Many people do not see the importance of insurance until they need it, or until it is too late for them to do anything with it, and what’s worse, many considers it an unnecessary expense. In reality, however, insurance is more than that – it is a useful financial tool that forms part of our wealth management planning.
Our financial needs, income and liabilities vary at different stage of our life, as shown above. Those who are young and single who have just started their working life in their 20s are only interested in investment to grow whatever little money that they have.
Although it is good to have the desire to start accumulating wealth early, many of them are unaware that the risk of falling ill can happen any time while accumulating wealth.
Thus, at that particular age, they should also look into wealth protection. If they are still single, they should at least have healthcare planning.
What is healthcare planning? Is it just a medical card? When someone is sick and have to be admitted to the hospital, do they stay for a longer period of time, or do they recuperate at home?
For instance, a cancer patient who is undergoing treatment at the hospital might be required to stay at the hospital for a certain period of time. Even after being discharged, they will still be required to go for follow-up treatments, and all in all, the recovery period could take up to a year or more.
There is a possibility that they might not be able to work like before, and thus, their income will be affected. In cases of major illnesses, besides medical expenses, many will find themselves having to spend their money on daily sustenance, alternative therapies, supplements, and sometimes they might even require a caretaker.
A complete healthcare plan should include a medical card and critical illness coverage. Do remember that a medical card solely pays for hospital expenses while critical illness insurance pays a lump sum when one is diagnosed with any of the critical illnesses listed.
A patient can use this lumpsum amount to cover their daily needs resulting from the loss of income as well as for alternative treatments.
Having a Family
Thirties is the age where many people choose to start a family. At this phase of life, having children will also mean creating an education fund and protecting the family income and assets.
This is the period when you need to look into family income protection to take care of your most important responsibility – your loved ones. Should anything unfortunate happen to you, you can rest easy knowing that they will be well taken care of.
That being said, their financial needs – including their daily expenses and funds for their education – need to be calculated. The amount required might be several million ringgit, and most people in their 30s do not have such a large amount of money available.
In this instance, the cheapest tool is to purchase an insurance for the required sum, which will provide a peace of mind with the knowledge that in case of any tragedy, your loved ones will be protected.
Take this case study as an example. Mr Tan, 33, is married with two children aged two and five; his wife is a homemaker. Mr Tan, whose monthly disposable income is RM5,000, is the sole breadwinner of the family, and since this is the case, he is worried about his family’s wellbeing should anything happen to him.
He has estimated that his family needs RM60,000 a year, and wants to ensure that his family is provided for until his youngest child is 22 years old. To achieve this, he would therefore require 20 years’ worth of funds amounting to RM1.2 mil.
At 33, Mr Tan does not have that much savings. His house may be worth RM1.2 mil, but his family will still need to live in it. Therefore, having a life insurance coverage of RM1.2 mil to cover this risk would be the most effective financial tool.
Bear in mind that we should review our insurance policies every 5-10 years as our financial status and priorities change. 40-50s is the prime time where we have more assets and liabilities, as well as changes to our lifestyle as we move into our retirement years.
It is also the time when our income is more stable and we have excess funds to prepare for our golden years.
Preparing for Golden Years
We would want to enjoy our retirement days without worrying about whether there is sufficient money to tide us through the years. If we prepare well in our 40s or even earlier, we would not need to worry about risks or expenses that might take away our retirement funds.
Someone once asked, “What and how to prepare financially in order to enjoy the golden years?” Well, there are three types of expenses that we need to prepare for post-retirement, namely
- Daily living expenses (which can be from our EPF fund that many of us have accumulated during our working years);
- Maintenance or medical expenses; and
- Happy fund.
Advancements in science has led to an extended life expectancy rate, but while people are now living longer, many are still unaware that older medical plans only insure a person up to the age of 70. Medical hospitalisation is becoming very costly, and therefore, we need to ensure that our healthcare insurance plan covers us until are 80, at the very least.
Furthermore, as we age, there will be an increased risk of developing health problems such as high blood pressure, diabetes and high cholesterol. Such health conditions require daily medication which is not covered by medical cards and will eat into our retirement funds.
On top of the daily medications, there will also be other supplements and nutritional needs required to promote better health. These are the maintenance expenses that need to be taken into consideration as well.
To enjoy our retirement years to the fullest, we need to have a certain amount of money to do the ‘fun’ stuff like travelling and indulging in hobbies. We should start accumulating our lifestyle or ‘happy’ fund as early as possible by growing our wealth through unit trusts, shares and saving plans.
How we choose from the different wealth accumulation tools will depend on our risk appetite and duration of investment.
Financial planning at different stages of life is important. Insurance is one of the cheapest tools to manage risk and is only one of the many financial planning tools out there today.
In addition to protecting your wealth, there are other financial tools in the market, each with its own purpose such as accumulating and growing wealth through savings and investments; and wealth distribution though estate planning.
About the Author
Andrea Siew is an Approved Financial Adviser with Harveston Wealth Management Sdn Bhd.