Personal Finance Notes PDF

PERSONAL FINANCE NOTES CHAPTER 1 : INTRODUCTION TO FINANCIAL PLANNING Financial planning: process of managing your money effectively to meet your financial goals Importance: ​ Help achieve financial goals -​ set specific, measurable, and time to achieve goals -​ Implementat...

PERSONAL FINANCE NOTES CHAPTER 1 : INTRODUCTION TO FINANCIAL PLANNING Financial planning: process of managing your money effectively to meet your financial goals Importance: ​ Help achieve financial goals -​ set specific, measurable, and time to achieve goals -​ Implementation : budgeting, savings plan ​ Allows you to control your finances -​ monitor income, expenses and investments -​ Implementation : spending control ​ Managed the unplanned -​ medical emergencies, job loss or unexpected repairs -​ Implementation : emergency savings, insurance ​ Save for retirement -​ ensure have enough money to maintain lifestyle after retirement -​ Implementation : retirement account (EPF) ​ Minimize tax payments -​ helps take advantage of tax-saving strategies -​ Implementation : tax-advantaged account, tax advisors Principles of personal finance: 1.​ The risk-return trade-off: higher returns come with higher risks ○​ Highest risk: ​ Cryptocurrency: digital currencies that use cryptography for security ​ High volatility: prices can fluctuate dramatically in short periods ​ Lack of regulation: exposed to fraud and manipulation ​ Technological risks: hacking and security breaches ​ Venture funds: funds invest in early-stage companies with high growth potential ​ Uncertainty of future success ○​ High risk: ​ Equity funds: funds invest in stocks of publicly traded companies ​ Market volatility: prices influenced by market conditions, economic news and company performance ​ Company-specific risk: companies can underperform/even go bankrupt ○​ Moderate risk: ​ Mutual funds: pool money from multiple investors to invest in a diversified portfolio ​ Diversification reduce risk ​ Managed by professional fund managers, who make investment decisions on behalf of investors ​ Still subject to market risk, meaning their value can decline due to overall market downturns ○​ Low risk: ​ Corporate bonds: debt securities issued by corporations ​ Lower volatility ​ Regular interest payments: steady stream of income ​ Credit Risk: risk that the issuer may default on the bond ○​ Lowest risk: ​ Cash and bank deposit 1  ​ High liquidity 2.​ The time value of money: money received today is worth more than money received in the future 3.​ Diversification reduces risk: ○​ Spreading investments across different assets ○​ Help reduces risk without affecting return 4.​ Different types of risks have varying impacts on investments: ○​ Credit risk: lead to partial/complete loss of the invested principal ○​ Market risk: declines in asset values across various investment classes 5.​ Taxes affect personal finance decisions: ○​ Taxes reduce the income ○​ Compare investment alternatives on an after-taxes basis Financial planning process: 1.​ Evaluate financial health : ​ Prepare personal balance sheet and income statement ​ Uses ratios to monitor financial health ​ Determine money inflow and outflow 2.​ Define your financial goals : Determine what you're saving for and how much ​ Short term goals (within 1 years) - 3 month emergency funds, pay off bills, finance vacation, etc ​ Intermediate term goals(1-10 years) - save for child college, down payment on home, finance large items (weddings) etc ​ Long term goals (more than 10 years) - purchase retirement home, create retirement funds, start a business, etc 3.​ Develop plan of action ​ Flexibility : adapt to life changes ​ Liquidity : maintain accessible cash or assets to cover short-term needs ​ Protection : use insurance ​ Minimizing taxes : tax-efficient strategies 4.​ Implement your plan ​ Use tools : budgeting, investment 5.​ Review your progress, reevaluate and revise your plan Personal balance sheet: What to do Elements Assets ​ Use fair market value ​ Monetary assets (cash, saving ​ Look at the purpose of accounts, etc) assets ​ Investment (stocks, bonds, etc) ​ Retirement plans (EPF, etc) ​ House ​ Automobiles ​ Personal property (furniture, jewelry, etc) ​ Other assets Liabilities ​ Include only unpaid balance ​ Current debt (utility bills, rent, insurance premium, etc) ​ Long-term debt (home, car, students loan) Net Worth ​ Negative = insolvency ​ Total assets - total liabilities 2  ​ Positive = solvent Personal income statement: Financial life cycle: 1.​ The early years (prior to age 54) : a time of wealth accumulation ​ Purchase home, prepare child rearing and education costs, start retirement savings, emergency fund 2.​ Approaching retirement (between ages 55-64) : the golden years ​ Set retirement goals, reviews financial decision, insurance and estate planning 3.​ The retirement years (after age 65) : live of savings ​ Less risky investment (preserve funds), review insurance, estate planning Analysis of financial planning: ​ Emergency fund: adequacy, liquidity ​ Level of debt: debt to income ratio, type of debt ​ Level of savings: savings rate, savings goals ​ Diversification of assets: assets allocation, risk tolerance ​ Assets and income at risk: stability Ratios: ​ Current ratio: ○​ measures ability to cover short-term obligations ○​ 1 or higher indicates good short-term financial health ​ Month’s living expenses covered ratio ○​ how many months liquid assets can cover living expenses if income stops ○​ rule of thumb - should have liquid assets that can cover 3-6 months of expenditures ​ Debt ratio 3  ○​ proportion of total assets financed by debt ○​ lower ratio (below 0.4 or 40%) is generally considered healthy, meaning you have less reliance on deb ​ Long-term debt coverage ratio ○​ ability to cover long-term obligations with available income after essential expense ○​ higher ratio (above 2 or 200%) is preferable, showing that you can comfortably cover your debt payments ​ Saving ratio ○​ percentage of your income that you save CHAPTER 2 : MANAGING LIQUIDITY 2.1 BANKING AND INTEREST RATES Types of financial institutions : ​ Deposited-type (banks) ○​ Commercial banks - offer a wide range of financial services ○​ Savings and loan associations - provide mortgage loans ○​ Savings banks - provide mortgage loans ○​ Credit unions - member-owned, not-for-profit financial institutions that provide financial services to their members ​ Nondeposit-type (non-banks) ○​ Mutual funds - pooled investment vehicle that collects money from multiple investors to invest and managed by professional fund managers ○​ Stock Brokerage firms - facilitate buying and selling of securities on behalf of investors Online banking : system that allows you to access and manage your bank account over the internet ​ Advantages ○​ Personal financial management support : online tools ○​ Convenience : access and manage bank accounts at any time and from anywhere ○​ Efficiency : access and manage accounts from one secure site ○​ Effectiveness : fast and reliable way to manage finances ​ Disadvantages ○​ Start-up time : register (verify) ○​ Adapting to online banking : older generations may struggle to use online banking ○​ Feeling comfortable : security concerns or a fear of identity theft ○​ Customer service : not as personal or immediate as in-branch support Time value of money : a dollar today is worth more than a dollar in the future ​ Earning potential: invested to earn interest or returns ​ Inflation: purchasing power of money decreases over time due to inflation ​ Elements : ○​ Present value : current worth of a future sum of money ​ PV = FV / (1 + r) ^n ○​ Future value : amount an investment will grow to over a period of time ​ FV = PV x (1 + r) ^n ○​ Interest : cost of borrowing money / earnings on investments ​ Simple interest : earned only on the initial principal 4  ​ Compound interest : calculated on the initial principal and on the accumulated interest from previous periods (interest paid on interest) The rule of 72 : estimate how long it will take for an investment to double in value based on a fixed annual rate of return ​ Time to double (years) = 72 / r ○​ r - interest rate expresses in 8% instead of 0.08 ​ Importance : ○​ Investment planning - how long money will double at specific interest ○​ Understanding debt - how long debt will double if left unpaid ○​ Compare investment Differences between conventional and islamic housing loan : 2.2 LIQUID ASSETS MANAGEMENT Cash management : process of collecting, managing, and optimizing cash flows ​ Importance ○​ Ensure liquidity - enough cash to cover immediate expenses ○​ Prevent overspending - track expenses ○​ Help achieve goals - allocate resource effectively ○​ Avoid debt accumulation - minimize the need to borrow Cash management techniques : ​ Budgeting - allocate funds ​ Investing - invest idle cash to earn return ​ Tax planning - increase income ​ Monitoring ​ Savings Risk : ​ Theft - physically or digitally ​ Loss - misplaced, forgotten, or destroyed accidentally ​ Human error - mistakes made during financial transactions or record-keeping Deposit Insurance System (DIS) : ​ System established by government to protect depositors against the loss of their insured deposits placed with member institutions in the event of a member institutions failure ​ PIDM : statutory body established by the Malaysian government under the Deposit Insurance Corporation Act 2005 to provide protection to depositors ○​ Benefits to depositors 5  ​ Protection - if bank fails, depositor are reimbursed up to RM250,000 ​ Peace of mind - can savings without worry ○​ Benefit to the financial system ​ Promote public confidence - prevent bank runs ​ Minimizes costs ​ Stability 2.3 CREDIT CARD MANAGEMENT Credit card : financial tool that allows the cardholder to borrow funds up to a predefined credit limit ​ Credit line / limit : maximum amount can spend on the card ​ Advantages ○​ Gives ability to pay even don't have money ○​ Convenient - no need to carry cash, quick and secure payment ○​ Earn discount, cashback and reward points ○​ Build credit score - increases chances of getting loans with favorable interest rates in the future ​ Disadvantages ○​ High interest rate ○​ Consequence of pay minimal balance only : ​ If you pay the amount in full and within the interest-free period, you will not be charged interest ​ If you fail to make the full payment within this period / pay the minimum amount only, interest will be charged on outstanding balance ​ Still allowed to continue using their credit cards but increase their debt in the process ​ The longer you take to pay off your debt, the more interest you will end up paying ○​ Consequence of failing to make payment on time : ​ Late payment charge, often 1% of the outstanding balance ​ If you still don’t pay up, you will start receiving letters / calls from your credit card issuer to remind you of payment ​ Repeated late payments can also land you on BNM’s CCRIS blacklist ​ Declared bankrupt if you owe the bank RM100,000 and above, and are unable to repay your debt Factors lead to increase in credit card usage : ​ Inflation ○​ cost of goods and services rises ○​ use credit cards to cover daily expenses when their income not enough ​ Improving labour market ○​ rising employment rates and wage ○​ higher spending ​ Attractive rewards and incentives ○​ cashback, travel points, and exclusive discounts Cash advance : use credit card to withdraw cash from an ATM machine ​ Banks charge a service fee ​ banks charge an additional 17% to 18% per annum interest for every day that the amount is not repaid in full Best practices of credit card management : ​ Keep track of your spending ​ Pay off your balance in full 6  ​ Use balance transfer ​ Negotiate with your credit card issuer ​ Avoid cash advances ​ Cut back on your expenses 2.4 BANKRUPTCY Bankruptcy : ​ Legal process where individuals / businesses are declared unable to repay their outstanding debts ​ Insolvency Act 1967 : process where a debtor is declared bankrupt following an Adjudication Order (perintah pengadilan) from the High Court Process : ​ Court petition filed by creditor / debtor ○​ Debtor’s petition cannot be withdrawn without the permission of the Court ​ Declaration of bankruptcy (conditions) ○​ The individual should be domiciled (bermastautin) / have resided in / carried on business in Malaysia within one year before the date of presentation of the petition for bankruptcy ○​ The individual is unable to pay debts, which amount to a minimum of RM 50,000 ○​ 6 months have lapsed (telah berlalu) since the debtor committed an act of bankruptcy ​ Official assignee takes control of the debtor's assets to settle debt ​ Certain civil rights are restricted ○​ The right to file / maintain a lawsuit without the permission of the bankruptcy court ○​ The right to transfer / sell property without the permission of the bankruptcy court ○​ The right to obtain new credit without disclosing the bankruptcy to potential creditors ○​ The right to travel outside of the country without the permission of the bankruptcy court Discharge from bankruptcy : ​ By annulment (pembatalan) of bankruptcy ○​ Applies to the court of an order to annul under two condition : ​ Can prove that he should not have been declared bankrupt in the first place ​ Successful in paying back his debts to his creditor ​ By order of court (sec 33) ○​ Apply to the court to grant him an order to discharge ○​ Court review report submitted by the DGI ​ By certificate of Director General of Insolvency (DGI) ○​ DGI has the authority to issue a certificate to discharge a bankrupt ​ Automatic discharge ○​ Insolvency Act 1967 : bankrupt individuals are automatically discharged after 3 years from the date of submitting their statement of affairs ​ complied with all legal obligations during bankruptcy ​ made efforts to repay creditors Effects of bankruptcy : ​ Travel restrictions - cannot leave the country without permission from DGI or court ​ Bare from holding any public office (leadership roles) 7  ​ Restricted from managing business ​ Control of assets : all assets are transferred to an official assignee who manage them to settle the debt ​ Publication of bankruptcy status Bankruptcy and insolvency : ​ Similarities : both deal with excessive debts ​ Differences : Aspects Bankruptcy Insolvency Definition legal status declared by a court financial state where a person or when an individual cannot repay company cannot pay debts as they debts become due Legal process requires a formal court process no formal court declaration required Control of assets are managed or sold by a Still have control over assets assets trustee to pay creditors Public disclosed private disclosure CHAPTER 3 : PERSONAL FINANCING 3.1 PERSONAL LOAN Personal loan : sum of money with interest lent by the bank to an individual borrower for a fixed period ​ Terms : 1-7 years (longer, high interest) Types : ​ Secured ○​ required collateral ​ valuable asset use as security against loan ​ If default, lender seize the assets to recover its losses ○​ Advantages ​ Lower interest ​ Longer repayment terms ​ Access to higher loan amount ​ Easily qualify ○​ Disadvantages ​ Longer application process ​ Risk of losing assets ​ Additional fees ​ Unsecured ○​ no collateral ○​ Advantages ​ Faster application process ​ Lower initial costs ○​ Disadvantages ​ Higher interest rate ​ Lower loan amount 8  ​ Shorter terms Origination fee : ​ Processing fee bank will charge when you take out personal loan ​ 1-8%of total loan ​ Paid in cash / taken off the loan Credit score : ​ Credit history detailing how responsible you are at making payment and servicing debts ​ Score range from 300-850 (650 is favourable) ​ Influenced : ○​ Approval of loan ○​ Amount of interest ○​ Terms of loan (shorter) 3.2 HOUSE LOAN (MORTGAGES) House loan : loan specifically used to purchase a home or property Differences between LPPSA and Bank loan : Debt to service ratio (DSR) : Determine an individual's ability to repay loans based on their income and current debt obligations ​ Lower DSR - can take additional debt ○​ prefer no more than 30 – 40% ○​ many banks might still consider your loan application even with a DSR of 70% ​ Higher DSR - financially stretched and at higher risk of defaulting on payments 9 3.3 CAR LOAN Hire Purchase : hiring (pengambilan) of goods with the option of buying the goods at the end of the hire purchase term ​ Borrower : hirer ​ Creditor : owner Type of costs : ​ Fixed cost : installment, insurance, road tax ​ Variable cost : petrol, services and maintenance, parking Installment of hire purchase loan : Flat rate basis : method of calculating where the rate applied is constant, regardless of the remaining balance or time period Car loan : secured loan for purchasing a car or other vehicle ​ Bank own the vehicle until you made the final payment ​ If default ○​ lender can reclaim the car to cover their losses ○​ Legal action ​ Required down payment Calculate ideal car : 10 Things to do before buy vehicle : ​ Research and advice ​ Consider cost ​ Save for down payment ​ Insured car 3.4 TAMBAHAN CHAPTER 4 : TAX PLANNING STRATEGIES 4.1 INCOME TAX Income tax : tax imposed by the government on the income ​ Who need to pay : Resident of Malaysia earning above RM34,000 per year (after EPF deductions) ​ Chargeable / taxable income : total annual income - tax exemptions - tax reliefs Type of income : ​ Profit from business / employment ​ Dividend, interest, discounts ​ Rent, royalties, premium ​ Pensions, annuities, other periodic payments ​ Profit not falling under foregoing paragraphs Tax exemptions : specific income, goods, or services that are excluded from tax liability ​ Reduce / entirely eliminate obligation to pay tax ​ Include : 11  ○​ Pension received (retires at age of 55, compulsory age, due to ill health that the pension received from government / approved pension scheme) ○​ Scholarship ○​ Dividends received from unit trust approved by Minister of Finance Tax relief : reduction in the tax payable by an individual or a business ​ To reduce chargeable income ​ Deduct total income ​ Include : ○​ Disable individual - 6000 ○​ Education fees - 7000 ○​ Medical treatment for parent - 8000 Tax rebate : reduction in the amount of tax owed to the government ​ To reduce amount of tax charged ​ Deduct actual taxed amount ​ Approval tax rebates for zakat : keep original receipts of zakat and payment must be made in yearly basis Record keeping : ​ Taxpayer must keep document for 7 years ​ Include : ○​ EA / EC form ○​ Original dividend vouchers ○​ Insurance premium receipts ○​ Book purchase receipts ○​ Medical receipts ○​ Donations receipts ○​ Other supporting documents 4.2 REAL PROPERTY GAIN TAX (RPGT) RPGT : tax charged by the Inland Revenue Board (IRB @ LHDN) on chargeable gains derived from the disposal (pelupusan) of real property ​ Gains : difference between the disposal price and acquisition price *Years : period of ownership / holding period Calculation : 12 Holding period / number of applicable years : ​ Starts from the date of the property’s Sale and Purchase Agreement (SPA) and not the date of vacant possession ​ Ends on the date of the property’s disposal / written agreement / final payment made CHAPTER 5 : MANAGING RISK AND INSURANCE NEEDS 5.1 RISK Risk : uncertainty about loss from an exposure Loss : unpleasant outcome of risk ​ Forms : ○​ Precipitated loss (have occured) ○​ Loss exposure (right turn out in the future) ​ Terms associated : ○​ Peril : source of loss ○​ Hazard : condition that creates / increases the probability of loss ​ Physical hazard : physical condition that increases the chance of loss ​ Moral hazard : dishonesty / character defects that increase the chance of loss ​ Morale hazard : slackness / indifference to a loss because of the presence of insurance coverage Classification of risk : 1.​ Fundamental risk : ○​ Risk that affect the entire economy / large groups ○​ Arise from nature or society (hyperinflation, earthquake, war) ○​ Not insurable 2.​ Particular risk ○​ Risk that affects only individuals ○​ Robbery, fires, thefts ○​ Insurable 3.​ Dynamic risk ○​ Risks resulting from changes in economy that may cause financial losses 4.​ Static risk ○​ Losses that would occur even if there no changes in economy ○​ Mismanagement, dishonesty, floods 5.​ Pure risk ○​ Risk lies in either get a loss or no loss ○​ Insurable ○​ Aspect that influenced the potential impact ​ Amount / quantum that could potentially be lost ​ Chance of loss occurring 6.​ Speculative / investment risk ○​ Risk lies in either obtaining less / more than anticipated ○​ Not insurable Dimension of risk : ​ Perceived / subjective risk ○​ Interpretation of risk in an encountered situation ○​ Risk perceived differently without considering the facts ​ Objective / factual risk ○​ Based on the available facts 13 Categories of risk behavior : ​ Risk taking / seeking : risk is an opportunity ○​ prefer variety and uncertainty ​ Risk indifferent : neither influenced by the danger nor the opportunity presented by the risky situation ○​ not attracted and not repulsed by risk ​ Risk averting : risk is a threat ○​ Prefer certainty ○​ Overestimate risk and pessimistic in risky situation ○​ Focus on the loss potential 5.2 PERSONAL RISK Personal risk : risk related to individual’s circumstances Impact of personal risk : ​ Loss of income earning ability ​ Incurred additional expenses due to illness /disability ​ Inability to lead to desired lifestyle / fund child education ​ Wealth accumulation uncertainty Types of personal risks : ​ Premature death ​ Illness ​ Disability ​ Retirement ​ Education Human life value : the present value of the potential income lost by dependents as a result of the person’s death ​ Assumption : ○​ Salary is unchanged for entire period ○​ Constant interest rate throughout period ○​ Unchanged income need (ignore evolving needs) ○​ Ignore inflation rate ○​ Does not consider income generating activity after retirement Capital Needs approach : examines the amount of funds required to meet the income needs of dependents ​ Capital liquidation : ○​ Both principal and portion of interest will be consumed in meeting income needs ○​ Focus on meeting the income goals for a certain fixed period of time ​ Capital conservative : ○​ Investment earnings alone will supply the income stream ○​ Focus on meeting the needs of dependents and transferring wealth to heirs 14 Additional capital sum : Amount of funding / additional capital sum required : 5.3 PROPERTY & LIABILITY RISK Property risk : potential for loss or damage to physical property or assets ​ Include : natural disasters, fire, theft ​ Terms : ○​ Actual cash value : replacement cost of assets - depreciation ○​ Replacement cost : cost required by client to replace / repair the damaged property ○​ Depreciation : reduction of value of the assets ​ Property insurance ○​ Property that insured below its true value : not recover the full value of his losses ○​ Over-insurance : client pay more than necessary (waste of money) ○​ Compensation amount = (insured value / property value) x indemnity value Liability risk : possibility of being held responsible for an action / inaction that results in financial loss ​ Example of liability exposure : ○​ Death of customers ○​ Product liability ○​ Environmental pollution ○​ Personal injury ○​ Sexual harassment 5.5 RISK MANAGEMENT Risk management : process dealing with risks Areas of financial planning that associate with risk : ​ Wealth / assets accumulation : focus on building and accumulating wealth through investment ○​ Expose to speculative risk ​ Wealth /assets conservation ○​ Risk that reduce / destroy wealth that has been built ○​ Risk that reduce ability to earn income Risk management : 1.​ Setting objectives - define direction and give meaning to action 2.​ Gather information - to perform accurate analysis and make appropriate recommendation ​ Examples : financial position, insurance coverage, etc 3.​ Analyse information 15  ​ Stage 1 : identify risk (make list of risk that can have effect on financial situation) ​ Stage 2 : measure risk (quantum / monetary size of the risk) ​ Stage 3 : evaluate risk (determine the risk impact) 4.​ Develop plan - select and apply different techniques that suitable ​ Must have mixture of risk avoidance, risk control, risk retention and risk transfer ​ Defensive instrument : 5.​ Implement plan 6.​ Review, monitor and revise plan 5.6 INSURANCE LIFE INSURANCE : Type of financial product that provides a payout (death benefits) to beneficiaries when the insured person passes away Types : ​ Term life insurance ○​ Coverage for specific period ○​ More affordable ○​ Payout during the term (no payout if passes out when term end) ○​ Purpose : ensure dependents are financially protected during a time when financial obligation are high ​ Permanent life insurance ○​ Lifelong coverage (as long as premium paid) ○​ More expensive (include investment components, build cash, etc) ○​ Payout when passes away ○​ Types : whole life insurance, universal life insurance, variable life insurance Key features : ​ Premiums : regular payment to keep policy active ​ Death benefit : money paid to beneficiaries ​ Beneficiaries : individuals receive the benefit Benefits : ​ Financial protection ​ Peace of mind ​ Inheritance ​ Tax benefits GENERAL INSURANCE : Category of insurance that provides coverage for non-life-related risks Types : ​ Motor insurance ○​ Protect against damage / theft of vehicle ○​ Types : third party insurance, comprehensive insurance (cover insured vehicle) ​ Health insurance ○​ Covers medical expenses ○​ Types : individual health insurance, family health insurance, critical illness insurance ​ Home insurance 16  ○​ Protect against damage against home / personal property ○​ Types : building insurance, contents insurance (personal belongings inside home) ​ Travel insurance ○​ Protection against risk associated with travel (trip cancellation, lost baggage, accidents) ○​ Types : single-trip insurance, annual multi-trip insurance ​ Personal accident insurance ○​ Protection against accident resulting in injury, disability and death ​ Liability insurance ○​ Protect against legal liabilities ○​ Types : public liability insurance, professional indemnity insurance ​ Fire insurance ○​ Protect against fire damage ○​ Types : standard fire and special perils, comprehensive fire insurance ​ Marine insurance ○​ Protection for ships, cargo and other goods being transported via sea / air ○​ Types : hull insurance (ships) cargo insurance (goods) ​ Pet insurance ○​ Coverage for veterinary bills ​ Business insurance ○​ Protect business, assets and employees ○​ Types : commercial property insurance, employer’s liability insurance,business interruption insurance Key features : ​ Premiums : regular payments to keep the general insurance policy active ​ Excess / deductibles : amount the policyholder must pay out of pocket before the insurance company starts to cover the claim ​ Claim process : procedure a policyholder follows to request compensation ​ Coverage limits : maximum amount to cover loss Benefits : ​ Financial protection ​ Peace of mind ​ Risk mitigation ​ Compliance TAKAFUL : ​ Arabic word - kafala : to guarantee / take care of something ​ Islamic insurance ​ To provide financial protection in a way that complies with Islamic principles Key principles : ​ Mutual cooperation : participants (policyholder) pool contributions to help one another in times of need ​ Risk sharing : risk spread across the group ​ No interest : not invest in interest-bearing instruments ​ Shariah compliance : all activities adhere with Islamic law ​ Cooperative risk pooling : contributions are pooled together to compensate participants Types : ​ General takaful : protection against risks associated with assets and properties (motor takaful, home takaful, etc) 17  ​ Family takaful : long term product that combine life insurance and savings and protect against death, disability and critical illness (life takaful, critical illness takaful) Components : ​ Participants (policyholders) ​ Takaful fund (pool of contributions) ​ Tabarru' (contributions) ​ Underwriting and management ​ Surplus sharing Benefits : ​ Ethical and shariah compliant ​ Risk sharing ​ Transparency and fairness ​ Community support ​ Saving and investment Takaful vs Conventional insurance : CHAPTER 8 : ESTATE PLANNING 8.1 INTRODUCTION Estate planning : arrangements for the management and distribution of assets and liabilities after death Objectives : ​ Minimize costs of estate administration - reduce tax, legal cost, hire trust, etc ​ Provisions for maintenance of dependents - life insurance ​ Avoiding disputes among beneficiaries ​ Management of assets of deceased Importance : ​ Peace of mind : clear plan ensures assets distributed according to wishes ​ Protecting family interest ​ Minimizing legal complexities : reduce lengthy battles over assets ​ Avoid taxes and delays 18 Challenges in Malaysia : ​ Inadequate knowledge of legal instruments ​ Lack of proper documentation ​ Family disputes ​ Tax implications 8.2 COMPONENTS Wills : ​ Legal document that specifies how assets should be distributed upon death ​ Nonmuslims create will under the Wills Act 1959 and appoint executor to manage distribution ​ Muslims comply with Islamic inheritance law (Faraid) and appoint wasi to distribute based on fixed shares prescribed in Islamic law Trusts : ​ Allows to transfer assets to trustee who manages and distributes ​ Types : ○​ Living trust : create during lifetime of the trustor ○​ Testamentary trusts : created by a will after death Power of Attorney (POA) : ​ Gives someone authority to act on your in managing your finances / making decisions if you become incapacitated ​ Types : ○​ Durable POA : remain in effect even if you are no longer mentally competent ○​ Springing POA : takes effect only when a specific condition occurs Letter of Administration and Grant of Probate : ​ Letter of Administration : applies by administrator appointed by court when person die without will ​ Process of extracting Letters of Administration : ○​ Assets value less / equal to RM600,000 without immovable property - applications filed to Amanah Raya Berhad under the Public Trust Corporation Act 1995 ○​ Assets below RM2 million includes immovable property - application filed to a District Land Administrator ○​ Assets exceed RM2 million - application filed to High Courts in Malaysia ​ Grant of Probate : applies by executor when person die with will that legally authorized them to distribute 19 Assets distribution planning : ​ Decide how to divide assets among beneficiaries ​ Non Muslims based on personal preference ​ Muslim based on Faraid Guardianship for minor children : ​ Design a legal guardian to take care of children / prevent court make decision Family trusts and foundations : ​ Vehicle help ensure wealth is passed down in a controlled and structured manner 8.3 LEGAL FRAMEWORK Civil Law - for non Muslims ​ Wills Act 1959 ​ Probate and Administration Act 1959 ​ Trusts Act 1949 Islamic Law - Muslims ​ Islamic Family Law Act 1984 ​ Faraid 8.4 TYPES OF TRANSFER Transfer in testacy or intestacy ​ Personal representative : person who takes charge of the estate ○​ Executor ○​ Administrator ​ Testacy : have will ○​ Will (Wills Act 1959) : declaration intended to have legal effect of the intentions of a testator with respect to his property, guardianship, custody or other matters ○​ Purpose of wills ​ Expresses testator’s declaration ​ Appoint executor, trustee, guardian ○​ Formalities and legal requirement of wills ​ Must be in writing (handwritten, typewritten, printed) ​ In legal / formal language ​ Intestacy : without will Transfer by statutory law provisions ​ EPF paid to named nominee upon his death under EPF Act ​ Proceeds of life and personal insurance paid to named nominee under FSA 2013 Transfer by contract ​ Certain assets may be subject to contractual terms ​ Legal instruments used : ○​ Trusts ○​ Power of Attorney ○​ Assignment of insurance policies : transfer of ownership rights from policyholder to another party ○​ Joint accounts : joint account for a bank and unit trust allows multiple people to be account holders with some restrictions ○​ Buy-sell agreement : written contract between business owners that outlines what happens when owner dies, become disabled, terminated 20