“Insuring your way to financial security”, Published in The Star, On 31 January 2022.
When we talk about financial security, many of us think about how to earn more, save more, and invest more in order to be more financially secure for the future. While this is an advisable and proactive strategy to work towards financial security, we must not overlook the importance of contributing time, money and effort into protecting our hard-earned assets in the event of a tragedy.
One of the most effective ways to do this is to transfer a major portion of your risk to an insurance company. While this may seem like the obvious thing to do, you’d be surprised at how many people have either neglected their insurance review or completely fail to sign up for insurance for themselves and their family members.
For those of you who are reading now, have you gotten life insurance for yourself? If yes, do you know how much you’re covered for? In the eventuality of your death, do you know how much your family will receive in payout and how long it will last them?
These questions should be part and parcel of your financial planning journey, especially in today’s existence of a major health crisis. However, this is also the undesirable and highly avoidant part of financial planning that many are hesitant to talk about. No one wants to talk about their spouses death. On top of that, planning out your financial situation after your spouse’s death can appear to be an insensitive topic to approach.
This is when the services of an independent financial advisor comes into play. On top of being well-versed in various strategies and products that are available to grow your finances, an independent financial advisor is also able to look at your assets holistically to draw up a financial roadmap based on your current financial trajectory and close the gaps in achieving your financial goals.
Take the instance of one of my clients, Joel. Joel came to me one day after attending a seminar where I spoke about financial planning, as the topic piqued his curiosity on where he currently stands in his journey to financial freedom.
After our first meeting, I got to know more details about the current state of his finances and what his goals were. As it turns out, both he and his wife are in their mid 30s, and he’s the single wage earner in his family as his wife had recently given up her job to focus on bringing up their children aged 8 and 5.
Although young, Joel pulls in RM 240,000 in wages annually and has half a million in Ringgit stashed away in savings. Additionally, Joel and his wife have also accumulated half a million in EPF, while the annual expenditure for the whole family amounts to about RM 96,000.
When queried about their financial goals, Joel and his wife aim to retire at the age of 60 with about RM 60,000 in annual expenses, which they hope will last for the next 20 years until Joel is 80 years old. They also hope to be able to provide RM 200,000 for each of their son’s tertiary education.
Joel’s wealth will take two dips in his 40s due to the cost of funding his children’s education. His wealth would peak at his 57th year when his wife withdraws her EPF. But from then on, their wealth decreases and eventually runs out when Joel reaches the age of 71. Suffice to say, Joel is shocked with this newfound discovery.
Upon further discussion, I convinced them to look into increasing the ROI of their current investments, making 3.75% annualised return, to various assets and funds that offers an average ROI of 8% per annum.
[Roadmap to Financial Freedom for Joel and his family (Stress test for higher ROI)]
With just a small adjustment made to the ROI that they are getting, Joel’s wealth can now last them to age 86. This is a marked improvement from the original projection.
But here’s the catch – Joel has not bought any insurance to protect himself or his family. As it turned out, Joel has a strong aversion towards insurance. His stance up till the time we met had been deeply personal: when he was a child, his family got scammed out of a huge amount of savings by a person posing as an insurance agent. Ever since that day, he had always turned away any person and shunned any talk about buying insurance plans.
However, part and parcel of mapping out a financial roadmap is to also stress test for different possible scenarios in the future, such as the loss of income, disablement, or death. The next scenario was mapped out to see what their roadmap would look like should Joel, the sole wage earner in the family, were to meet with an unexpected death.
Therefore as grim as it sounds, should Joel unexpectedly die tomorrow, his wealth will only last his family up till when his wife turns 43. His children would not have completed their tertiary education by that time, and will likely have to forgo their education in order to survive.
This was indeed a very bleak picture to paint for Joel. But in his case, and his headstrong opinion of adamantly staying away from all things insurance related, perhaps this was the necessary wake up call that was needed to spur him into action.
After seeing the possible reality of their children’s future crushed in the event of his demise, Joel and his wife proceeded to have the necessary discussions and agreed that their finances should at least last them until their youngest son turns 22 years old, which was when Joel’s wife would be 51 years of age.
To make his wealth last in the event of his early death, Joel will need to get additional insurance coverage for RM700,000. I suggested that Joel purchase a term insurance which carries a cheaper premium. In addition, the family will also need to adjust their living expenses after Joel’s death to RM48,000 per year.
With those adjustments, Joel’s roadmap will look like this:
[Roadmap to Financial Freedom for Joel and his family (Stress test for additional life insurance and lifestyle adjustments in the event of premature death)]
We can see here that with the adjustments of the insurance, Joel’s wealth would last their family until his wife is 52 in the event of his death, which is well after their sons have graduated. Although this is not the life that they are aiming for, it is necessary to project these costs to help Joel and his wife visualise what they will be facing under the circumstances. This can help a couple rethink their priorities and accommodate them into their existing financial goals.
Upon Joel’s agreement to purchase insurance coverage to mitigate the financial gap, I went to work redrawing the financial roadmap.
After adding in the cost of the insurance premiums, both Joel and his wife’s planned retirement lifestyle would now last up till the age of 84, instead of 86. Although their retirement lifestyle has been cut short by 2 years, they were both in agreement that it was worth it. They have peace of mind knowing that their sons would be taken care of in the event of Joel’s death.
Conclusion
You may strive to save and invest and earn more in your effort to attain financial freedom and achieve your financial goals. But do you know how all the forces of your assets and wealth will come together in reality to serve you over time?
This is where a financial roadmap, a snapshot of all your finances, comes into play. In Joel’s case, it helped him visualise the actual outcome of his investment and realise that despite his high income and decent savings, his wealth was really not enough to see him and his wife through to retirement.
It spurred him into action to do two things for his financial security: 1) increase his overall investing portfolio to achieve an ROI of 8%, and 2) invest in life insurance that will help see his family through important milestones in the event of his premature death. By using different roadmap assumptions, we could ascertain the correct amount of insurance coverage needed to fulfill their wishes.
Joel’s wife, previously worried about their family’s financial security and unable to convince her husband to look past his hatred of insurance agents, can now breathe a sigh of relief knowing that their family finances will be taken care of in the event her husband, the only breadwinner, is no longer around. Joel and his wife can now return their focus to growing and nurturing their family.
Yap Ming Hui is a licensed financial planner. The views expressed here are the author’s. Any reliance you place on the information shared is therefore strictly at your own risk.
The article is featured in The Star Online, at the following link: Insuring your way to financial security | The Star