PROTECTION FIRST

Excerpt from The Star, 15th August 2009

Saturday August 15, 2009


Protect yourself and your liabilities

Comment by TAY HAN CHONG


PAYING yourself first will ensure that there is savings, but that may not be sufficient. Sure, it provides the resources for one to better plan for the future but on its own, savings is very low yielding though it is liquid and “safe”.

Just like having a good workout physically, we cannot kickstart from a sedentary lifestyle straight to running a marathon. It takes a bit of building up before one can reach a certain level of fitness.

My father-in-law is a personification of “good life”, in the traditional Chinese sense. After sustaining a spinal injury at work, he swapped roles with my mother-in-law and became the stay-home dad. He kept himself active for 20 years looking after the home, his girls and ailing mother. However with the daughters grown up and married, his lifestyle has gone from active to sedentary. Unfortunately, his appetite remains hearty despite attempts to change his eating habits, and naturally his weight has piled on.

As luck would have it, he had problems with his insurance application earlier this year and through the urging (and nagging) of his wife and daughters he became determined to re-gain his fitness. Being a proud man, he rejected help from my wife’s ex-personal trainer. However, in his eagerness he pushed himself too hard physically and injured his bad back and shoulders as well. The next three months was thus spent undergoing physiotherapy.

Two lessons from this – (1) Age issue aside, he did not gradually build up his foundation before attempting more advance and strenuous exercise, thus straining himself. And (2) Don’t wait till it’s too late to get started.

Financial or money workout is not any different. I am encouraged to move beyond savings, the core focus of my money workout #1 – paying yourself first, to other aspects of money workout to provide a full spectrum of financial advice.

So to build a good foundation of financial strength, I shall start from protection. Protection is, in my mind, the basic level of wealth management. This is even before one embarks on investing to grow one’s wealth. Let’s start with a cliché – it is not about someone dying, it is about their loved ones continuing on with their lives.

Many people do not know what policies or coverage they have. Some don’t even bother to insure themselves because they think insurance is a waste of money! And to dismiss all the constant hounding from insurance agents, we have even perfected the script “got enough insurance already la” which rolls off our tongues without batting an eyelid. Many a times, we convinced ourselves so well that we really don’t know otherwise.

It is all about contingencies and with life’s uncertain twists and turns, who is to know what might happen? It is therefore important to ensure that we have adequate protection as it provides peace of mind knowing that if anything were to happen, our loved ones will not be left out in the cold.

When should one buy insurance? One should and could only buy insurance when one doesn’t need it, yet! When you need insurance, you will not be able to purchase it anymore. Pre-exisiting conditions are normally excluded from coverage. So today is the best day to start, protection planning is all about meeting contingencies. It’s everything about living too long, dying too young, or living with impaired health.

Here’s my guide: Money Workout #2 – Protect Yourself. How do we start?

Life coverage is about providing for loved ones in case of death or total permanent disability. How much life coverage is sufficient? I don’t subscribe to the rule of thumb that some insurance salespeople use to frighten you with – that is for coverage to be about 10 years of one’s income. It probably would be closer to 5 years of one’s expenditure (and not income). Hopefully after 5 years, the family would have adjusted to the loss and re-established their lifestyle without the deceased.

More often than not, the insurance provides for 5 years while other forms of savings and investments can also provide for a few more years of expense. If more coverage is needed, it might be boosted based on one’s ability to pay the additional premium or, alternatively consider term insurance. So if you spend RM5,000 a month or RM60,000 per year, the suggested minimum life insurance is RM300,000. There is no such thing as too much coverage, but there is the minimum amount that would be considered sufficient.

Critical Illness is about living with impaired heath. A definite must-have is critical illness rider to life insurance which usually covers the common illnesses such as heart attack, stroke and diabetes. When one is suffering from such critical illnesses, it is already tough on the family particularly if one is also the bread winner. Not to mention the sudden spike in medical costs which can increase the normal monthly expenses by many folds. Generally, I would imagine that the minimum amount needed would be in the range of RM300,000-RM500,000, especially if you take into consideration long-drawn illnesses such as kidney failure or a heart attack that may result in impaired health (and perhaps loss of income and job).

While on the topic insurance, I shall quickly jump into Money Workout #3 – Protect against your liabilities. This is about protecting yourself against outstanding liabilities, should anything happen to you. While we may provide for our loved ones, sometimes we forget that we have debts and liabilities which would be transferred to our loved ones as well. In this case, I provide one clear cut example.

Liabilities are what we owe others. And usually the largest debt that one has is the mortgage. And since most people have only one house, the mortgage is usually on the house that we call home. So it is important to make sure that if anything should happen to you, your biggest liability is totally paid off to avoid the burden on the family. Generally as our debts are repaid, this liability also falls over time, so the protection needs to be reducing in coverage over time. The bottom line is to have insurance that matches one’s liability closely. In this aspect, more is not necessary but less would be a burden.

Buying an insurance can be a taboo for some, since many tend to believe mishaps happen only to “others”. But a joke I came across smacks of reality: Needing insurance is like needing a parachute. If it wasn’t there the first time, chances are you won’t be needing it again.

I consider insurance to be the foundation of one’s overall financial wellness, even before embarking on investing. This provides a peace of mind for you and your family. Just look at the faces of your children and you will know that you must build this foundation well. Once done, and the remaining money can be better used to make more money, provided you have the risk appetite.

Tay Han Chong is senior vice-president and senior head of UOB’s personal financial services division