Asset Allocation – News Analysis
$1 million gone in one year !
While doing a legacy planning talk recently, I shared with the participants of the talk how a widow managed to fritter away the $1m proceeds from insurance payouts and donations in the short span of 1 years!*
Whilst it is easy to pin blame on the widow for poor money management (she generously gave some to relatives and spent some on a family holiday in Genting Highlands) or poor investment management (she invested $300K in her brother’s business which eventually failed), it also leaves one to wonder if it is fair to her in the first place that she has to suddenly inherit the problems that come with managing such a huge sum of money.
A few issues are at play here. Firstly, in the sudden demise of a loved one, will the dependents be of the right mindset to properly manage such a large sum of money? Would it be fair to them in such circumstances to make them responsible for a large sum of money?
Secondly, even if emotionally the dependents are able to cope with managing the funds, are they also experienced or wise enough to do the right thing for the family? The intention of the widow was good. She had wanted to invest the money to ensure a steady income for the family for a longer time. What she had lacked was the business know-how and the experience in managing a business.
Thirdly, how many of us would have been able to avoid the “curse of the lottery winner” where the sudden windfall creates a lifestyle that increasingly becomes unsustainable? The widow was left to care for 4 other children with an estimated RM$5-6000 in expenses a month. Yet, when she was supposed to have wised up after the failed business venture, the last $400K was spent in a mere 5 months! What they did spend on is anyone’s guess though the article did mention that she regretted not having at least bought a house to stay with the money and has to stay in a rented house in Malaysia. Many a times when we turn to insurance as a form of protection for the family when we are no longer around, we failed to consider the implications of managing a large sum of money for the surviving dependent. Consider these two other real life scenarios, which encountered within the past year.
What if you have $2 million in investible
assets ?
I met a pensioner who just retired and received a lump sum gratuity of almost $1.2m. Together with his other savings, he has close to $2m in investible assets for retirement. Even though this sum of money would be sufficient for his retirement needs, he had plans to invest the funds in the US or HK markets for potentially higher returns. I highlighted the risks to him as well as explained to him that he should consider structuring part of his savings into a simpler solution that would be able to provide him and his spouse with regular income and which would be easier for the spouse to manage should he be out of the picture one day. His spouse has spent her lifetime managing the household and was generally not exposed to financial markets and to leave her managing such a large amount of investment would be foolhardy.
I said this from my other experience working with a widow whose husband has left her with a stock portfolio, which she neither understood nor cared to understand. Whilst in this case the portfolio was easy to manage as it consists of mainly blue chips that pay her a good dividend, she had wanted to liquidate the portfolio wholesale immediately and park the funds into fixed deposits as she has always thought that stock markets are risky.
After working out her finances, we came to the conclusion that the portfolio would do well to continue to pay her a dividend income to supplement her other sources of income. This would be a better alternative than to park the money in the bank when she has no need for the liquidity.
Protection planning for the family should be made as stress-free and foolproof as possible. The last thing we want to happen when we are no longer around to protect our families is to subject them to more pressures. The pressures from other relatives coming to “beg, borrow or steal” from them when they realized that our beneficiaries have inherited a large sum of money. Or the pressures of having to invest the money and becoming victims of get rich quick schemes. Or the pressures of keeping up with the jones and spending their inheritance on the latest Ferrari!
Aviva has recently launched their new solution,
MyFamilyCover which seeks to address this issue.
One of the competitors has a similar solution through
their Enhanced Income Benefit, their solution will
payout in the event of premature death, terminal
illness, total and permanent disability (TPD) and
critical illnesses. This makes the policy more costly
for families who wish to provide for the family in the
event of death or terminal illnesses only.
Financial
Solution
A brief introduction to Aviva’s MyFamilyCover.
Aviva has allowed for 4 options to provide different level of coverages for different needs and their premiums which seem to be generally competitive compared to its competitor. In addition, Aviva’s cover allows for coverage for one to take care of himself should TPD or critical illnesses strike. This would appeal to the increasing numbers of singles who have no dependents but are keen to ensure that their income is protected should TPD or critical illnesses arise.
Most of us would probably have term policies or whole life policies that are designed to pay out a lump sum of money to our beneficiaries when we are no longer around. These policies typically would provide for the house to be paid or liabilities to be discharged. However, to continue living in the house, an income replacement plan that would ensure that your income continues to provide for your family or yourself would do well to supplement your protection coverage. All these, at a fraction of the cost of a whole life policy. Speak to your adviser today to find out more about this solution and relieve the pressures on your loved ones should you be unable to take care of them anymore. Now, I should also review my own coverage. I’m not sure if my mum can handle being a multi-millionaire should I predecease her!
APEX Private Wealth Management (A group of advisers representing PIAS)
Alan Tang
Senior Financial Services Director
Mobile: 9679 9129
E-mail: alan.tang@proinvest.com.sg