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.