5 Ways To Protect Your Family Through Responsible Financial Planning

Every single breadwinner works hard for the family, regardless of stress at work or business. We work to raise up our family’s standard of living and to provide for our children’s education, retirement and legacy. The importance of financial planning is just like the importance of car maintenance. It keeps your car in good condition and helps it last longer. Similarly, this is how you’d protect your family through financial planning. With that, here’s a family financial planning guide to get you started:

1. Get the Right Type of Insurance

Many are being encouraged to sign up for different policies with fancy features. How do you identify what is necessary and what is excessive during financial planning? Let’s look at some examples: 

• Medical insurance with an annual limit of at least RM1,000,000
• Critical illness insurance to supplement the limitation of medical insurance and replacement of lost income
• Life insurance policy which can settle all debts and provide living funds for your family

Is there a difference between an assured sum of RM100,000 and RM500,000 on your critical illness or life insurance? Let’s assume your annual income is RM60,000 (monthly income RM5,000):

Scenario 1:

RM100,000 paid out in the event of diagnosed critical illness or death can barely match your income for 1.5 years. Alternatively, you could place this last source of income RM100,000 in a fixed deposit with 2% interest per annum as your “passive income”.

Scenario 2:

RM500,000 paid out in the event of diagnosed critical illness or death could match your income for 8.5 years (RM500,000/RM60,000) or you may invest RM500,000 in any form of investment with a return of 10% per annum as your “passive income”. You have more investment choices to generate passive income instead of just placing it in fixed deposit.

Using the formula above, the more you earn, the more you need to protect your family with a 10x return on your annual income when considering life and critical illness insurance.

2. Diversify Risk on Asset Classes

Are your assets spread out across the business, fixed deposit, insurance policy, shares and unit trusts, properties and single currencies? What is your allocation between liquid (easy to sell) and illiquid (difficult to sell) assets? I recommend that you try to maintain a 50:50 ratio to ensure flexibility. These are important questions that must be asked during financial planning.

For example, many fall into the trap of buying too many properties which limits your liquidity and may affect your cash flow in the event of an emergency like Covid-19! Nobody could’ve predicted this pandemic, and many have struggled to liquidate assets like properties. It’s safe to assume they would not be in such a tough position if they had previously stuck to the 50:50 ratio and assessed their financial standing prior to taking on these long-term commitments.

3. Assess your Dependency Risk

Do your earnings heavily rely on active income? Are there investments that can generate passive income? Do you have cash in hand to last for 3-6 months of household expenses in the event that you lose your job? Financial planning will involve assessing these areas of concern.

If you run a business, does your company have enough cash to cover 3-6 months of overhead costs? Is there a dependency risk on a few customers or suppliers? You may feel the impact during a crisis, with many businesses affected which can trigger tensions linked to credit terms and suppliers. Eventually, all these dependent risks could lead to the winding up of your company.

Whether you are an employee or entrepreneur, always consider your dependency risk before buying or investing in anything.

4. Writing a Will or Setting Up a Living Trust for Family

Unfortunately, most people don’t prepare for sudden death or being admitted for surgery. I’ve received a few emergency calls to write a will for parents in a critical stage. Some couldn’t even sign off on their will due to being in a coma or passing away before the will was ready for signing. This led to assets being frozen during the estate clearance while the family was left waiting for funds to carry on with their lives!

Another example of a worst-case scenario is if both parents die prematurely in an accident while their kids are still under the age of 18, which makes estate distribution even more complicated. Who will be your estate executor? How well will he/she manage your estate fund for your kids? Is there a chance that your estate could be compromised by bad actors? These scenarios are unlikely, but demonstrate the need to set up a living trust on top of writing a will during financial planning in order to protect your family. This ensures your family receives a fixed amount for living expenses and children’s education.

Structured distribution will also ensure that the funds are not spent all at once. For instance, can you imagine what the average 18-year-old would do if they inherited RM1,000,000? There’s a good chance it’d be spent on travel, a luxury vehicle, and just living the good life. Setting up a living trust mitigates this risk and ensures that funds are distributed in a timely and sensible manner.

5. Engage a Licensed Financial Planner

You don’t need to be loaded to engage a professional in financial planning. You can expect your assets to be well planned, allocated and distributed, as they would know everything about your financial standing. From your risk profile to your family relationship chart, he/she will draft a customised financial plan for you from A-Z!

More importantly, dealing with one licensed financial advisor who is professionally qualified, independent and unbiased is better than dealing with many different agents who may prioritise selling their financial products instead of your financial health! After all, you’re not just doing this for yourself, but to protect your family.

About the author

Jordan Peh Kian Hong (FAR CMSRL RFP B.BA) is a FA Director, Licensed Financial Planner and Bank Negara-approved Financial Adviser Representative with approximately 20 years of experience in financial services. He can be contacted at jordan@yesfinancial.co