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Arifin has been retired for the past eight years. He’s currently living a stress-free life of retirement, with a small pension that he is able to stretch while living with his son, Adam
He has been financially prudent most of his life. When his peers fail to save for their retirement and have to depend on their children in the golden years, Arifin is still able to be somewhat financially independent.
It is not surprising that Arifin friends do not have the same retirement fate as him. The Employees Provident Fund (EPF) found that one in three Malaysians did not have a savings account, and most had not saved enough to last them more than five years after retirement1.
However, despite having some retirement fund, there are still some risks that Arifin faces, and also aspirations that he still has for himself and his family.
Being retiree, Arifin faces different levels of risk compared to his other family members. Although he has no financial dependents, his risks for medical treatments increased exponentially as he ages.
Having the right takaful protection can help cushion some of the costs for his son, Adam. Here are some of the financial concerns that Arifin have:
Illnesses that require high cost of treatment
Insufficient retirement fund
Accidents causing Total & Permanent Disability (TPD)
Death without leaving a legacy
Most retirees with no dependent would likely not participate in a family takaful plan because a takaful plan is intended to cover the financial loss, or hardship, that someone would experience should your life end. Most of the time the primary loss being covered is the loss of income.
In the case of Arifin, who does not have any financial dependent, does he still need a takaful plan?
Like most people, Arifin has already participated in a takaful plan when he was younger. The question would be, should he then cash out his takaful plan now that he has retired?
Here are three questions that Arifin should ask himself to make that decision:
Does he still need takaful coverage?
Will someone suffer financially when you pass on? If the answer is no, then you probably don’t need takaful coverage. If a retiree passes on, leaving behind his spouse with no retirement fund, then it’s probably best to keep the takaful plan intact.Does he want takaful protection?
You may like the idea of leaving some money behind for your family, or a charity upon your death. Then, having a takaful plan can be a great way to save a little each month to leave a substantial amount to the beneficiary of your choice.How much should he be covered for?
If you answer yes to the first two questions, then the next question should be: How much should your coverage be?The type of takaful plan you need will depend on your needs and the extent of the protection that you want.
Here are a few common types of takaful plan that Arifin can consider:
Term takaful plan
A term takaful plan is perfect for these situations. It provides coverage against death and/or TPD for a short term, and it comes with a much lower contribution rate, making it more affordable.Medical takaful plan
The older you get, the higher your risks of requiring medical treatments. This is also why your contribution amount for medical takaful plan increases as you age.Critical illness
Critical illnesses are not unheard of among Malaysians, and they become even more common as we age. This plan will payout a lump sum upon diagnosis of the 36 Covered Events listed in your takaful certificate.An investment takaful plan
This is an investment-linked takaful plan that allocates a large portion of the contribution amount to investment. This will allow the Person Covered to build their wealth and leave a significant legacy to his loved ones should he/she passes on.If there is insufficient savings to cover child’s tertiary education in retirement, consider taking a student loan from PTPTN.
This will reduce the financial burden on the family.
If there is insufficient savings for retirement, avoid an education withdrawal as there isn’t a loan to fund a retirement.
Cash value or profit from a takaful plan can be withdrawn (Subject to terms and conditions) for one-off expenses such as wedding expenses.
However, if there isn’t any savings, consider holding a budget wedding with reasonable expenses, or defer the wedding until adequate fund can be raised or saved.
Encourage independent financial management by getting the child to take over the contribution of his/her takaful plan. This will instil in them the habit of making their income work against their expenses.
Performing Hajj being one of the five commandments in Islam, is something that most Muslims strive to achieve in their lifetime. However, to be able to perform Hajj, one must be sound financially and medically.
Should Arifin has taken a takaful plan that includes Hajj rider when he was younger, he may perform Umrah/Hajj with peace of mind knowing that he is provided with double indemnity.
Some Hajj rider benefits also include savings where you can use the payout to supplement your expenses for the journey.
1https://www.imoney.my/articles/9-in-10-malaysians-have-zero-savings-says-epf
Other than a serious illness, the next biggest worry a retiree have is probably outliving his/her retirement fund.
This is even more alarming with these statistics from the Employees Provident Fund (EPF):
had less than RM50,000 EPF savings
spent their entire EPF savings in less than 10 years
would achieve the minimum EPF savings of RM228,000 by age 55 years
Although, Arifin has a pension of RM600 a month, there is still a chance that his retirement fund running out, or he be struck with a prolonged illness that requires high medical cost and long-term care.
It makes sense for Arifin to consider other alternatives to supplement his retirement income as Plan B.
In an ideal world, we all want to have a sizeable retirement fund that will outlive us. However, this is not always possible because life is unpredictable.
Other than being prudent in his spending, Arifin should also consider employing a few tips and tricks to stretch his pension.
How much is enough for your retirement? There are many theories and rules of thumb to answer all these questions, and they all work – depending on the retirement lifestyle that you have envisioned for yourself.
Planning this out is essential to figuring out whether you will be able to retire or whether you’ll need to keep on working!
Here are some common rules of thumb to help you determine how much you need for your retirement:
According to Private Pension Administrator (PPA), the rule of thumb is to ensure that one has two-thirds of the last drawn salary to maintain one’s lifestyle past the retirement age.
If your last drawn monthly salary is RM6,000, you will need about RM4,000 a month to enjoy the same quality of life in your retirement years.
To achieve that 60% to 70% of his income in his retirement, one needs to save 33% of his income as early as possible:
This rule, expounded by many reputable financial planners and written by Forbes, estimates how much money you’ll need in retirement by multiplying your desired annual income by 25.
How this works (and why we take 25 as the multiplier) is that if we assume a 4% real return whenever you withdraw an amount that is 1/25 of your capital, the profit you receive after withdrawing is enough to maintain the value of your capital amount. This gives you the security of not depleting your funds before your time’s up because you’re withdrawing 1/25 (or 4%), while gaining 4% at the same time.
This means, if you want a monthly retirement income of RM4,000 a month, you will need to withdraw RM48,000 a year from your retirement portfolio, which makes a total of RM1.2 million in your retirement portfolio (RM48,000 x 25 = RM1.2 million). If you want to withdraw RM60,000 per year (RM5,000 a month), you’ll need RM1.5 million.
RM4,000/month
RM5,000/month
RM4,000 x 12 months = RM48,000
RM5,000 x 12 months = RM60,000
RM48,000 x 25 = RM1.2 million
RM60,000 x 25 = RM1.5 million
The 4% rule, created using historical data on stock and bond returns over the 50-year period from 1926 to 19763, guides you on how much you should withdraw annually once you’re retired. As the name implies, this rule of thumb says you should withdraw 4% of your retirement portfolio the first year.
Then for the subsequent years, you take the last drawn annual amount plus inflation, while assuming 4% annual gains as well. You can also adjust your withdrawal amount to account for reduced performance on your investment. If investment performance is not in your favour, you can adjust your withdrawal rate to 3.5% or 3%. The key to surviving retirement with enough money is to be flexible and maintain a low-cost lifestyle.
For example:
RM1.2 mil x 4% = RM48,000
RM48,000 x 103% = RM49,440
RM49,440 x 103% = RM50,923.20
There are many ways one can save for their retirement. From investing in the stock market, to depending on their EPF savings.
Takaful plans are also commonly used in retirement planning, not just because of the investment part of it, but also because of the protection it gives to the Person Covered and his dependents should he passes on before he manage to save up the desired amount.
Here are some ways the takaful benefit will be helpful for your retirement:
The truth is, we will never know if our retirement fund is adequate in our golden years, until we run out of it. Therefore, it is always safe to have a backup plan.
2https://www.thestar.com.my/business/business-news/2017/10/25/most-malaysians-cannot-afford-to-retire/
3https://www.investopedia.com/terms/f/four-percent-rule.asp
No matter how much we try to lead a healthy lifestyle by taking care of our diet, being active and avoiding unhealthy habits such as smoking, sickness can befall us when we least expect it, especially in our old age.
For Arifin, who is 68 years old, the medical costs will definitely be higher.
Here are some diseases that commonly afflict senior citizens at retirement:
Cataract is the leading cause of blindness4
39.1% among the 70-74 years age group has diabetes5
75.4% among the 70-74 years age group has hypertension6
19.8%
Lung cancer
18.3%
Colorectal cancer
10.4%
Prostate cancer
Sickness can affect more than your health. With medical inflation estimated at 11.5% in 2016, and projected to rise to 12.7% in 2017, sickness can have an impact on your finances, too.
Here are the estimated medical costs for the following common diseases for someone in Arifin’s age.
Chemotherapy
Radiotherapy
Coronary Angioplasty
Coronary Artery Bypass Surgery
Blood test with device and test strips
Blood test at private hospitals
Doctor consultation fee
Medication (Insulin)
Medical and health takaful covers the cost of private medical treatment, such as hospitalisation, surgery and treatment, in the event that you are diagnosed with certain illnesses or are involved in an accident.
This can be a stand-alone plan or can be added to a basic family takaful plan as a rider.
Here are three types of health and medical coverage :
Just like any expenses that you are planning to commit, you should be very careful when choosing a medical cover that best suits your needs by understanding the product features, conditions, benefits, limitations and exclusions of the takaful plan. Don't be pressured into getting more than you need.
Some of the things you should look out for are the room and board limit, annual limit, and lifetime limit.
The Hospital Room and Board coverage refers to the maximum cost of your room and board that you can claim for in a day.
For example:
Limit per day | Maximum days per certificate year |
---|---|
RM150 to RM300 | Up to 180 days |
On the other hand, the annual and lifetime limits dictate how much you can claim in a year and in a lifetime. Some products also provide unlimited lifetime limit.
In Arifin’s case, the coverage should be a rough estimate of treatment in the event of critical illness.
Check your coverage using this Great Eastern Takaful Critical Illness calculator.
Most people make the mistake of signing up for a medical takaful plan solely based on the contribution. While the affordability is important, it should not dictate the type of plan we should get.
It is more important to get the coverage that you need within the contribution that you can afford.
So, what are the common factors that will affect your contribution?
A co-takaful is an agreement that is set between the takaful operator and you, where a certain percentage of the cost charged for any medical treatments will be shared between two parties.
Full coverage means the takaful operator will fully pay the medical bill on selected charges such as Room and Board, ICU, surgery as well as inpatient and outpatient treatments, within the annual and lifetime limit.
Treatment | Estimated Cost | With co-takaful |
---|---|---|
Knee replacement | RM15,000 - RM40,00015 | You need to pay RM1,500 to RM4,000 (10% co-takaful) |
A plan with co-takaful is a good option to help you lower your takaful plan contribution, making it more affordable. However, if Arifin wants total peace of mind, it’s good to look into a takaful plan that offers no co-takaful (full coverage) so he and his family won’t be financially burdened when he falls sick.
It’s also important to consider coverage of outpatient treatments before and after hospitalisation, as these can come up to a significant amount.
Typically, a takaful plan covers up to 90 days after discharge for follow-up check-ups.
Some takaful coverage ends at the age of 65 or 70. This exposes the Person Covered to a myriad of risks in their most vulnerable stage of life.
This is why it is important to look for a takaful plan that gives you the longest coverage to at least 99 years of age.
An investment-linked plan with a unit deducting medical rider charges the same contribution every year, whereas a standalone medical plan or contribution paying rider increases its contribution rate as the Person Covered ages.
However, the investment-linked plan may require top up contribution in case of the participant’s account value is less than or equal to zero at any point of time.
The standalone takaful plan is more affordable in the early years but the cost can go up significantly as you age.
Most takaful plans come with a waiting period before you can make a claim.
Here are the types of waiting period and the typical duration from the date the medical plan is active:
Type | From the effective date of the medical plan |
General waiting period | 30 to 120 days |
Normal illnesses | 30 days |
Specified illnesses such as hypertension, diabetes mellitus and cardiovascular disease | 120 days |
Certain illnesses such as cancer | 60 days |
Some of the general exclusions usually included in a family takaful and health protection plans are:
Suicide | Self-inflicted injuries |
Extreme activities such as skydiving or parachuting | Injuries sustained while committing a felony or assault |
War | Pre-existing medical condition |
Cosmetic surgery & circumcision | Pregnancy and child birth |
Dental | Optical |
AIDS, AIDS Related Complex & HIV related diseases | Congenital conditions & deformities |
Note: The list above is non-exhaustive and differs from plan to plan, and takaful operator to takaful operator.
We all know someone who is suffering from cancer or heart disease, or has passed on due to these non-communicable diseases (NCDs). However, we tend to think that this is something that will only befall someone else, not us or someone close to us.
This is far from truth. According to the data from the National Health and Morbidity Survey (NHMS), 73% of the total deaths in Malaysia were due to NCDs, and half of those were caused by cardiovascular diseases.16
Here’s why you need both medical plan and a critical illness plan:
If Arifin suffered from a stroke and was hospitalised, he would use his medical takaful plan to cover his hospitalisation and treatments.
This plan covers treatment and room & board of hospitalisation as set out in the certificate.
After spending a few weeks at the hospital, Arifin was discharged but he has not recovered fully to lead his day-to-day life independently. Here’s the estimated out-of-pocket expenses that may incur:
Monthly consultation and check-up
Physiotherapy
Long-term medication
There are also other hidden costs:
Hidden costs to hire a caregiver /Loss of productivity for the caregiver
Alternative treatments that are not covered by the plan
Income replacement if the Person Covered is unable to return to work
The lump sum provided by the plan will be able to cover the costs that are not covered by the medical takaful plan.
* Based on exchange rate of US$1 = RM3.95854 as at January 15, 2018.
Post-stroke outpatient care costs are significantly influenced by stroke severity. The cost of attendant care was the main cost incurred during the first three months after hospital discharge, while travelling expenses was the main cost incurred when attending outpatient stroke rehabilitation therapy.
Alzheimer’s Disease/Severe Dementia | Bacterial Meningitis | Blindness | Brain Surgery |
Cancer | Chronic Aplastic Anemia | Coma | 8 Coronary Artery By-Pass Surgery |
Deafness/Loss of Hearing | Encephalitis | End-Stage Kidney Failure | End-Stage Liver Disease |
End-Stage Lung Disease | Heart Attack | Heart Valve Surgery | Major Burns |
Major Head Trauma | Other Serious Coronary Artery Disease | Paralysis/ Paraplegia | Parkinson’s Disease |
Primary Pulmonary Arterial Hypertension | Surgery to Aorta | Full-Blown AIDS | Fulminant Viral Hepatitis |
Loss of Independent Existence | Loss of Speech | Major Organ Transplant | Multiple Sclerosis |
Severe Cardiomyopathy | Stroke | Systemic Lupus Erythematosus with Lupus Nephritis | Benign Brain Tumour – of specified severity |
HIV Infection Due To Blood Transfusion | Motor Neurone Disease – permanent neurological deficit with persisting clinical symptoms | Muscular Dystrophy | Angioplasty and Other Invasive Treatments for Coronary Artery Disease |
Covered events do not just include critical illnesses but also accidents that result in coma, head trauma, loss of hearing and major burns, to name a few.
These diseases can happen to anyone, and the best preventive care we can take to minimise the financial risks are:
Staying healthy to take advantage of No Claim Bonus
Participate in healthy activities organised by takaful operators
Get adequate critical illness coverage
Participate in a takaful plan that allows different coverage for different stages or severity of the illness
4http://www.themalaymailonline.com/malaysia/article/survey-shows-216000-malaysians-became-blind-due-to-delays-in-cataract-surge#jypyHvhiYpGxR6xG.97
5http://www.iku.gov.my/images/IKU/Document/REPORT/nhmsreport2015vol2.pdf
6http://www.iku.gov.my/images/IKU/Document/REPORT/nhmsreport2015vol2.pdf
7Malaysian National Cancer Registry Report 2007-2011
8http://www.federalgazette.agc.gov.my/outputp/pua_20131216_P.U.%20%28A%29%20358%20-%20PERINTAH%20KEMUDAHAN%20DAN%20JAGAAN%20KESIHATAN%20%28PINDAAN%20JADUAL%20KETIGA%20BELAS%29%20%202013%20%28disahkan%20oleh%20kementerian%29.pdf
9https://www.mahkotamedical.com/cost/coronary-artery-bypass-surgerycabg/?pn=2&lang=&discipline=0
10https://iprice.my/accu-chek/
11https://www.pantai.com.my/kuala-lumpur/facilities-services/diagnostic-services/health-screening
12http://says.com/my/news/malaysia-hospital-medical-bill-price-increase-in-march-2014
13https://www.thestar.com.my/lifestyle/health/2012/11/18/insulin-in-diabetes/
14https://www.thestar.com.my/business/business-news/2015/10/04/planning-for-healthcare-costs-in-retirement/
15https://www.thestar.com.my/business/business-news/2015/10/04/planning-for-healthcare-costs-in-retirement/
16https://www.themalaysianinsight.com/s/20706/
17https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4350462/table/T2/
The reality is that as we retire and get older there's a need to understand the legacy that we'll leave behind.
This is one of Arifin’s biggest concerns, on top of ensuring his retirement income is sufficient to last throughout his retirement years.
Leaving a financial legacy can be a tough goal to achieve, especially when Malaysians are already finding it hard to save up an adequate retirement savings. However, it is not an impossibility.
Here are some ways one can plan for a financial legacy for their loved ones:
Even if you don't expect to be able to leave money to your children or other beneficiaries, having the additional savings can give you the peace of mind to address unforeseen emergencies or special spending needs.
It’s never too early to start thinking about estate planning. In Arifin’s case, it is the perfect time for him to plan his financial legacy for his loved ones.
Close to 90% of Malaysians have no valid estate planning18. Many people make the mistake of thinking that estate planning is just for the super-rich. The truth is, it applies to most of us too.
Estate planning is more than just drawing up a will. It is a process of making proper arrangements for the protection, preservation and provision of a person’s total assets for the benefit of his family and loved ones.
First of all, what happens to your assets if you do not have a will?
Inheritance is governed by the Probate & Administration Act 1959, while non-Muslims are governed by the Distribution Act 1958 and Inheritance (Family Provision) Act 1971.
You die intestate
(without a will)
Your assets
Cannot be transferred to the appropriate heirs
In 2016, an estimated RM60 billion of frozen assets comprising homes, land and cash, remained unclaimed19.
For both Muslims and non-Muslims, heirs who need to access and distribute the assets of the demise, they will have to apply for a Letter of Administration (LA).
Filed by a beneficiary who has priority over other beneficiaries
Every other beneficiary must agree to the appointment and renounce their rights to petition.
However, if you have a will, the assets will be distributed differently for a Muslim and a non-Muslim.
Here’s how your assets can be distributed for a Muslim according to Faraid
Beneficiary | Fraction | Percent | Estimated amount |
---|---|---|---|
Wife | 1/8 | 12.5% | RM1.250 million |
Son 1 | 13/60 | 21.67% | RM2.166 million |
Son 2 | 13/60 | 21.67% | RM2.166 million |
Daughter | 13/120 | 10.83% | RM1.083 million |
Father | 2/12 | 16.67% | RM1.667 million |
Mother | 2/12 | 16.67% | RM1.667 million |
A will does not revoke a takaful nomination the same way an EPF nomination will not be affected. Even though you have a will, it’s important to ensure you have an updated nominee for both your takaful plans and your EPF savings.
Here’s how distribution of your takaful benefits work:
A takaful operator will only pay the benefits to an executor, administrator or proper claimant22
If there is takaful nomination (as beneficiary or executor): | If there is no takaful nomination: |
Takaful benefits will be given either:
|
Takaful benefits will be given to lawful executor or administrator. If there is no lawful executor or administrator, Takaful benefits of up to RM100,000 will be paid to a proper claimant. The remaining balance (if any) will be given by requiring the grant of probate, letters of administration or a distribution order. |
* Proper claimant includes parent or guardian of an incompetent nominee or an assignee or who claims to be otherwise entitled to the takaful benefits under the relevant law.
For Muslim families, there are some concerns that they may want to include in their takaful planning. Some of these include:
Badal Hajj is performing an obligatory Hajj on behalf of those who is unable to perform Hajj due to sickness, old age or death. Under a takaful plan, the Badal Hajj service is provided where someone will be appointed to perform Hajj on behalf of the deceased or the unfit person in the event of death or Total & Permanent Disability (TPD).
In the event of your passing, an amount as previously agreed by you from the Death Benefit will be channelled to a waqaf body appointed by us for this purpose. Typically, this is an optional service provided by the takaful operator, and you will need to inform the operator if you would like to opt in.
18http://www.thestar.com.my/news/community/2013/10/01/many-malaysians-still-have-misconceptions-on-writing-wills/
19http://english.astroawani.com/malaysia-news/faraid-not-cause-assets-being-frozen-100363
20http://www.inheritancecalculator.net/
21Distribution table here http://www.malaysianbar.org.my/non_muslim_inheritance_law.html
22http://www.bnm.gov.my/documents/act/en_ifsa.pdf