September 14, 2009

What Type of Life Insurance to Buy?

Following up from the previous posting, you may have decided to buy a life insurance for yourself. But wait a minute...there are tons of life insurance out there by so many companies! Which one is the best life insurance policy, you might ask?

Well my dear, there is no such thing as the BEST life insurance policy. To me, a good insurance policy is the one which fulfills 70-80% of your and your dependencies life protection needs, and the one which is affordable to you at that point of your life.

Since most of the insurance companies are regulated by Bank Negara Malaysia, most of the insurance policies have very similar coverage. Generally, life insurance can be categorized to the following categories:
  1. Whole life/endowment plan - this is basically insurance + savings
  2. Term life plan - this is basically a life insurance for a limited term, i.e. 5/10/15/20/25/30 years protection with no savings component at all
  3. Investment-linked plan - this is basically an all-in-one insurance plan that combines protection and investments in a whole package
Whole life/endowment life policies are basically insurance that provides you with protection and savings at the end of the days. Since the life insurance company has to provide returns for the savings portion, generally this kind of plan is very expensive. For some, they use whole life insurance plan as a kind of savings plan which has typical return of 3-5% p.a. I personally think there are better ways out there to get much better returns. Whole life/endowment plan is only suitable for those who wants protection and who are conservative/ignorant of other investment instruments.

Term life plan can provide huge coverage for a limited term for very little premium. At the end of the term limit, the policy will lapse with no savings at all. This kind of plan is good for those who want limited term coverage as well as a good substitute for MRTA for housing loan. However, if you intend to take very long term (like 30 years coverage) with add-on benefits/riders, such as critical illness rider, the premium of term plan will escalate and might be on par with investment-linked policies.

Investment-linked plan (ILP) basically provides all kinds of coverages, such as life, medical, critical illness, personal accident and etc in a whole package at a relatively cheap premium. This is because the insurance companies are shifting all elements of risk management to the consumers themselves. The effectiveness of your ILP depends on your investment performances. If your investments are not doing well, you might have to top up the premium especially when you grow older.

So now you know how to differentiate the life insurance categories, what should you buy? For me, a complete insurance coverage should have these four basic components/riders:

  1. Life/Permanent Disability
  2. Hospitalization & Surgery
  3. Critical Illness
  4. Personal Accident
With these four components/riders included in your insurance package, you are at least taken care of when you are hospitalized/met with accidents/come down with dreaded disease.

For those in the 20-30s/single/have some sense of investments, you should have a look at investment-linked policies since this plan is complete and affordable. You have the benefits of time to accumulate the investments (provided you know how to manage the investments).

If you are in the 40s and still dont have insurance coverage, I feel sad for you since insurance should be bought when you are young with no lifestyle diseases such as overweight, diabetes, hypertension etc. You may opt for term insurance plan with medical card, at the very least.

For those in the 50s with independent/working children, I think the purpose of life coverage is not as critical anymore. You may opt for short term term insurance plan with the VERY important medical card.

Ok, now you know what to buy, the dilemma is how much should i buy? Well, we'll discuss about this in the next posting.


Anandhan said...

An investment-link insurance plan is a life insurance plan that combines investment and protection. Your premiums provide not only a life insurance cover, but part of the premiums will also be invested in specific investment funds of your choice. You get to choose how to allocate your insurance premiums towards protection and investment.

Premium Allocation

Depending on your age, the premium and the basic sum assured, the premium that you pay may be split into insurance premium and investment premium.

For example if your total annual premium is RM3,000, always keep your insurance premium at the minimum RM1,200 due to the high deduction made in the first 6 years.

Annual premium of RM3,000 can be split into:
- Insurance premium ~ RM1,200.
- Investment premium ~ RM1,800.

A) Investment-link plan service charge deducted from the insurance premium of RM1,200/yr.
(will be charged for the first 6 years)
1st yr - 60%
2nd yr - 50%
3rd & 4th yr - 30%
5th & 6th yr - 10%

-Total Deduction ~ RM2,280.

B) Investment-link plan service charge deducted from the investment premium of RM1,800/yr.
(will be charged annually) ~ 5% (RM90).

Service charge is used to pay the commission of the agents and administrative charges of the policy, so if more allocation is made to the insurance premium, the agent's commission will be higher.

C) For example if your total annual premium is RM3,000, and all of it is allocated to insurance premium:
-Total Deduction ~ RM5,700.

So always insist on minimum allocation to the insurance premium and avoid paying high charges & fees.

By minimizing the insurance premium and maximizing the investment premium, you should be able to get higher coverage and more benefits at a lower cost.

Both the combined insurance and investment premium should be able to cover the insurance charges for the basic life insurance coverage and other optional benefits such as critical illness, personal accident & medical insurance.

If both the combined premium does not cover the insurance charges, then get a quotation from a different insurer.

Some of the terms used by different insurers to describe investment premium:
- Great Eastern ~ GreatSaver.
- Manulife ~ MaxiSave.
- MAA ~ MaaxSaver.
- Allianz ~ WealthCover.
- Prudential ~ PRUsaver.
- or usually termed as " top-up".

Only a few of the regular premium investment-link plans can be packaged whereby both the combined insurance and investment premium will cover the insurance charges at the initial stage itself. So please beware of agents who give you the wrong information.

Anandhan said...

Term insurance is a type of life insurance policy that provides coverage for a certain period of time, or a specified "term" of years. If the insured dies during the time period specified in the policy and the policy is active - or in force - then a death benefit will be paid.

Term insurance is initially much less expensive when compared to permanent life insurance. Unlike most types of permanent insurance, term insurance has no cash value.

Two of the best term insurance products in terms of pricing & coverage:

1) Mutual Life Plus 2 ~ exclusively for Unitholders of Public Mutual.

2) MAAKL Life Plus ~ exclusively for Unitholders of MAAKL Mutual.

Please compare both before purchasing.

Justin Kemp said...

If truth be told informative and valuable detail is rates

Sakhi Sawant said...

Thank you for sharing useful information. Can you please explain what the pro and cons of this term insurance policy, is there any age specification to go for this plan?

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