Life Insurance Planning

What is Life Insurance?

Life Insurance is one of the least monitored and most misunderstood area of personal finance. Due to its’ endless jargons and its’ close associations with unpleasant scenarios, such as death, disability, and diseases, life insurance can be unpleasant to talk about and may seem less appealing compared to other investment-related topics. However, it is essential to recognise life insurance as a proper foundation to sustainable financial planning. Basically life insurance serves as a protection against financial losses in the event of death, disability and diseases (3D’s). Insurance companies will pay huge amount of money ( i.e. coverage or benefits ) if 3D’s happen in exchange of relatively small amount of money ( premium ) paid to them in consistent times.

Understanding The Different Types of Life Insurance and Coverage

There are plentiful of life insurance products out there being marketed to accommodate to different needs and wants. One key characteristic to distinguish life insurance is the type of risk they cover. Almost all life insurance covers against death and disability, but not all life insurance covers against diseases. Critical Illness Policy is one such life insurance, where the coverage includes policyholder being paid one lump sum in the event of being diagnosed with one of the 36 listed critical illnesses. On the other hand, medical insurances cover hospital bills and expenses, mitigating cash outflows and insuring the policyholder from huge financial losses arising from hospitalization.

On the other side of the spectrum are the savings plan. Despite the fact that these life insurance products offer comparatively lower protection against 3Ds, they are mainly designed to enforce discipline savings and often offer higher returns in premium. Life insurances can also be distinguished by the duration they are enforced. Whole-Life plans covers for an entirety of one’s life, whereas term life insurances are usually enforced for a limited period of time, up to 30 years.

Why Do We Need Life Insurance?

If you’re the breadwinner, life insurance makes sure breads get put on the table, mortgage gets paid, your children’s education gets funded even if the worst happens to you. If you are not immune to all diseases, a medical insurance ensures your savings are safe from being emptied overnight by the hospitals.

If you’re a business owner, a life insurance can be structured to fund a buy-sell agreement to ensure that the remaining business owners have the money to buy your company interests if you unfortunately faced with death or total disability. In this case,the business sustains and your family gets the money from the transfer of ownership. If you desire to leave a huge legacy for your next generation, life insurance ensures this legacy exists by paying the creditor-proof death benefits to your children.

If you are a property investor, a life insurance can act as your mortgage insurance so that your loan gets approved more easily. If you are planning for retirement, savings plans are an alternative way to ensure a consistent stream of income in the later years.

The point is, life insurance can cater needs in a lot more ways most people think it does. With the rate of medical inflation between 10% to 15% every year, medical insurance is expected to be ever more crucial as time passes. We are still far away from being a well-insured community. It is found that only half of the Malaysian population had life insurance protection in 2015, with 90% of this half being underinsured. This is a far cry from our neighbouring country Singapore, with an average of 2.5 policy enforced per person.

How High of a Coverage Should We Secure?

Coverage benefits are the money policyholders will claim when stricken with death and disability. The optimal amount of this benefit varies for each individual and changes from time to time, depending on commitments. To identify your coverage, identify the total money needed to sustain you and your family once you are financially disabled, minus the total savings and investments you own. This amount of money is the shock absorber that is expected to shield you financially from the worst of rainy days. It is necessary to keep track of this amount consistently, as financial commitments of an individual are always changing and, whenever possible, factor in inflation into the calculations.

( Financial Commitment Needed per Month x Number of Months For Recovery ) – Total Savings & Investments = Coverage Benefit

For critical illness protection, the figure ought to be around 3 to 5 times your annual income as that is the typical period a person diagnosed with critical illnesses need to fully recover and return to employment. On choosing medical insurance, take note of annual limits and lifetime limits, as they are caps on how much you can claim per year and per lifetime. Some medical insurances also impose deductibles, a specified amount the policyholder must pay before the insurance company will pay a claim.

What to Do When Buying Life Insurance?

Don’t lie. Being dishonest about your health conditions and lifestyle may void your insurance contract and have you inaccessible to the much needed claim if a crisis arises. Make sure your life insurance agent performs the duty to ask and submit your health details as well. Any agent that encourages you to lie should be reported to the insurance company immediately. Next, understand that most of the time the cash values indicated on the sales quotation are not guaranteed. Although there are plentiful of sales agents out there, one agent can still be more qualified than another. Your insurance planning can be made substantially easier with agents who exhibit more professionalism and expertise. Ensure that the product recommended suits your need and circumstances, do not hesitate to communicate openly with your trusted representative. Last but not least, most insurances, especially medical insurance are best bought when one is healthy. Medical conditions and histories may cause you to be unqualified from purchasing life insurance for a lifetime.

References

Lim, H. (2016). BNM hopes to see 75 pct of Malaysians covered by insurance by 2020. [online] Borneo Post Online. Available at: http://www.theborneopost.com/2016/09/30/bnm-hopes-to-see-75-pct-of-malaysians-covered-by-insurance-by-2020/ [Accessed 17 Nov. 2016].

De Alwis, I. (2015). Planning for healthcare costs in retirement. [online] The Star Online. Available at: http://www.thestar.com.my/business/business-news/2015/10/04/planning-for-healthcare-costs-in-retirement/ [Accessed 17 Nov. 2016].

Life insurance data 2015 (2016) Available at: http://www.mas.gov.sg/~/media/resource/data_room/insurance_stat/2015/Life%20Insurance%20Data%202015.pdf.

Malaysian Digest (2016) 90 per cent of life-insured Malaysians under-insured, says LIAM. Available at: http://malaysiandigest.com/news/600094-90-per-cent-of-life-insured-malaysians-under-insured-says-liam.html [Accessed 17 Nov 2016]