TAKING AN INSURANCE POLICY

Introduction

I am reminded of my first job as a house officer in Malacca when I was earning RM 650 per month with no knowledge of taking an insurance policy. A very good insurance agent talked me into getting into the saving habit and I landed up buying an endowment policy that caused me to part with about 5 % of my meagre income with inadequate coverage. It is common for insurance agents to continue with the same line of encouraging advice that by putting some money away through purchase of insurance you are forcing yourself to save and it would come in handy later in life. This is true but to a certain extent.

I came across an article in the Personal Money Magazine (2011) and I thought it was a well written article that needs to be shared.

Types of Life Insurance Policy

Basically when we talk of life insurance policies (often term products) there are three:

1.       Term Insurance

2.       Whole –life Plan

3.       Endowment Plan

Term Insurance

The ‘term plan’ basically provides coverage for whatever sum you elect for with no other advantages like the other two, in other words , you would not be expecting to get any return after the period of say 5, 10, 15 or any number of years the insurance coverage is needed for.  It does not ‘cash value’. It is by far the cheapest of the insurance products as the premiums paid are low and affordable. The advantage is a higher insurance coverage is provided for a smaller premium compared to the others mentioned.

A word of advice is to consider if this is the best product you would want at that stage of your career especially when your earning capacity is not high and yet you feel there is a need for a reasonable insurance protection. The premiums tend to increase as age creeps in, obviously! Unfortunately trying to get insurance protection after your 60s becomes near impossible with many insurance companies (at least of those I know of!). As we grow older medical problems are inevitable and this often affects our eligibility or there would be additional sum of money to pay.

Should the young executive be able to plan his career and would expect to move up the salary scale the term insurance could be a better plan so as to provide protection in the interim period till he elects for other insurance products when his income permits him to keep a larger sum of money to pay for premiums which invite surrender value (cash value).

Whole Life Plan

The Whole-Life Plan, as the term implies provides for lifetime coverage hence doubling up as both savings and protection. Riders are often included customised to your needs to provide additional coverage for illness and personal accident. These policies can also be used as collaterals for taking loans from the insurance companies. Again the premiums have to be paid on time (fixed premiums) to enjoy protection.

Endowment Plan

This is a savings plan and the premiums are much higher. The coverage may not be high because of the nature of the plan. They have a fixed maturity date and may be useful if you are saving for a future event like providing for children’s education after, say some 15 years. Some have also worked out the period of coverage so as to be able to redeem the sum with interests to be useful for retirement. It looks attractive as you may be lured to take a RM 30 000 policy so that you could draw say RM 55 000 at the end of X number of years. Some criticism is that inflationary factor may not make this sum attractive after the policy period! All the same you need to decide why you want an endowment policy, most times it is because it forces you to save and you have a commitment like children entering tertiary education at the end of the policy term.

Investment Linked Insurance Products

This is essentially an investment product that the insurance company offers with some insurance protection. As in all investment products one needs to contend with the unwritten transaction and fund manager’s fees. Life insurance coverage is related to the investment, say you put in RM 50000/= and the insurance coverage may be 110% of the premium paid. This is payable in the event the policy holder dies prematurely. The insurance company may stipulate the terms and conditions. Some may want you to place the fixed sum of money for fixed period of time (say RM 2 K for 5 years) to enjoy the returns. One needs to be aware that the unit price will fluctuate with market forces, so you may want to hunt for ‘guaranteed ‘products if you do not want to take risks. Others argue that you would rather use other means of generating profits than take such investment linked insurance products. The decision is to be made by you considering the purpose you want to take ILIP.

Commission

Insurance agents work on commissions as whole life; endowment and ILIP derive the most commission compared to term insurance. Kelvin Tan, the writer of an article ‘Go for term insurance’ claims that whole life policies generate commissions of 35-50% of the first premium while term insurance policy generates a commission of 10-20% (quoted for Singapore). One must be aware that the latter does not qualify for cash value and if you are the type of person who feels that a surrender value is a must, then you would opt for any of the other products. It all depends on the purpose of taking out an insurance policy. Good insurance agents would be able to give excellent advice on the best policy for your age and purpose.

Conclusion

Taking up an insurance policy would be a means of providing protection for yourself and dependents. While term insurance plans do not give cash returns, the premium is much lower for a larger insurance coverage. Whole life plan and endowment have cash returns. There are hidden costs in ILIP and market forces dictate returns. One needs to consider if the small insurance coverage that comes with ILIP is worth the returns one gets or should you get a higher protection with term insurance and invest the rest of the money in another investment instrument?

Sivalingam Nalliah

22 Nov 2011

Further Reading
Kelvin Tan, Go for Term Insurance. Personal Money Oct 2011