When we have acquired our assets such as properties and shares, or built a successful business, we need to ensure that they are protected against financial crisis such as critical illnesses.

In critical illnesses, the risk is 3 folds

1)    the immediate medical bill itself

2)    the loss of income / value due to the sickness

3)    cost of long term treatment, maintenance, health supplements and rehabilitation

Furthur notes

1) Medical bill

What is the average medical costs required for the common dreaded diseases such as the HSBC (Heart attack, Stroke, By-pass and Cancer)?

I have seen people spent RM50,000 on nose cancer and survive;

I have heard of people spent RM500,000 on a tooth cancer and did not.

It also depends on what is the level of medical service you expect?

Do you want private or government hospital? There is no right answer here. Based on the recent hospital admission I have handle, most people prefer to stay in single room, which is at least RM200/day in a private hospital. Mainly because it is much more comfortable and convenient for relatives to visit.

For a RM200/day room & board plan, it usually comes with medical bill coverage of RM100,000 per annum, and a lifetime limit of RM300,000. What happens if RM100,000 is not enough? Then the critical illnesses coverage payout from life insurance will used to pay the bill. If this is also not enough, their recourse is to go to the semi government hospital (HUKM) or GH.

2)   Household expenses and other financial commitments

When major illnesses strikes, usually will take at least 2 to 3 years to recover. During this period, living expenses will continue to be incurred. The critical illnesses protection payout is used to finance such area as well.

A basis to calculate the coverage required is as follows: Yearly household expenses x Est. Number of years to recover = RM30,000 x 3 years = RM90,000

Another area that is usually overlooked is the loss of contribution from a key man in a business due to critical illnesses. The loss to the business can be very significant and came sometimes lead to closing down of the business. In order to protect the interest of the business owner the following are some of the basis used to calculate how much to insure :

a)      the cost require to find / train a new person to take over the role

b)      the value of the goodwill / business reputation of the key man. If he is not in the business the customers may not buy goods from the company. As such we need to put a value to the involvement of the key man. Usually the value is locked in by getting an insurance cover on the key man 

3)  Road to recovery

Some of the examples of long term treatments, maintenance and rehabilitation are :

a)    Kidney dialysis and medication for kidney patients

b)    Physiotherapy

c)    Health supplements from reputable companies

d)    Home nurse

It is sad to note that a patient’s life expectancy very much depends on his/her bank account. Very often we see entire family’s coffers kaput because of an illness. How true this will be, when love takes priority over money.

In Malaysia, if a person dies without a will (intestate), the estate will be distributed according to the Distribution Act 1958 (amended 1997). i.e.

1) Parent(s) will get All if there is no Spouse or Child*

2) Spouse will get All if there is no Parent or Child*

3) Child* will get All if if there is no Parent or Spouse

4) Parent(s) get 1/2 , Spouse get 1/2, when there is no Child*

5) Parent(s) get 1/4, Spouse get 1/4, and Child* get 1/2

6) Spouse get 1/3, Child* get 2/3 when there is no Parent

7) Parent(s) get 1/3, child* get 2/3, when these is no Spouse

 *child - the actual word in the Act is issue(s). This includes all children of the decease. If the the children pre-decease then it means the grandchildren.

 A testator is a person who makes the will.

Writing a will will help to make known the wishes of the testator as to whom and how much he/she wish to give. Some of the situation where having a will is not good enough;

1) there is a lapse time between the death of the testator and obtaing the grant of probate. Usually between 6 months to 18 months. So in the mean time the estate is frozen. Family of the decease may suffer due to lack of cash

2) the time lapse also may cause increase risk of losing the value of the estate due to freeze. e.g. shares in the stock market.

3) a testamontary trust can be created within the will, however the trust cannot be of use until the grant of probate is obtained

The solution is to draw up a Power of Attorney (PA). The PA is given a person / trustee company on passing the rights of the properties, on the condition that, the donor of the PA is disabled, striken by critical illnesses or dead. This complementary way of passing the assets of the decease has a few advantages, i.e.

1) no need to wait for grant of probate, and the assets are not frozen e.g. bank account, house, and shares. This allows the donee of the PA to continue to deal with assets as usual.

2) in the event of the donor’s estate becomes insolvent, the assets passed over via PA will not constitute part of the estate of the deceased. Therefore it is creditors proof to a certain extent.

Trust is a common tool used in estate planning. It helps the individual (settlor) who created the trust to retain some degree of control over the usage of the assets after he is no longer around.

A will’s function ceases when the estate has been given out to the beneficiaries mentioned in the will. After the distribution, the testator will not have any more control over the asset. This is the reason why testamentary trust is created under a will.

e.g a mother wants to will away her only house to her only son. Since her son is still a minor, she created a testamontary trust in her will. She(the settlor) appoints her sister,the boy’s aunt (the trustee) to hold the house until the son (the beneficiary)reaches 21 (as indicated in her will). 

e.g. a father has a RM1,000,000 insurance policy. In the event of his death, he wants to ensure that the money is strictly used for the education of his 3 children. So he creates an insurance trust and appoint a corporate trustee to be the trustee of the would be education fund. In the trust deed, he can instruct the trustee to pay the guardian of the children a monthly alowance and to pay any expenses relating to their education and even reward those who achived good results.

Usually a combination of will, PA and trust will be used for the purpose of Estate Planning.

Have you ever wondered how much a typical executive starting work today will have in the EPF account when he/she retires? We have done a simple projection just to see how much of money there will  be.

We found that after 32 years of toiling, the executive will have RM2.14million in the EPF account. Since the real value of money has reduce to 1/4 of today’s, it will be RM0.52 million, which will give a retirement lifestyle of RM1,783 per month. it won’t be luxurious but it is the least to maintain some dignity and convenience.

If you are self-employed, are you contributing to your retirement fund ? Say if you do not intend to work in your business, how much salary will you need to pay for a manager to handle your work ? If the manager’s pay is RM5,000 a month, then his EPF contribution is RM1,150 a month (or RM13,800 a year not inclusive of bonus). Even if there is no increment for the next 20 years, his total contrinution will be RM276,000. Based on average conmpounding return of 5.5%, he will have RM500,971.50 for his retirement. So, you as your own boss, do you have RM500,000 retirement ready for your most hardworking staff ?

If we put the monthly contribution into any equity based unit trust with an average return of say 12%, the retirement fund after 20 years will be RM1,137,643.67 ! So, the question is, when you have decided to call it a day, and to sell off your business, will you get RM1,237,643.67? In other words, your business valuation must grow at least on par with the performance of a professional equity fund manager who invest in well established local companies such as Maybank, Sime Darby, and IOI or internationally, DBS Bank, Pfizer, McDonalds and Apple ?

The assumptions & computations

What will be the purchasing power of the money after 32 years?

Rule of 72- this formula is used to calculate how many year it will require for the price of a certain goods to double up.

At Inflation rate of 5%, the number of years for a RM1 teh tarik will double up in price to RM2 will be 72/5%=15 years.

Which means that after 15 years the purchasing power of RM will be halved, and after 30 years it will be halved again. So after 32 years the purchasing power of money will be less than ¼ of today’s. The Teh Tarik then will cost RM4.

The actual purchasing power of RM2.14mil in 32 years time will actually worth RM535,023 in today’s term. (RM2.14mil /4). If the money is put in the FD at rate 4%, the senior citizen will receive RM1,783 per month.

The EPF dividend rate of 5.5% & FD rate of 4% is deliberately used even though they are higher than the rates of past many years, just to proof a point that the actual amount can be even lower than RM2.14 million and RM1,783 per month respectively.

If you are interested in getting the Excel compatible format of the above table to do your own simulation, please feel free to drop me a mail.