Here is a comment from KCLau’s Money Tips Facebook Page:
Of which, I like to write a case study on how we could plan for our estates, thus, protecting the financial and emotional interests of our loved ones better. Hence in this article, I would list down 3 points that Keong may consider and discuss in detail with his wife and a financial planner to solidify his family’s finances:
1. Insurance Needs
Let’s say, Keong’s family is a dual-income family, where both him and his wife as of today are working and contributing to the family’s finances. The main risks of them losing their income-generating abilities would be death, disabilities, and a diagnosis of a major disease (critical illness).
In terms of finances, death is ‘cheaper’ than disability and disease. Why? This is because while death is a loss of potential income, both disability and illness will add to the family’s annual expenses on top of a potential loss of income.
In Keong’s case, he bought medical cards for himself, his wife, and two kids. The medical cards are helpful as they will come in handy to foot in the hospital bills. Thus, Keong did well in this aspect.
Likely, Keong’s medical card is attached to an investment-linked policy (ILP). The policy will cover death and disability. But, I’m not sure if it covers diseases. Now for Keong, if his policy covers diseases, that’s great. Otherwise, he may consider adding such coverage into his overall insurance plan.
Based on Keong’s comments, he has a personal accident policy (PA). To me, PAs are great to boost one’s sum assured at an affordable price. This could be really helpful especially in situations when Keong passed on or became disabled in an accident, but not a natural occurrence or disease. So in estate planning, I would regard PAs as a dessert over as a main course.
In short, the coverages that Keong needs to consider are death, disability, and a diagnosis of a major disease (critical illness).
2. How Much Sum Assured is Needed?
Keong has a shared mortgage outstanding of RM 300,000, a wife and two kids. I believe the amount of sum assured that Keong needs should include:
1. His portion of outstanding debts (50% of RM 300,000).
2. His contribution to the family’s annual living expenses.
3. The amount of gifts he likes to offer to his wife, kids, and other relatives.
4. Other special needs: charities.
Let’s say, Keong contributes RM 60,000 per year in his family’s living costs. Also, Keong wishes to fund RM 100,000 (or RM 50,000 each) in university fees for his two children and another RM 100,000 to his own surviving parents. For his case here, Keong has no intention to contribute to local charity at the moment.
In addition, let’s say Keong has RM 300,000 in sum assured which covers death, disability and diseases. Thus, the additional sum assured that Keong needs shall be calculated as follows:
So in Keong’s case, he would need to add RM 650,000 in insurance coverage.
3. Special Note: Beneficiaries of Insurance Policies
Here are two things that Keong needs to consider.
First, Keong has two kids aged 5 and 8 today. It is impractical for Keong to name his two kids as the beneficiaries of his insurance policies as they are minors. For Keong, he could nominate his wife to receive the sum assured if he trusts her to withhold the funds for their kids’ tertiary education.
But, as it is with life, it is possible for his wife to spend or invest his sum assured for her own purposes. Such deviation to Keong’s original intent would either be helpful or jeopardize his kids’ tertiary education funds. Hence, this is one issue I believe Keong needs to address if he wishes to fix and dictate the objectives for his insurance money. I’ll come to this in Point 4.
Second, Keong is married. If he buys his next life insurance policy, the policy will be a trust policy, where his legal beneficiaries would be his wife and kids. This is despite him nominating his parents to inherit the sum assured. So if Keong likes to bless his parents a fixed sum of money, he could either assign the next policy he purchases to his parents or use other means such as a will to channel money to his parents.
4. One Will Document Each for Husband and Wife
It is ideal for Keong and his wife to write their will documents. This is because it is a more efficient method to manage their estates and take care of their kids in the event of a premature passing in the future.
There are a couple of points to consider when writing a will.
First, who shall be the legal guardian to their kids as they are still minors?
Second, who should be the executors to their will documents?
Third, let’s assume that both Keong and his wife are joint-owners to their home presently. If Keong passes on, it is important for Keong to know that without his will document, his portion of the home ownership would be splitted, not just to his wife, but also, to his surviving parents and two children. Hence, the home in Keong’s case, will have more joint-owners, which is complicated in terms of the administration and management of it.
So if Keong wishes his wife to fully inherit his portion of the home, Keong needs to put that down in his will document.
This is likewise for Keong’s wife.
Although Keong’s comments are short and simple, it is important to note that it takes multiple disciplines (insurance, will, and trust) to effectively plan out all of his estates so that Keong would add financial security to his loved ones. For him and his family members, it is best for Keong to be more educated on the above, thus, allowing him to ask better questions to address his financial issues.
The above is best planned out with the help of a licensed financial planner such as a CFP or a RFP as they are multi-disciplined in areas of financial planning and thus, are more efficient.
Here, I would like to thank Keong for his comments on our Facebook page.
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