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Life Insurance

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LIFE INSURANCE

 

Life insurance is a contract between an individual and a life insurance company. The individual agrees to pay a premium and in return, the insurance company promises to pay a predetermined amount of money to:

 

*      The insured, in the event he or she becomes disabled or when some specified event takes place, and/or; 

*      A beneficiary or beneficiaries if the insured passes away.

 

What it offers:

 

Predominantly, life insurance is bought for the following reasons:

 

a.) To create an immediate “estate” once the Insured passes away. This leaves one peace of mind knowing that the family has immediate cash to fall back on. There will be no need to liquidate assets to pay for funerals and clear debt in the event.

b.) To get financial protection in case of disability.

c.) To get health insurance cover. From our experience, this is important in a sense that health insurance cover provided by life insurers is generally better than those provided by general insurers. Why? It is because insurance offered or attached to life insurance policies are not prone to cancellations or “renewal not invited” like most general insurance policies due to bad claims experience. As long as you do not overuse your lifetime limit and pay your premium regularly, you are safe from such bad experiences.  The other reason is that, depending on the type of policy you buy, you can also tailor make your health insurance cover without much hassle depending on your life-stage, something you cannot do with general insurance policies.

d.) As a form of savings for retirement or planning for children’s education; while obtaining protection.

e.) To get a payout upon diagnosis of “critical illness” such as heart diseases & cancer. Importantly, you need the money to pay for the treatment etc. in a short period of time, which can be substantial, not after you are dead. Apologies, but I am being frank and you must know what you are getting when you buy one. Somehow, its sad that a lot of people I know don’t know what kind of policy they’ve bought and if they do, don’t really how understand what kind of riders they have.

f.)  Other reasons are varied such as to cover key employees or obtain financial protection from mortgage loans in the event of death by the borrower. We strongly urge those who have mortgage loans to purchase MRTA, MLTA or at least some form of term assurance. It really reduces stress for grieving spouses.

 

 

 

Some examples of insurance policy types:

 

There are basically four types of life insurance policies sold here in Malaysia. They are Term, Endowment, Whole Life and investment Link insurance.

 

1.  Term insurance:

 

Term life insurance provides for the payment of the sum assured only if the life assured dies within a specified period e.g. 10, 15, 20 years and do not provide any surrender values nor loan values. If the life assured does not die, the policy ceases and the premiums paid are retained by the insurance company. Thus, the premiums paid contain no savings element. Note however, there are also a few term insurance policies in the market that do offer a refund on basic premium at the end of the term and they are a minority. As such, term life insurance provides the maximum protection on the life assured for a specified number of years.

 

They are considered the least expensive form of life insurance cover with the “most bang for the buck” and are useful for the following purposes:

 

*      To provide life insurance cover for a fixed period of time.

*      To cover a mortgage loan, e.g. over a tenure of 20 years. 

*      To create an immediate “estate”.

 

 

2.  Endowment insurance:

 

Endowment insurance provides for the payment of the sum insured and any accrued bonuses at the maturity of the policy, or on death of the life assured, whichever comes first. Premiums are payable throughout the term of the policy.

 

What it offers:

 

Like whole life policies, endowment policies steadily build up cash values. However, since an endowment policy matures much earlier than a whole life policy, the cash values build up more rapidly. Therefore, the premium payable is often higher than that of a whole life policy. Thus, this type of policy is a good and systematic method of saving and obtaining insurance protection during the given period.

 

 

 

3.  Whole Life insurance

 

Whole life insurance is usually a policy designed to the insured with a level premium payable for life. If the insured dies, the sum assured less any outstanding policy loans are payable to beneficiary.

 

What it offers:

 

This is a permanent insurance policy and hence, there are surrender values available. Although it is a whole life policy, you are not expected to pay premium all your life and may chose to stop or cancel the policy at any time. It however, very importantly gives you the option to do so at any stage unlike the other policies which have fixed terms.

 

The advantages of whole life insurance are:

 

*      It gives the insured maximum permanent protection at a moderate cost each year. 

*      It need not be renewed or converted as with some term policies. 

*      It has surrender values, loan values, and paid-up values and it also contains non-forfeiture privileges. 

 

 

 

4. Investment Link insurance

 

Investment link insurance is a whole life policy with an investment vehicle in it to potentially give you better returns than the other types of policies.

 

What it offers:

 

*      Whole life cover with potentially higher returns

*      Ability to tailor-make your policy and make changes to it depending on your needs in future.

*      Ability to attach a good medical insurance scheme to it.

*      It is helpful in that you can save for future events like purchasing a new car etc and can withdraw money from the policy without any penalty such a policy loan where you have to pay interest. Great for planning education fund.

 

A word of advice, never ever buy a children’s educational policy where you have to pay interest if you take out money. It just does not make any sense to pay interest for money that is yours in the first place to use for eventualities. It’s as though you have to pay interest for taking out money from your a/c through an ATM.