Friday, August 23, 2013

The One Thing We Overlooked on our Wealth Accumulation Journey

The following is a guest article on personal money management.

Growing wealth is no brainer. Get a pay rise (either by promotion of “jump motion”), invest prudently, generate multiple sources of income, start a business, etc.

Today, if you are reading this, I suggest we take a step back and revise our medical coverage.

Here’s an analogy. Like a good soccer team, having world class strikers are just not enough. A good line of defense is equally crucial, although they aren’t as glamorous as the strikers. But in soccer or in life, it is about looking at the big picture. I doubt a rectangular table can be stable with only 3 legs.

They say 2 things are certain in life; death and taxes.

I’ll like to add one more - rising medical costs.

That’s exactly how much common critical illnesses will cost you (as of 2013)

Is it easy or hard to make, say, RM 100k from our investment? Are you OK to grow your wealth to pay for any of these events above?

It is no secret that medical inflation hovers at 14% a year in Malaysia. If you observe the room rates in private hospitals now, a 4 person room costs the same as a 2 person room 5 years ago.

If you’ve bought a medical policy more than 5 years ago, it is likely that the coverage is sorely lacking now. As of 2013, the minimum coverage I will advise my clients as an independent financial adviser is a RM 200 room and board daily, RM 100k annual limit and a RM 1 million lifetime limit, regardless of any insurance company. The features will differ from company to company but these are the 3 major things one should look for when we talk about medical card.

Some of my clients still hold a RM 150k lifetime limit (yes, lifetime limit, not a typo error) medical policy sold by their previous insurance agents. And they thought it is sufficient for lifetime and they don’t need to look at it anymore. The fact is, insurance coverage, whether life or medical insurance changes in different stages of our lives. You must be aware that no single insurance policy is set in the stone once it is in-force. You can always request to reduce or increase (subject to underwriting) the coverage and add in or remove features (riders) from your policy, depending on your most pressing current needs.

So, dust off that policy of yours and see your current coverage. Call your servicing agent or financial adviser to revise the coverage higher if insufficient. Don’t wait until it is too late because it is very hard to get additional medical coverage once you are struck with any chronic illnesses. A recent true story I could share with you is that a 42 years old father of 3 just underwent angioplasty and realized his medical coverage (lifetime limit) has been maxed out. Seek my advice but I got to disappoint him. He has to live with the fact that he need to liquidate his assets or investment to pay for any future medical expenses. And may I repeat he is just 42 years of age?

The irony about insurance is the same like banks. Banks don’t want to lend you money when you are in financial distress, but are begging you to borrow money from them when all is fine and dandy. By the time you desperately need coverage, insurance company refuses to cover you. Nothing personal, it’s just business.

Any reason you don’t need any medical insurance? Yes, if you really don’t mind paying future medical bills from your own pocket.  I’ll advise you to build up and  accumulate a substantial medical fund. It’s really up to a person if they want to pay 1 ringgit for a 1 ringgit cost of medical expenses or pay a 1 ringgit premium for a 100 ringgit of coverage.

Another objection among working people is this - they might retort “Company cover my medical expenses, I don’t need any!”

Yes you are right. Now, check with your company if the coverage extends beyond your mandatory retirement age. If yes, congratulations! If not, then I’ll also advise you to build up a substantial post retirement medical fund or ensure your health is in tip top condition to still buy a medical card after retirement. The easier way is of course, either learn to love general hospitals or to get a medical coverage sooner rather than later.

It is ok to grow your wealth for others? My take? ”What a waste of all the effort to invest and make money over the years!”  The reality is - that’s exactly what we are doing if we focus only on growing our wealth without getting sufficient medical coverage. Most of us will be devastated if our wealth are squandered by our kids - I reckon we will be more devastated if we let private hospitals do the same. Without sufficient medical insurance, whatever we have accumulated will vanish into the thin air in an instant.

Lieu Ching Foo is the founder of Malaysian personal finance blog and an independent adviser with financial advisory firm Fin Freedom based in Penang.


Sunny said...

It is very difficult to commit to a medical insurance policy that always keeps up with the inflation rate. The bill is so large consider that one earning an average salary may not just spend on his alone, but his children for many years. In addition, buying insurance does not reduce the risks of getting critical illness, proper exercises and diet do. It simply covers part of the expenses to treat the illness, and in many cases, just to extend a miserable life. Therefore minimum medical insurance plus good living habits is the best option for ordinary people. We should actually spend time to study health articles, perhaps one after every five financial report. This knowledge is invaluable and never is there anything rich enough to take its place.

Sunny said...

Only after reading and knowing the importance of health and how to preserve it, people would spend money on the right food and invest their time in doing exercises. With these in actions, it reduces not only the risks of getting critical illness, but financial. Therefore it is supposed to be a more effective way in countering the problem - prevent it and the medical bills that follow. This is one way you could spend small money to save big money, always two Ringgit back for one Ringgit spent. The return is for sure and you gain health and happiness besides savings. It is therefore in my view as an investor, fruits reasonably priced, moderate sport expenditure, etc. are all value buy.

LCF said...

Sunny, I like it when you say -" health article after every 5 financial reports". Indeed, medical policy is never "static" - if someone bought a policy more than 5 year ago, it is likely insufficient. But at the point of this writing, a 1 mil lifetime limit will do, even you don't and can't buy additional in the future. "DO THE RIGHT THING, FIRST TIME". At times, we encountered the irony of things - the person who's a chain smoker since 20's never had any problem, but someone healthy are afflicted with cancer.

LokGP said...

One of the best write up from Malaysia ever! And it is also important to figure out which life stages you are in. Like what you said, if you intend to stay in a private hospital, get a medical that gives you at least RM 200/day for the bed. Private hospital beds are more expensive than 5 star hotel beds. Maybe it the good services from the nurse compared to the bell boys. :-) On life stages, if you are young, my opinion is that you should go for more exercises. And watch your diet. If you do that, you can choose not to buy a critical illness insurance. This is by the most expensive insurance coverage, and you have the lowest probability of getting these critical illnesses before Age 40. So, you get to save up a bit, and buy that house and get married. When you are 40, you should get a critical illness. But as you can see, the coverage is quite limited if you are not near a critically endangered which requires surgery. This is also telling you to fix your diet and exercise program immediately, and cancer or not, your body can recover from critical illnesses at Stage 1. So, it is also fair for the insurance company. Not everything requires surgery to get it fixed. Which is why humans are unique. So, even if you play defensive, you should never play too defensive that you drag your younger life at with huge insurance cost.

LokGP said...

Especially when you are just starting out and your pay is low or you business income is low. It helps you to get married earlier. You don't want to get rich and left out important life experiences. Other steps you could take it to make sure don't go bungee jumping once every month. No amount of insurance will be able to cover you and your loved ones. If you have a employer's insurance, you should find your what are your coverage, and sometimes, those HR department gives you BS about its all secret and all that. You should tell me, you are going to tell your family lawyer that, and the company will give you full coverage for any mega event. It is important to find out what are they covering, else you should just assume they don't have one in the first place and get another job. If you don't trust the HR, you can't trust your life career with them. They are going to screw you hard. So, once you found out the coverage by HR, you should get your friendly insurance agent, or a wise friend, and ask him whether you can have a second layer of insurance, so that the employer's insurance pays the first part of the disaster, and if it runs out, you second layer insurance will pay the second part. So, let's say you have RM 100k hospitalisation in a luxury hospital with sexy nurses and friendly doctors, but you company's insurance on pay RM 60k, your second layer insurance will pick up the the other RM 40k. And these second layer insurance is pretty cheap compared to the first layer insurance. So, if you are not working in a company that buys you medical insurance, you are really better off working at other company. Promotion are not guaranteed, but the medical benefits and EPF are guaranteed. And if you do well, you get promoted with higher pay, all the better, if not, that's still ok. So, we talked about second layer insurance. What if you are age 50, and you got kids that need to go to college and university, and they think they deserve all you can give them? Well, just they them, that grandpa only paid for your free secondary school fees and you had to work your ass for the other great stuffs in life you have. So, your kids, can get a loan for their studies, and if they score well, it is converted in to a free scholarship by PTPTN, else, they better think carefully whether they have the ability to study well, or whether the course they are taking can pay back those loans later in life. Your role is best served by educating them on comparing the cost and benefit of your kids education. If you don't know any better yourself, you would find out online. So, there you go, you sorted out your kids problem. Now, once you are no longer commited to their problem, you need to understand that they are not going to get committed to your problems in old age. So, you should not expect too much in old age, so you got to look after yourself. But if you were that loving parent, and you are now working into your 60s, I would say, hey, just keep working, but find a job that gives your pleasures and fun and enjoyment. For insurance, just forget it. The kids a grown up enough to look after themselves, and the best gift you can give them is to watch your health, exercise, and eat healthy. The fewer problems you give your kids, the better it is for your grandkids. And if you do fall sick, they government is there to hold you. Bypass at General Hospital for 3 weeks stays only cost RM 200 for retirees at age 55 or so. It would chagne to age 60 soon, I think.

LokGP said...

So, you shouldn't worry too much about health. If you want to get a degree, go for it. You can work at the university as librarian or janitor or whatever, pay your study bills, and bring some education certificate with you to grave. Its pride you are seeking after all. I think I had BS enough. But, to summaries, if you are age 40 and above, you should watch out your insurance. If you are starting out in life, don't care about the insurance so much, its more important to get on the right boat and find the right spouse. And if you are over 55, they government is to catch you if you fall. If you think our government is crap, you should go visit a public hospital sometime. The facilities and friendliness of the staffs is going to blow your mind. :-)