Category: Personal Finance

The death of your loved ones is a terrible event, but it can’t be avoided and it’s a reality that we have to face. If you are married, it is your hope and wish that you and your spouse will get to grow old together.

But if it is fated that he or she passes away prematurely while we are not ready, here are 5 things that you should know.

1. Can I claim alimony (nafkah) for maintenance of myself or for my kids from my late husband’s estate?

It is a man’s obligation to provide for his wife and kids while he was still alive. But once he passes away, you can only demand for alimony from his estate are those that are overdue only while he was still alive.

Any claim of the unpaid alimony can be filed in the Shariah Court. You will then need to present the court order to the estate’s Executor/Administrator for the purpose of payment.

2. I have access to my husband’s bank account. Can I withdraw the money inside and use it to carry on with my life?

All the wealth of the deceased is considered as inheritance. The priority is to pay off all debts and for the expenses for giving out the inheritance. If there is balance, then it will be distributed to the next of kin.

If a family member needs the money to carry on living before the above is taken care of, then it requires the approval from all the heirs before it can be used. The amount that can be taken is the one allowed for her share of Faraid entitlement out of the total estate.

If it exceeds her share, then she needs to repay it or get consent from all heirs to allow it to be used.

3. My husband puts my name as the nominee for his Employee’s Provident Fund (EPF)/Tabung Haji/Takaful, can I use the money for my own benefit?

A nominee for his EPF does not make you the beneficiary. A nominee can only act as Executor/Trustee for the money and it can’t be used for your own benefit. Instead, it must be used for the administrative part of the estate and if there are any balance left, then it must be distributed according to the Syariah law inheritance  to the respective heirs.

If an Executor/Administrator for the deceased’s estate have been appointed, it is better to surrender the money to ensure the transparency in administration and distribution of the estate, as well as to avoid conflicts.

Whereas a nominee for his Tabung Haji or Takaful depends on the type of nomination. If it being named on the basis of Hibah, then you can receive the money as beneficiary. But if the nominee is on the basis of Executor/Trustee, then you need to act in accordance of a nominee for EPF as mentioned above.

4. What are the steps to get a bigger portion from my share of Faraid?

Husband or wife of the deceased can make a claim for Matrimonial Asset (Harta Sepencarian) in the Shariah Court for the wealth that was acquired while you are both married. Through these claims, you are able to get a portion from the Matrimonial Asset that is decided by the Shariah Court as well as the portion based on Faraid.

5. What should I do if I was appointed as a trustee for my children’s estate who is still a minor?

All immovable property that is inherited by under-aged children needs to be registered under your name as a trustee.

For cash, it is best that you open a trust account for the children to be transparent. You need to ensure that the money will be managed and used for the welfare of the children. A trustee must be meticulous and make records or keep receipts on its usage and it must be used for the benefit of the children.

A Huge Burden

In managing the estate of someone who has passed away, the main objective is to ensure that the debt and expenses needs to be administered first, before the distribution can be made of what is left. Therefore, estate planning is very important, not only to ensure that the estate is managed well, but also to ensure the well-being of heirs is taken care of.

About the Author

The article is written by Ms Rahimah Binti Sazali, Assistant Manager, Estate Management Department of as-Salihin Trustee Berhad. as-Salihin offers full-fledged Islamic Estate Planning products and services such as Wasiat writing, declaration of Hibah, jointly acquired asset agreement, takaful trust and living trust.

For many Malaysians approaching retirement or already retired, one of their biggest fears is having a massive hole blown through their nest-egg which they have painstakingly built up over the decades to see them through their golden years.

For many people, the situation becomes even more tenuous as their retirement funds are barely sufficient to provide a comfortable level of living or last till end of life.

Two of the major risk factors that can reduce individual retirement savings are health and income shocks, says Mohd Sedek Jantan, head of Investment & Financial Planning / Investment Unit at UOB Kay Hian Wealth Advisors Sdn Bhd.

Health shocks are defined as unpredictable illnesses that diminish health status, he says. “Individuals facing health shocks are often affected by significant out-of-pocket (OOP) healthcare expenditures incurred to obtain healthcare and the income loss from an inability to work.

“The OOP spending has particularly serious effects on poor households, who tend to spend more on healthcare as a share of their income compared to their richer counterparts,” he says.

On the other hand, income shocks are referenced by how many significant drops in income a person has suffered over their working career, says Mohd Sedek.

“For example, the current Covid-19 pandemic has caused the unemployment of large numbers of people, while others are facing pay cuts. The income shock during the pandemic is more severe among young adults.

“Income shocks are strongly associated with an expected spending reduction and, at a certain level, the individual will liquidate their savings in order to put food on the table.”

Mitigating Against The Risk Factors

Mohd Sedek says like other expenses in retirement, planning can make a difference in managing such risks. He says healthcare costs influence retirement income planning, and as such, the impact of rising healthcare costs should be a priority consideration.

“The most economical way to absorb the health shock is by changing lifestyle,” he adds.

He says research studies on people’s behaviour have shown a causal relationship between unhealthy lifestyles and healthcare expenditure, where individuals who practise unhealthy lifestyles need more healthcare services, forcing them to spend more on healthcare expenditure.

Taking steps to improve health can reduce annual medical expenses, he adds. In the case of Malaysia, hypertension stands as an important area of worry for economic evaluations because of the wide range of issues involved for the individual and for society.

“It is one of the most expensive diseases as far as treatment is concerned, as it generates higher healthcare expenses than those produced by individuals with normal blood pressure.”

However, he notes there is a reduction in total direct costs of the hypertension population if each patient’s blood pressure becomes controlled.

“This reduction in direct costs can be achieved by changing lifestyle habits, for example: reducing dietary sodium intake, decreasing body weight, quitting smoking, and reducing alcohol intake. In addition, anti-hypertensive medications can lower the risk of cardiovascular mortality in hypertensive individuals,” he adds.

High Cost Of Medical Insurance

R. Sathia, co-founder and CEO of GFlex40, a Malaysian insurance technology company, concurs the highest risk factors that would lead to reduction of wealth for a majority of Malaysians are health issues, either for themselves or their closest family members.

“As it has been well researched, the cost of medical insurance in Malaysia is among the highest in Asia and continues to rise,” he adds.

He points out that Malaysia also suffers from among the highest obesity rates in Asia. “The risk factors increase chances of individuals falling ill, and when combined with the cost of healthcare can quickly result in depletion of any savings that have been built by individuals,” he adds. 

To reduce the risk of this happening, Sathia says that apart from investing in maintaining one’s own health by way of exercise, diets, etc, another supplementary and important mitigant would be investment in the appropriate health or medical insurance plans.

“By procuring such a plan early in life, individuals can ensure they are covered for unforeseen circumstances later in life,” he advises.

For the individual there is little they can do to prevent the rising healthcare cost across the board in the market. “However, on a personal level, everyone can work towards limiting their exposure to such costs by living a healthy lifestyle from early in their life,” he says, adding this would include proper healthy diets and exercise.

Sathia notes that exercise is a particularly interesting topic when it comes to health/medical insurance.

“More and more insurance and Takaful companies are investing in health and exercise related insurances that track the lifestyle and exercise habits of customers through the use of electronic gadgets and apps.

“By availing oneself to such an insurance early and leading a healthy lifestyle, not only would the average person be able to improve on their overall health but they can also potentially reduce their own premiums as a result of their healthy lifestyle. 

He also says there have been efforts across the world to factor in lifestyles and exercise behaviours through electronic monitoring as inputs in pricing health and medical insurance by technology driven insurance companies.

“These efforts coupled with efforts to optimise operations of third party administrators and hospitals would eventually be able to lead to a reduction of pricing,” he adds.

Wealth Protection Measures

So, whatcan we do to prevent rising healthcare costs from eroding our retirement nest-egg?

UOB Kay Hian Wealth Advisors’ Mohd Sedek says reviewing one’s current insurance plan is vital to ensure it does not eat up the retirement saving.

“As healthcare costs continue rising, it is important for each individual to have life and medical insurance. According to the Employee Benefit Research Institute (EBRI), healthcare expenses are the second largest component, and these expenses steadily increase with age.”

Further, it is important for the policyholder to review their insurance policy from time to time, to ensure having adequate protection for the future and safeguard the income-earning abilities.

Sound financial advice also plays an important role when it comes to retirement planning.

“Individuals, regardless of their income level, should engage with a certified financial planner to ensure the retirement saving is not just sufficient but also sustainable, to hedge it against healthcare cost,” advises Mohd Sedek.

A financial adviser, he says, will review the individual’s overall financial situation and address the solution based on their needs. From the analysis, the financial planner will help the individual to address the challenges by:

• Estimating their expected out-of-pocket healthcare expenses, such as insurance premiums;

• Creating contingency plans for unexpected expenses such as long-term care; and

• Working closely with the client to help protect their wealth by integrating healthcare costs into the overall retirement plan.

He adds there are a number of insurance types and riders that can help to hedge the rise in healthcare costs, such as investment-linked products, medical card, critical illness coverage and specific elderly insurance.

In addition, the financial planner can explain the cost–benefit for each insurance plan, creating trust funds and other advanced planning strategies.

Risk Management Needed To Absorb Income Shocks

To mitigate against income shocks, individuals should do planning that includes matching up income streams, including guaranteed income, to fund recurring healthcare expenses such as insurance premiums.

Individuals may also plan on maintaining an emergency health savings fund for non-recurring health expenses, says Mohd Sedek Jantan, head of Investment & Financial Planning / Investment Unit at UOB Kay Hian Wealth Advisors Sdn Bhd.

Also, delaying withdrawal from the EPF can create a larger monthly benefit. “Hence, personal budgeting is important to achieve a clearer vision of personal finances so you can begin to plan your spending and saving and take control of your money.

“In short, budgeting helps you to ensure you have the right amount of money at the right time.”

And when doing budgeting, both regular events and extremely uncertain events must be dealt with. It is advisable for individuals to set aside at least six to nine months of living expenses in a money market account, one that offers liquidity and the safety of the principal.

“An emergency savings fund should be established so you don’t have to consider tapping your retirement savings,” he adds.

Dealing With The Medical Insurance Conundrum

If they can afford it, it is prudent for senior citizens to have medical insurance as it can help offset the medical expenses that they’ll incur as they age.

However, the flipside is that medical insurance premiums increase dramatically as we grow older, ironically at a time when we are no longer generating income.

So, is there a way out of this predicament?

Mohd Sedek Jantan, head of Investment & Financial Planning / Investment Unit at UOB Kay Hian Wealth Advisors Sdn Bhd, notes that age is one of the prime elements in the health insurance premium calculation because it impacts the medical support a policyholder may require.

It is significant to understand that an elderly insured individual will possess medical conditions quite different from those of a young or adult insured individual, he says.

“Typically, the premium amount increases on average about 5% to 8% for every year of age; it can be as low as 5% annually if you’re in your 40s, and as high as 12% annually if you are over age 50,” he says, adding that high-risk health status also has the potential to greatly increase costs.

As such, Sedek says it is advisable to buy health insurance “at a young age to avoid high insurance premiums”, as the policyholder is able to lock in lower premiums and reduce the total amount they will spend on life insurance over the course of a lifetime.

Most people, especially family breadwinners, have life insurance policies. They assume that on their passing or if they are permanently disabled, the policy will pay out the sum insured that will take care of the financial needs of his family.

However, depending on the circumstances, things may not pan out as the policy holder intends. The following story about Sam highlights the different scenarios that may lead to unintended consequences, and offers the solutions to deal with it.

Question:

Hi, I’m Sam and I’m 43 years old. I’m happily married to Jenny, a 40-year old housewife and together, we are blessed with two children namely, Jim and Gina aged 6 and 3.

As I write, I wish to continue to provide for my family’s living expenses and pay for Jim and Gina’s tertiary education fees if I pass on prematurely. In view of this, I intend to buy a new life insurance policy where the sum assured is RM1 mil and nominate Jenny to be the sole beneficiary of my new policy.

With that being said, I have a few concerns. My question is: ‘Who would receive and manage the RM1 mil in sum assured if:

• I become comatose or mentally disabled?
• After my passing, my wife passes on before my children reach adulthood? Or,
• I pass on simultaneously with my wife due to an accident?

Answer:

In Sam’s case, having a life insurance policy or a handful of them is a good start. The sum assured is helpful to his loved ones if he passes on prematurely as the money will be paid to his wife Jenny in a couple of weeks after Sam’s passing.

It is unlike Sam’s estate which may consist of cash, shares, and properties which will be frozen upon his death. It could take 1-5 years to unlock Sam’s estate and have them distributed to his beneficiaries, depending on his testacy status.

Here, I’ll list down possibilities of how his sum assured of RM1 mil could be received and used in the three scenarios above. More importantly, I’ll share a simple solution that Sam could use to be assured that his life insurance policy will be able to serve his intended objective.

For a start, most, if not all, life insurance policies will cover both death and total permanent disability (TPD). If Sam becomes comatose or mentally disabled due to an accident, his insurer will pay out the RM1 mil in sum assured to him.

But, is this RM1 mil collected helpful to his loved ones?

Well, it depends on the type of bank account his RM1 mil will be deposited into. First, if the RM1 mil is transferred into Sam’s personal savings account by his life insurer, who can have the access to his RM1 mil if Sam is the only person who has the username and password to his bank account?

Thus, his RM1 mil will be stuck and is of no immediate help to his family members.

Second, if the RM1 mil is banked into Sam’s joint account with Jenny, she will have full access to the money. So, is this problem solved? Well, I don’t think so because Jenny could be prone to mismanaging the money.

This could be due to a variety of factors ranging from overspending, to being conned by swindlers and failures in business ventures and investments. But then, Sam could place great confidence in Jenny’s ability to manage his finances.

If that’s the case, will it solve the issue? In a way, the answer is yes but it’s only if Jenny remains alive on planet earth. If not, this would lead us to:

It is possible for Jenny to pass on before their children reach adulthood, and this is after Sam’s demise. In this scenario, Jenny’s balance sum from the RM1 mil given would form a part of her estate and be distributed based on her testacy status.

If she has a written will, the balance sum would then be distributed to her beneficiaries accordingly by her executor.

Otherwise, without a will, the sum shall be allocated based on the ratio of ⅔ to Jim and Gina and the remaining ⅓ to Jenny’s surviving parents as mentioned in the Distribution Act 1958. If Jenny has no surviving parents, then, the sum shall be allocated to her children in full.

Here is a question. How will Jim and Gina collect their sum allocated, if they are below 18 years old?

The answer: Jim and Gina must have a trustee to help them collect the money and manage it on their behalf until they reach, at least, 18 years old.

This leads us to another question: ‘Who shall be their trustee?’

Will it be one of Jim and Gina’s uncles or aunties from either their paternal or maternal side or both? This could potentially result in conflict and strife among Jim and Gina’s relatives, which leads to more financial uncertainties to them.

The RM1 mil in sum assured will form part of Sam’s estate. Thus, the sum is to be distributed based on Sam’s testacy status, which is similar to what we had discussed above in Scenario 2. But here, it is common for a husband like Sam to have elected Jenny to be the sole executor of his will.

Hence, in the absence of a written will or a will without an appointed substitute executor, the question of ‘Who shall be their trustee?’ remains. The siblings’ relatives (both paternal and maternal) may contest to be their trustee, which can result in financial uncertainties for both Jim and Gina as mentioned earlier.

First, the RM1 mil in sum assured shall be kept with Sam’s insurer for a period of 12 months until a trustee to Jim and Gina has been appointed.

Let’s say, Jim and Gina’s relatives could not come into consensus on who should be their trustee after 12 months of their parents’ passing. In this case, the RM1 mil in sum assured will then be transferred from Sam’s insurer to a public trustee, namely Amanahraya Trustees Bhd.

The money shall be kept until Jim and Gina reach 18 years old, the age when both of them are eligible to receive their rightful inheritance. However, this would lead to three common issues for both Jim and Gina as listed below:

• Who shall fund Jim and Gina’s daily living expenses before they hit 18?
• Would Jim and Gina be aware of their inheritance when they hit 18?
• If they do, how will they manage their inheritance after receiving theirs?

Hence, having a life insurance policy alone is insufficient to offer assurance that the money provided for will eventually fulfill Sam’s intended purposes. As such, what then is his solution?

The answer is for Sam to set up an insurance trust.

So, what is it?

For a start, it is the use of both a life insurance policy and a trust to manage the sum assured based on Sam’s intentions upon occurrence of events stipulated in his trust document. Here is how it works;

a. Sam buys a life insurance policy where his sum assured is RM1 mil.

b. He assigns his policy to his trust instead of nominating Jenny as a beneficiary.

c. Then, Sam may elect Jenny, Jim and Gina to be beneficiaries of his trust.

d. Sam may dictate how and when the RM1 mil would be distributed to his beneficiaries. For instance, he may instruct the trustee to distribute the sum in the event of his passing on or him becoming permanently disabled according to the following proportions:

First, if Sam becomes permanently disabled, his insurer will pay RM1 mil to his trustee. Thus, the sum will not be stuck in his personal savings account.

Second, the trustee is to manage the sum based on Sam’s intentions with professionalism and integrity. Thus, the trustee is not permitted to use the sum to invest in stocks, real estate, or new business ventures if it is not instructed by Sam beforehand. This helps to reduce the risk of his funds being mismanaged.

Third, if Jenny passes on prematurely, Sam may include one additional clause in his trust where it allows his trustee to distribute the money directly to both Jim and Gina. As such, this would assure Sam that his children will be taken care of financially if he and his wife pass on prematurely.

Perhaps your situation is uniquely different and thus requires assistance from a qualified estate planner.

About the author

Jocelline Chee is the founder of WG Legacy, a leading professional estate planning firm. You can download a Strategy Report at wglegacy.com/report to find out how she preserved her family’s financial future via a combination of insurance, will and trust and how you can do the same for your loved ones too.