“My wife and I have RM300,000 outstanding on our mortgage loan, and have two daughters aged five and eight this year. What kind of insurance policy should we aim for?

“I currently have a mutual investment policy that comes with a medical card for myself, my wife and daughters, plus another policy that provides personal accident coverage for myself and my wife. Do advise. Kind regards, Keong.”

Here are four points Keong should consider and discuss in detail with his wife and financial planner to solidify his family’s finances.

1. Insurance

Assuming Keong’s family is a dual-income family, the risk of them losing their money-generating abilities would be death, disability, or a diagnosis of a major disease (critical illness).

Death could be said to be “cheaper” than disability and disease, simply because both disability and illness would add to the family’s expenses on top of the potential loss of income.

As Keong has bought medical cards for himself, his wife and children, they will come in handy when it comes to hospital bills. So, he has done well in this regard.

Likely, Keong’s medical card is attached to an investment-linked policy and will cover death and disability. But based on the above information, it’s unclear if it covers critical illness. If it does, great; if not, he should consider adding this coverage into his overall insurance plan.

Personal accident coverage is good for boosting one’s assured amount, and could prove helpful in the event of Keong’s passing or disability due to an accident. From an estate-planning perspective, this is icing on the cake.

2. Sum assured

Keong has a family and an outstanding shared mortgage loan of RM300,000. As such, he has to take into account the following:

• his share of outstanding debts (50% of RM300,000);
• his contribution to the family’s annual living expenses;
• gifts for and spending on his wife, children, and other relatives;
• other special needs, e.g. charities.

Let’s say Keong contributes RM60,000 a year to his family’s living costs, and wishes to save RM100,000 in university fees for his children, on top of another RM100,000 for his own surviving parents. He has no intention of contributing to any charities at the moment.

In addition, assume he has RM300,000 in sum assured, which covers death, disability and critical illness. The additional sum assured that Keong requires can be calculated as follows:

So in Keong’s case, he would need an additional RM650,000 in insurance coverage.

3. Beneficiaries

With two children aged five and eight, it’s not practical for Keong to name them as the beneficiaries of his policies as they are minors. He could nominate his wife to receive the sum assured if he trusts her to hold on to the funds for their kids’ tertiary education.

However, the possibility exists that his wife might spend or invest the sum assured for her own purposes. As such, Keong’s intent needs to be stated clearly – that is, he needs to dictate the objectives of his insurance money.

As Keong is married, his next life-insurance policy would be a trust policy, where his legal beneficiaries would be his wife and kids, even if he were to nominate his parents as the recipients of the sum assured.

As such, should he wish to bless his parents with a fixed sum, he would need to buy a policy that specifically ensures his parents can be the beneficiaries, or use other means such as a will to channel the funds to his old folks. Which leads to:

4. Wills

It is ideal for Keong and his wife to prepare their wills to manage their estate and take care of their children in the event of their passing.

There are a couple of points to consider: first, who shall be the legal guardian to their kids, as they are still minors? Second, who should be the executor of the wills?

Assuming Keong and his wife are joint owners of their home, if Keong were to pass on, his portion of the home ownership would be split among his wife, surviving parents, and two children. This could lead to potential complications in terms of administration and management.

As such, if Keong wishes for his wife to fully inherit his portion of the home, he needs to dictate this in his will, and likewise in the case of Keong’s wife.

In conclusion, multiple components – insurance, wills, and trust – are required to effectively plan out Keong’s estate and provide his loved ones with financial security.

The above is best discussed with a licensed financial planner who will be better able to provide insight into the finer points of estate planning.

This article first appeared in KCLau.com. Ian Tai is a financial content writer, dividend investor, and author of many articles on finance featured on KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’ and ‘Small Cap Asia’ in Singapore.