If You're An Expat We Bet You've Made This Financial Assumption Too...
Last week I was stuck in Anti Money Laundering (AML) limbo!
And after reading that first line I'd forgive you for stopping reading and moving on to something more interesting. Though bear with me because I promise, you're going to learn a few things that could save you a ton of money.
Let me explain...
On one side I'd got a client who'd transferred money and on the other was the provider asking for more information.
The client thought that they'd given everything they'd needed to and was getting irritated by the ongoing requests. Whilst, the providers compliance department were saying that the information didn't meet the AML standards that they were legally obliged to satisfy.
I was stuck in the middle trying to keep everyone onside and finesse the whole process to a happy ending.
The situation was caused by a really big assumption that the client was making.
And it's one that many of you will be making as well...
What's that assumption?
Well, I'm going to share that with you and exactly how it could impact you if you're doing the same thing.
We're going to do that in a moment.
Though this situation got me thinking about what other assumptions you might make as an expat that would have a negative financial impact on you?
So, that's exactly what we're going to do today.
Before that though let's go back to those assumptions that my clients was making and find out what it was.
When Your Bank Isn't A Bank?
So, we were talking about a transfer that my client had made and the provider was refusing to accept it. Unless they got some additional supporting documentation.
You see the transfer had come from a well known money transfer service. You know what we mean, one of those companies that you use to get a much better exchange rate.
My client was using them like a bank and holding seriously large balances with them. That's because he assumed that they were a bank because of the services they provided. Also the option of being able to get a Visa debit-card from them was also helping to colour his perception.
You might be saying "So what? I'm doing exactly the same thing"
You get great exchange rates, the debit card is multi-currency and it's convenient. More than that it's saving you a ton of money in exchange rate commissions and transfer fees.
What's not to like, Right?
The issue here was that because my client saw them as a bank...
He couldn't understand why a statement from them wasn't an acceptable source of funds for the proof of transfer.
What was the big issue?
Why was this provider being so picky?
As far as he was concerned there was no difference between this money transfer service and a bank, because that's essentially what they were!
Right?
At the moment you're reading this and you're agreeing with him.
Here's The Issue If You're Making This Financial Assumption As An Expat!
The thing is they aren't a bank and there's some big differences between the two types of company.
First off I want to say that there's nothing wrong with using one of these money transfer services. They have there place and make a massive difference for expats. They can save you so much money on cross currency transactions and also time with their convenience.
In fact they've forced some banks to become more competitive with the rates that they now offer their customers.
The thing is they're NOT banks and they're not designed to replace them.
For one thing the regulatory framework that they're subject to isn't anywhere near as robust as that of a bank.
Why would it be?
The services that they provide is far more limited than that of a bank. They're designed to move money from one currency to another as cheaply as possible.
Money transfer services don't pay interest and they don't lend money. They're not designed to hold balances for long periods especially large ones. They make their money through the volume of transactions that go through them.
Whereas a bank has much greater scope for revenue.
This doesn't mean that they're not subject to regulation because they are. Though as previously mentioned that governance is much lighter than that of a bank.
Bank Regulation
Governments want to make sure that investors have confidence in their banking systems. If the public don't think that banks are safe, then the financial system in that country won't work.
So, because of this, there's one big thing that you get from a bank that you don't get from a money transfer service.
And that is...
Depositor Protection Schemes (DPS)
This is where a government will underwrite your deposit held with a regulated bank. This guarantee usually has a monetary limit per account or regulated firm.
These money transfer services aren't included in these depositor protection schemes. So that means there's no government guarantee for the money that you hold with them.
So, if you're using one of them as a bank then you could be taking on a whole heap of unnecessary risk.
That's Not All
On top of that there's another issue with holding deposits with them. And that's your money is held in a communal account along with everyone else's. You don't have your own separate account.
So, what happens if the money transfer service company fails?
In some cases you may find that your money disappears along with the company. Whilst, in other cases these accounts may be help with a third party custodian and therefore independent of the company's assets.
The good news is that if there's custodial ring-fencing then you get your money back. The process of doing that could be straight forward or it could be very involved and drawn out.
We're still not done because there's another issue that is a cause for concern if you're using one as a bank...
And that's counterparty risk
Those communal holding accounts that we mentioned earlier. Well they're run by partner banks because the money transfer service can't hold your deposit.
Why not?
Well, that's because they're not a bank!
The partner banks used and their location will depend on the currency that you're holding.
Who are these partner banks and how much influence do you have on whose holding your money?
The answer to that question is that you have no influence and the who can change.
Here's the big issue though...
What happens if one of these partner banks goes bust?
What impact will the location of your money have in such circumstances?
Well, this is likely to vary from one money transfer service provider to another.
Again, if there's a custodial ring-fencing arrangement in place then there shouldn't be an issue. If the partner bank gets into difficulties then they can just be replaced by another one. Though this isn't that common when it comes to cash holdings, which is why bank deposit protections schemes are so important.
If there isn't a custodial relationship then things can be very different. In fact there's a strong possibility that your capital could be at risk. With an aggregated account subject to a DPS you're only going to get a small proportion of your money back.
So if you're using one of these money transfer as a bank...
Then you really shouldn't because they're not banks and your money doesn't have the same protection.
Use them in the way that they were intended which is to transfer money across accounts and from one currency to another.
If you see someone on social media telling you to use one of these money transfer schemes as a solution for your local banking needs. Ignore them because they really don't understand what they're talking about.
Now we're going to move from one assumption that has potential for financial loss to one that actual caused it for many expats.
When You Assume That All Banks Are The Same
Another example of when many expats made financially damaging assumptions was back in the noughties. We were recovering from the fallout of the tech bubble bursting and it's impact on global assets.
People had made some big losses after markets fell for three straight years. This meant that investors were looking for something safe with higher returns.
The Icelandic banks were more than happy to oblige.
They were offering accounts that had interest rates 2 or 3 times higher than the mainstream banks. And they gave you these extra ordinary returns in all the major currencies.
It wasn't just the expat community that were attracted by these high yielding accounts. Local authorities and municipal bodies opened savings accounts with them as well.
Then in 2007 the global financial crisis started to unfold. By 2008 this started to impact these Icelandic banks. They struggled to refinance their short term debt and then confidence in them started to drop.
It was a domino effect and one thing led to another. The end result was that these Icelandic banks failed. Account holder lost their money with little or no prospect for recovery.
The Icelandic government were unable to offer account holders compensation. This was because these banks had borrowed so much and taken so many overseas deposits. It amounted to so much that it dwarfed the Icelandic economy so there was no way the government could afford it.
These accounts weren't subject to depositor compensation schemes anywhere else. Which meant that investors were stuck and they lost everything.
Before we finish off with the Icelandic banks we want to let you know that next we're going to look at one of the most common assumptions that expats make. And it's one that can destroy your financial plans and leave your family devastated.
Though before that we'll finish up with the current assumption that we're looking at...
I'm sure that you can appreciate how damaging this situation was for people. There were many expats who lost the majority of their savings in one go.
So, here's a quick piece of advice!
If you find that one bank is offering a much higher interest rate than it's competitors then ask yourself why.
It's important because as you can see from above not all bank accounts are the same and you don't want to get it wrong.
Can You Rely On Your Life Insurance If You're An Expat?
We're now going to talk about one of the most common assumptions that expats make. This is a big one and when I say big I mean the number of you that make it and also the impact that it can have on you and your family.
It all starts when you send your life insurer a change of address notification...
Let's set the scene for you and see if it sounds familiar.
When you first moved overseas you wrote to everyone and notified them of the change of address. One of those providers was your life insurance company.
They then contact you back and acknowledge the address in your new country of residence. There's no mention of anything else and they keep on collecting the premium every month.
That's that, nothing else needs doing...
Unfortunately, that's where the trouble starts!
That's because the situation isn't that simple. Not taking one extra step could prove disastrous for you and your family.
Here's the thing, when you move to another country most life insurance cover will come to an end.
Right, now you're scratching your head and asking about the change of address.
Confusing, right?
Why don't they raise this issue when you tell them you've moved abroad?
Why do they keep collecting the premiums?
Here's the thing...
When you send your change of address notification it goes to the customer service department. They process it and do EXACTLY what you've asked them to do.
They don't have the technical knowledge to do anymore than that. So things seem to keep ticking along and you keep paying premiums.
In reality 80% of domestic life insurance policies stop coverage after you leave the country. Obviously that doesn't happen immediately because none of us would be able to go on holiday if it did.
They usually give a grace period of 6 months after which your cover will end.
Even though they've kept collecting your premium the insurer would decline any claim made on the policy.
Once that they'd established that you were living overseas then benefits wouldn't pay.
So, would your family end up with nothing?
Probably not!
The insurer would most likely return the premiums that they took since cover ended.
Imagine that, not only has your family suffered a tragic loss, they've also lost they're source of future income. On top of that the financial safety net that was there to help them has also gone.
So, how are they going to cope now?
Whether it's clearing your mortgage, providing income or paying for your kid's education. There's a really important reason why you took that life insurance policy out in the first place.
Right?
There's something that we said earlier that we want to clarify here and now.
We talked about a domestic policy and how 80% wouldn't accept cover after you become an expat.
You might not understand what this means, so let's explain...
A domestic policy is one that provides cover for the residents of a specific country. In some cases this may extend to a limited geographic area beyond the single country.
If you move beyond that area and start living outside it, your cover will end. Today we're not going to talk about why this happens, we'll leave that for the next post in this series.
Now, it doesn't matter if you took out this policy before or after you became an expat. The chances are you're going to face the exact same issue when you move to another country.
So, right now you might be thinking this...
"My policy's with a big multinational insurance company so surely this won't apply to me"
Well, it still does. It doesn't matter if you're using a global company with operations around the world. You're still going to get a local domestic policy.
The overseas offices that these companies have are local domestic operations. The policies that they sell are for the local market and written to meet domestic regulation. They're priced and costed based on the local market where they're distributed.
So, when you move to another country the most likely outcome is that the cover is going to end.
Remember what we're talking about today!
Yes, we're looking at how making assumptions can lead to some serious financial setbacks.
And to be frank, ending up paying premiums on a life insurance policy that isn't going to pay out a claim, has to be the biggest.
You might have only recently become an expat, or you could be a seasoned veteran. In either case the chances are you're in this very same situation right now!
If you've got a life insurance policy that you set up when living in another country...
PLEASE DON'T ASSUME THAT IT'S STILL PROVIDING YOU WITH COVER!!!
To help give you peace of mind and give you a definitive answer to this question. We've put together a FREE "Expat Life Insurance Confirmation Pack" for you.
It's designed to help know what action you should take and what you should look out for in your insurer's response.
So, CLICK BELOW to get your copy NOW!
Even if you've had confirmation from them in the past and then you've been reposted to another country. It's worth checking again, please don't assume that the answer remains the same.
The thing is by the time you find out that you're not covered then it's too late.
You may have set up your life insurance whilst you've been an expat.
Since then you've moved to another country.
Guess what?
You should still check that your policy covers you because there's a very big chance that it won't.
The FREE "Expat Life Insurance confirmation Pack" is designed to give you everything you need to give you piece of mind. It makes the whole process of finding out if you've got life cover that works as simple as possible.
CLICK BELOW to get your copy NOW!
Here's a real life example of an expat who set up their life insurance in one country and then moved elsewhere.
Adam's Prudential Policy
Our client, Adam, had lived in Malaysia for over 15 years. In that time he'd met his partner, got married and started a family.
Like any responsible parent he set up life insurance to make sure that his family were taken care of if something happened to him.
There's be money to clear off all debts and replace his income.
He took out a whole of life policy with the Prudential in Malaysia. The Prudential are one of the most recognised names in insurance. They're a large multinational company who he was familiar with and this made him comfortable.
Then one day his company offered him a position at their head office in continental Europe. It was a big deal, a promotion, so him and his family were going to move.
He asked us to do a review of his financial situation so that he could get things in order before he relocated.
As part of that review we advised him to check with Prudential in Malaysia to check that the policy would cover him after the move.
We explained why a simple change of address wouldn't give him this clarification. He had to ask if the policy still provided cover once he moved to Europe.
He's taken out the policy with his brother-in-law and was reluctant to make any changes to it. Adam felt that it would be fine, after all it was with the Prudential who were one of the biggest insurance companies in the world.
So' he had a brief chat with his brother-in-law who felt that there wouldn't be any problem. This was enough for Adam so he left things as they were and did nothing.
Several years later Adam's situation had changed even more.
He was working with another company and he'd moved countries a couple more times. He was still living outside of Malaysia, though he'd moved back to Asia for a period and then back to Europe.
He asked us to do a review of his protection benefits because the package he got from his new employers wasn't as good as his old company. His salary was much larger though the benefits package was much more streamlined.
His brother-in-law no longer worked for the Prudential so he was happier to ask the question this time. Though he was still confident that there wasn't an issue.
We drafted him a letter (something that you'll find in our FREE Expat Life Insurance Confirmation Pack) which he signed and sent off.
The Prudential responded saying that the life cover didn't extend to policy holders who resided outside of Malaysia. it turned out that for the past four years Adam had been paying for a life benefit that his family wouldn't get.
Now, because his life insurance was a whole of life policy, there was an investment element that had value. Though the policy value was only a fraction of the death benefit.
Every month when he'd been paying his premiums part of it got invested. The other part of the premium went to pay for the death benefit on the policy. So, after he'd left Malaysia he'd been paying this money for nothing and there probably wasn't much chance of getting it back.
If he'd have checked when he left Malaysia then he'd have know about this situation. He would have had choices on what he could have done with the policy.
He could have stopped paying his premiums completely...
Or reduced the premium to reflect the death benefit element that he wasn't going to get.
Another option would have been to keep the premium the same and have the whole amount invested.
Now, unwinding the situation was so complicated that it was never going to happen. That money was gone...
The really fortunate thing for Adam was that there's been no need to claim on this policy. Whilst his family would have got something back, it would have only been a small proportion of what they'd planned.
If Adam had taken out a term policy then they wouldn't have got anything back (this doesn't mean that the term policy is a bad option, though that's for another time).
A very lucky escape!
Summary
We've covered quite a bit today!
Hopefully we've highlighted how dangerous it can be to make assumptions when it comes to your finances.
As an expat you do face more challenges because you're working and living across borders. You need to use different currencies because you have expenses in more than one country.
We wanted to show you that asking questions is a very important and normal part of your financial planning process.
And this is especially true for your life insurance!
So, if you want some help getting that peace of mind by making sure that your family are protected. Then we have exactly what you need to do that...
CLICK BELOW NOW! We'll send you our FREE "Expat Life Insurance Confirmation Pack"
So, you can be absolutely sure that your family have the financial resources that they need.
Remember, you might not be as lucky as Adam...
Next week we'll take a look at why these policies don't work once you become an expat.
We'll also look at the mistake that many expats make when they replace their life insurance. And we'll talk about the impact that this can have and how you can avoid it.
See you next week!
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