from time to time, like when bubbles burst and everyone panics and pushes stock prices to unjustifiable lows.

40% in Philippine Veterans Bank's Advantage Plus deposit

This is what your dad is considering. It is is a tax-exempt, 5-year time deposit that bears an interest rate of around 6% per year (or around 7% if you count the accompanying life/accident/health insurance, which I roughly value at 6,000 pesos per year). It's the same flavor of investment those rural banks became infamous for, but the interest rate is considerably lower and closer to prevailing market rates. And partly because of this, I believe there's very little chance that PVB will fail. Still, just to play it safe, you might want to limit your exposure to 500,000 pesos, which is the maximum covered by PDIC.

What sets this apart from other similar long-term time deposits is that it gives you access to your earnings even before the investment matures, a feature that partially answers your need for periodic income while providing modest returns and capital preservation at the same time.

So that's it, a mix of equities, cash, and long-term time deposit for your mixed investment objectives. Feel free to play around with the actual proportions as these are just based on rules of thumb.

Happy investing!

Answers for Thursdee, Part 2: BPI Family's Plan Ahead Time Deposit, T-Bills, and Bonds

DEAR INVESTOR JUAN

As promised, here are my answers to the rest of Thursdee's questions.

2. We were supposed to place 100,000 pesos in BPI Family's Plan Ahead account. Have you heard of this? It indicated 4.5% monthly income but the money would be locked for 5 years. Is this a good investment?

BPI Family's Plan Ahead account is basically a five-year time deposit product that is also offered by other banks, albeit at different interest rates. Five-year time deposits are attractive to some investors because interest income from these accounts are tax-free (the 20% tax is waived by law); of course, the caveat is that you won't be able to use your money for five years, which is a considerable amount of time to give up access to capital for most people.

We see the following details about the product from BPI's website:

Now we see why you thought this investment would provide a "monthly income" of 4.5%, or 54% per year, a figure that's closer to what loan sharks charge than what actually exists in "formal" markets; 4.5% is actually a yearly and not a monthly rate. The label "monthly" just means interest will be paid to you every month, amounting to 0.375% of your investment, instead of every year. 

This practice of misleading depositors, inadvertently or not, actually borders on being unethical, not just for BPI but other banks as well; I just say "borders" because because the bank actually does say in its website that the rate is an annual rate, although in a not-so-obvious way.

That being said, it does not necessarily mean that Plan Ahead is a bad product. But try to shop around for better rates from other, similarly reputable banks. Or if you have no qualms about investing in rural banks and are willing to completely place your trust in the Philippine Deposit Insurance Corporation (which insures bank deposits of up to 500 thousand pesos), they you may consider investing in these five-year deposits, most of which feature rates that are twice as high as that offered by BPI and other commercial banks.

3. Can you tell me more about Treasury bills and bonds? Is it really risk-free. I read also from one of the websites I came about during my "research" that it provides higher yield than time deposit accounts. Should we invest our 100,000 here instead of BPI's five-year time deposit?

Treasury bills or T-bills are short-term (one year or less) debt instruments offered by the government to investors; it basically represents what the government borrows from the investing public. Treasury securities (including Treasury bonds which are long-term) are considered "risk-free" only in the sense that it's impossible for the government to not be able to pay what it owes; as a last resort, the government can always just print money to pay off its debt, but of course while devaluing the currency at the same time. So strictly, treasuries are not really completely risk free since what investors earn can actually lose purchasing power, most likely from inflation. Still, since they are regarded as safe investments, they offer the lowest possible returns among available investment instruments (remember the high risk, high return rule).

A bond is just a generic type of long-term debt instrument that is sold by the government (Treasury bonds) or corporations (corporate bonds). Corporate bonds are riskier than government securities because it's entirely possible for corporate issuers to default on their debt (since they don't have an option to print their own money), and thus provide higher returns than Treasury securities. The last time I checked, annual returns on corporate bonds are in the range of 5 to 6% per year, after tax.

Both T-bills and bonds are sold by most banks and other brokers, albeit at higher minimum required investment amounts than other investment instruments. But there are alternatives for retail investors like you and I. If you want a safe investment similar to T-bills, you can always just invest in a time deposit account, or even a money market fund (mutual or UITF) so you won't sacrifice liquidity (meaning you can always sell your holdings at no or low cost). If you're comfortable with the additional risk of bonds (which significantly less than what you'll get from investing in stocks), then you can just invest in bond funds.

I hope you're satisfied with my answers to your questions, Thursdee. Happy investing and good luck. :)

"First Country Bank" Part 2: A Deeper Look

DEAR INVESTOR JUAN

If you take another look at website and the offers, the banks tries to reassure its potential customers and build its reputation with two things: that First Country is authorized by the Bangko Sentral ng Pilipinas or BSP and that the 10% annual after-tax yield offer is covered by the Philippine Deposit Insurance Corporation or PDIC. So if you're thinking of investing in the bank's instruments, the next logical thing to do would be to check the veracity of these claims.

A Deeper Look

First, let's try to check if the bank, indeed, is an authorized and registered bank of the BSP. On the BSP's website, you'll find this section where you can look the details of a particular bank. Entering "First Country Bank" on the search field yields this result:

Hmm... interesting. So there's no such thing as "First Country Bank" in the BSP's directory. Let's try another search string, this time just "First Country":

So this time we get a result, but not for "First Country Bank" but for "First Country Rural Bank, Inc." Well, the name difference should not really be an issue, if we assume these two banks are one and the same. After all, it's common practice for small and medium businesses to use a brand name that's slightly different from the name of the entity registered with government agencies. But it is also highly understandable if some people view this inconsistency as some sort of red flag.

But are "First Country Bank" and "First Country Rural Bank, Inc." really one and the same bank? If we compare the details of the "Contact Us" page on First Country's website to the bank details in the BSP search results:

We see that both are in Pasig City and have (more or less) the same address. Some of the telephone numbers are the same, although the email addresses are different. Given all that we've seen so far, I'm betting that "First Country Bank" is indeed the same as "First Country Rural Bank, Inc.", but again with the inconsistencies!

Also, we see another name linked to the bank from the BSP directory, this time the bank's president. A quick search shows us that this president is also the president of a pre-need plan company named First Country Plans, Inc., which coincidentally has the same address as First Country Bank. So are the bank and the pre-need firm related? They share the same president, share the same name... What do you think? And rural banks and pre-need firms? Haven't we all heard this before?

Let's now take a look at the PDIC coverage of First Country's 10% per year deposit. If you check out PDIC's website, the first thing you'll see is this statement:

MAXIMUM DEPOSIT INSURANCE FOR EACH DEPOSITOR: P500,000

Which means if your balance is 1 million pesos and the bank goes under, you'll only get half of your money back. And it does not matter how many accounts you have with a bank, you still only get a maximum of 500,000 per bank. 

Fortunately, as per that ad on First Country's website, the offer is open to deposits worth at least 100,000 pesos. So if you just deposit any amount up to P500,000, you'll be entitled to both the 10% yield and be PDIC coverage at the same time. 

But we have to remember that PDIC coverage does not guarantee that the bank will not run away with your money. If the bank does do something a-la-Legacy, best case is you will be inconvenienced with having to wait to get your money back; worst case is you'll lose your deposit and subsequently suffer a heart attack.

The Verdict

Perhaps the most important thing we can get from the PDIC that can help us decide whether to invest in First Country or not would be this "Bank Deposits Advisory" document on the website, which includes the following reminders:

• The rate of interest paid by banks to deposits and other terms and conditions vary among banks.
• It is best to deposit in a bank offering rates generally comparable with those of other banks.
• The higher the rates, the higher the risk.
• Offers that sound too good to be true may not be true at all.

For debt investments like bank deposits, bonds, and notes, the foremost determinant of investment risk would be the trustworthiness of the borrower. Ask yourself: is the bank capable of paying its financial obligations to you? And even if it is, what's the chance that the bank will fuck you over and run with your money instead, as some of these greedy motherfuckers are wont to do?

So, will I deposit 100,000 pesos in First Country Bank to earn 10% per year tax free for five years? Hell no. I'd rather buy a bond paying 7.5% per year after taxes, at least I'll sleep more soundly. And I don't really care much for the PDIC coverage, not when it takes them up to a year to give the depositors' money back, as Henry pointed out earlier.

I'm not saying First Country is a fraud: it may very well be that the bank's legit and all that. But all the inconsistencies and the red flags, coupled with the nightmarish experience of thousands of depositors with rural banks and pre-need plans these past few years, have made me skeptical and cynical of these kinds of offers and furious at the all the people who permit and support this irresponsible and malicious economic practice.

So, no Henry. I don't think investing in First Country Bank's offer is such a good idea. Personally, I think it's simply too good to be true.

Click here for Part 1: A Closer Look.

"First Country Bank" Part 1: A Closer Look

DEAR INVESTOR JUAN

Dear Investor Juan,

What do you think of the 5 years time deposit, 10% interest tax-free offer of First Country Bank. You can check out their website at www.firstcountryfinancial.com.

Thanks.


Henry

Hi Henry!

Wow, that's a very good offer. It beats all available time deposit rates of all commercial banks, and even yields on similarly-tenored bonds, hands down. At first glance, the offer looks too good to be true; so good, in fact, that it deserves a second, closer look.

A Closer Look

This is the first time I've heard of "First Country Bank," so before we discuss "what I think" of the offer, I have to check out the website first:

Wow. It looks nice, doesn't it? It has a familiar and homey feel to it... something one feels when one looks at a blog site... Maybe, just maybe, that's just exactly what it is!

If you take a look at the upper-right hand corner of the image, you'll see a WordPress search bar, which should be enough evidence that it is a blog. If you want further evidence, take a look at the bottom of the page and you'll see another reference to WordPress (that Ocean Mist theme looks mighty crisp, though ;)).

But if you want unassailable evidence that what we have here is a blog masquerading as a commercial site, try googling "First Country Bank" and the top result you'll see is http://firstcountrybank.wordpress.com/.

Okay, now that we have already established that, so what? It does not necessarily mean that the bank is a fraud, does it? Well, no, of course not. It can mean any one of several things, like maybe the bank's just trying to control its marketing and advertising spending. But whatever the reason, First Country would do well to come up with a more professional-looking website, especially if that website is the bank's primary means of introduction to its potential customers.

On the "About Us" page of the website, we see that the bank's primary thrust is to be "a catalyst in uplifting the lives of the unsung heroes of our country" by providing "relevant and innovative financial services to underserved niche markets at a fair return to [the bank's] shareholders and depositors." Well, that sounds noble, and doable enough. We also see that the bank plans to provide these "fair" returns through microfinancing, or as I understand it, by lending money to individuals or small businesses without collateral.

We also see the bank's board of directors, accomplished individuals, all, with very respectable resumes. Unfortunately, I'm not really familiar with any of them. I tried googling the names, but apart from finding out that some of them have active Facebook accounts, not much else came out of doing that.

So moving on, let's now take a closer look at the offer:

 

So this is what Henry was talking about: 10% per year, 100,000 pesos minimum deposit required, tax-exempt for 5 years, and even covered by PDIC! Which basically means if you deposit 100,000 now, you'll get around 160,000 after only five years! Now that's un-fucking-believable!

And even if you can't afford a five-year investment horizon, the bank has several other alternatives that are almost as attractive:

Again, these rates and terms are.. just... AWESOME.

Unfortunately, there remains this persistent, nagging feeling that things can't be as easy and simple as this; I still believe there's no such thing as a free lunch, which is precisely what this offer is being advertised as. So before you whip out your wallets and start running to Ortigas to open an account (I'm looking at you, Sam), let's delve deeper and try to find out as much as we can about "First Country Bank."

Click here for Part 2: A Deeper Look