The Mindset Of Protecting Your Investments
If you are like most people, you would focus on reducing lifestyle expenses, increasing your income and steps to protecting your investments. It is highly likely that you, as a personal investor, focuses a lot on finding the right investments opportunities and ways to save up more money for your dream home, getting married, etc.
The big question here is, do you think about protecting your investment and assets?
Just as if you can see a typhoon coming your way, you are unlikely to be able to outrun it in time. This might sound all doom and gloomy, but if you start to protect your investments and assets when you need it, it’s already too late.
We’re here to tell you that this is a myth and that investment protection saves you so much more money in the long run, and all types of people, with all types of investments, must have an investment protection strategy in place.
Why It’s Important To Protect Your Investments
The objective of any investments should be to fund your retirement and/or financial freedom. If you’re serious about attaining financial freedom, the money you set aside for investments are NEVER meant to be spent on consumption.
You need to accumulate investments until the passive income your investments produce can fund the lifestyle you want, without ever having to work again. This can be real estate, stocks, mutual funds, bonds or ETFs. The last thing you want to do is having to liquidate your investments to handle a family emergency, fix your car, medical conditions, home repair, legal disputes and the list goes on and on.
Having an asset protection strategy is the foundation to achieve financial freedom. it is extremely important that your assets are protected from all unforeseen scenarios. Without asset protection strategies in place, it is unwise to start implementing wealth accumulation and preservation strategies. In this article, we will go through some very powerful tools and methods that you can use to protect your investment portfolio.
Insurance plans are integral to protecting yourself and your investments
Life & medical insurance is one of the most important aspect of any asset protection plan. We know that insurance plans only pay out on worst case scenarios and may sound pessimistic, but hey, anything can happen and you definitely need protection. From a financial planner’s perspective, these two types of insurances serve two very different purposes and both of them are equally important. We’ll break it down deeper in just a moment.
Contrary to popular belief, the real objective of a life insurance policy is to replace lost income in the event of death and total permanent disability. The ideal life insurance pay out should be at least 60 months of your last drawn income. So you need to make sure that your insurance policy has all these covered.
The fact is, when you pass on, your income stops coming in – especially if you’re a salaryman. Life insurance helps ensure that your loved ones will have enough funds to pay off any debts you may have (car, home, credit card) and living expenses such as petrol, groceries, and bills after you’re gone or totally disabled. Here are some important facts about life insurance policies that you may not know. Life insurance policies are income tax deductible (RM6,000 in total including EPF contributions), usually comes very cheap and typically ranges from RM60-300 per month depending on your age and your monthly income.
There is this old saying that “health is wealth”. Without health, it is increasingly difficult to sustain wealth. A market research done by WillisTowersWatson shows that Malaysia is one of the countries experiencing the highest inflation rates in medical costs. The key objective for a medical insurance plan is to hedge against inflation for medical bills throughout your retirement life. A medical expense in your 20s and 30s might seem very manageable with a stable source of income – considering you have very good health.
The same expense will seem way more daunting when you have limited to no income during retirement. To ensure a worry-free retirement, having a good foundational solution to rising medical costs is very important in any financial plan. Like life insurance policies, health insurance policies are also income tax deductible up to RM3,000 per year for education and health insurance policies. A good health insurance policy will set you back about RM200-RM500 per month depending on how old you are and your health condition.
Very important fact about insurance policy nominations
A common mistake among young couples is that they appoint their boyfriend/girlfriend as a nominee, young people in relationships should always appoint your parents or a private trust as the nominee for things to not be messy. Appointing your siblings or girlfriend/boyfriend is never a good idea as they are not permitted beneficiaries. Here’s the difference between a nominee and a beneficiary.
A nominee is a person who is nominated in an insurance policy to administer the policy payout monies upon the policyholder’s demise. That means, if your girlfriend/boyfriend is a nominee, they will receive the payout but it’s actually legally not theirs to spend. This means you run the risk of putting your beloved girlfriend/boyfriend in heavy debts as they think the payout is for them.
The role of the nominee is to administer the policy payout to allowed beneficiaries, which are only limited to your children, parents as well as legally wedded spouse. Only allowed beneficiaries are entitled to directly benefit from the policy monies.
As for married couples without children, it’s usually wise to name your wife/husband as the nominee. This changes with married couples with young children below the age of 18. In this scenario, it is best to appoint someone you can trust as a trustee to administer the insurance payout to benefit your children in case both husband and wife passes on at the same time (in a car accident for example).
This is because children below 18 are legally incompetent and cannot participate in contracts, so they are unable to benefit from your policy monies directly. The key point here is that you should be updating your nominee(s) in your policy to safeguard your investments across different life stages.
The Importance Of Emergency Funds
Having an emergency fund is one of the most overlooked requirement in investment protection. Young people who just joined the workforce might be tempted to invest every single dollar they have into return-bearing investment products that may not be easily liquidated. Don’t be shy, we have made the same mistake! As long as you are receiving predictable income, you should always have access to relatively stable cash equivalent instruments that is about 6 months of your monthly fixed expenses.
This is to ensure that even if you experience a temporary loss of income or a sudden medical emergency that you have to pay upfront while waiting for reimbursement from your medical plan. With emergency funds set aside, you wouldn’t have to liquidate your investments to meet unforeseen circumstances – because remember, money set aside for investments should NEVER be spent.
I personally have my emergency funds sitting in Phillip Master Money Market Fund (75% of total, yields about 3.7% per annum in daily accrued interest, 2 days to withdraw) and Maybank2u Savers (25% of total, yields about 2% per annum in daily accrued interest, immediate access). Another popular alternative is Fundsupermart.com’s Cash Management Fund.
It’s highly important that this fund that you set aside is liquid and easily accessible in the event of emergencies. Don’t stress too much if you have to dip your hands in the cookie jar from time to time to pay credit card bills or mortgages, but always be sure to replenish the emergency fund back to it’s healthy levels – 4 to 6 months of your monthly fixed expenses. This will ensure that you will have the safety net you need in the event of loss of employment or when unexpected expenditures arise.
Leverage on limited liability business entities
Did you know that if you’re a sole priorietor or a salaried employee, you are personally liable for any legal disputes and creditors? For example, if you are a medical practitioner for a private hospital and a mistake you made has cost someone their life (more on this example here). When a litigator or creditor takes legal action against you, your shares, mutual funds, real estate, savings are all at risk to be liquidated to pay for damages in court. Trust me, you DO NOT want that to happen, ever. The best way to circumvent this is to set up a Limited Liability Partnership (LLP) or a Limited Liability Company (Sdn Bhd).
Steer clear from sole proprietorships and “regular” partnerships as these business entities, as they do not protect you from liability. Legally speaking, your LLP or Sdn Bhd exists as a separate legal entity. External parties such as litigators and creditors can only take action against the LLP or Sdn Bhd, but never directly towards you.
Operating under a limited liability business entity not only allows protection of your investments, doing so also gives you immense tax benefits (19%-24% of net profit after expenses). Since the focus of this article is only to protect your investments, we’ll talk about this in a later article.
Sure, running an LLP or Sdn Bhd will expose you to extra costs from bookkeeping, audit and tax filing services. But if you’re in a career pathway that is exposed to high risk of negligence, always opt to offer your services and run your business under a corporate veil if possible. This will save you tax money and offer wealth protection in the long run. If your business heavily relies on debt funding, always set up a limited liability entity to protect yourself from creditors when things go south.
If you’re a full time salaried employee, negotiate with your employer to replace your full-time employment as an internal consultant / resident freelancer and get them to bill your company for your services rendered instead. This will put the business entity liable while keeping your personal assets protected.
For more information, you can read this resource on the different business entities in Malaysia by 3E Accounting.
Get your will or surat Wasiat written
Did you know, as of 31st August 2015, there are more than RM60 billion in assets and cash that is unclaimed due to lack of a proper will in Malaysia? This is a question that most people will not ask yourself until you’re old: “What happens to your assets if you passed on without having a will written?” It’s totally normal if you have not asked yourself this, human beings are not wired to think about our own death.
Don’t let this happen to you! Getting your will (non-muslims) or surat Wasiat (for muslims) written is one of the most important things that you have to do to protect your assets from bureaucracy and wasted time. In Malaysia, Muslims and Non-Muslims are governed by separate sets of laws when it comes to estate and inheritance.
- Surat Wasiat for Muslims
As a Muslim, your assets are distributed according to the system of Faraid under the Syariah laws. If you do not have a surat Wasiat written, this can often be a painful, expensive and lengthy process. If you’re a Muslim, writing a surat Wasiat also gives you the ability to benefit people who do not fall within the definition of estate beneficiaries in Syariah laws like, adopted children, non-Muslim parents or any charitable organization with 1/3 of your estate, while 2/3 will be distributed according to the Faraid system. You will also need 2 male muslim witnesses when signing the surat Wasiat to ensure it’s legitimate. The only two things that a surat Wasiat is unable to control are insurance payouts and your EPF, which will be distributed to their respective beneficiaries.
- Wills for Non-Muslims
As a non Muslim, your assets will be distributed according to Will’s Act of 1959 and also the Distribution Act of 1958 (Ammended 1997). Unlike surat Wasiat, wills are not executed based on Fariad system. That means you can control the distribution of 100% of your assets instead of just 1/3 to your loved ones.
Your estate will be distributed as per the contents of your will. It is imperative that you update your beneficiaries when you transition from one life stage into another to ensure your loved ones benefit from your estate without much hassle. However, do take note that if you convert to Islam as a non-muslim, your previously written will will be revoked because the distribution will automatically follow the Fariad system. Another very important point is that your will will also be revoked upon marriage or re-marriage but does not get revoked upon divorce. Like surat Wasiat, your Will have no control over insurance and EPF payouts.
If you do not have a will or surat Wasiat written, estate distribution is a process that takes at least 2-5 years! If you do not want your family to go through this ordeal, we advise you to get a will or surat Wasiat written. There is also the unlikely event where the Malaysian government is authorized to access to all your estate if your next of kin cannot be contacted or has already deceased, more on this in this great article by Dollars and Sense.
Costs for getting a will or surat Wasiat written may vary depending the number of clauses and it’s complexity but generally it will only cost a few hundred ringgit at most. If you do not want to pay for your will, most Malaysian banks also provide free will writing services if you deposit more than RM100,000 with them – so you may want to remember this. We highly suggest that you engage specialist will writing companies like Rockwills instead of going to lawyers to get the best and affordable experience as lawyers can be pricey, especially if they are not estate administration specialists.
There are other techniques such as using private irrevocable trusts as well as placing assets under your spouse’s name. These are generally advanced asset protection strategies used by individuals or families with more than RM10 million in total assets, so we will cover this in a later article.
That’s it bosses! We know this is a super comprehensive article but we find this to be extremely important. In our experience, many fantastic entrepreneurs may be great at making moola but do not have a proper personal finance strategy in place to protect their wealth. We hope this helped!