When it comes to life insurance, getting a plan based on the insurance-agent-who's-a-friend-of-my-brother's conviction is not good enough. It is important that you do your own research before embarking on a plan; after all, your family's future, and yours, is at stake. Here at SaveMoney.my, we will provide you with all you need to know about life insurance: the basics, the good, and the bad.
What Is Life Insurance?
There are so many types of insurance and protections available in the market such as business, property, health, vehicle, burial, and then of course there's life insurance.
Life insurance is a contract between a policy owner (you) and the insurer where the insurer (insurance company) will pay a specific amount of money to the beneficiaries (the individual that will receive the money: could be your spouse, children etc) if death or terminal or critical illness occurs to the policy owner.
How Does It Work?
The most basic process for life insurance is this: The policy owner will pay the arranged amount at regular intervals or in lump sums (both are known as premiums) into a fund managed by the insurance company. In return, when the policy owner suffers a hardship or death, the insurer will give a pre-determined sum of money to the policy owner's beneficiaries.
Maisarah (policy owner) bought a life insurance plan from the Pro-Life Company (insurer) to ensure that her children (beneficiaries) will be taken care of in the event of her death or critical illness. Maisarah has to pay RM 200 per annum (premium) for her insurance plan for the next ten years (term). If she happens to die or be struck with a critical illness within those ten years, her children will receive RM 120,000 from the insurer.
Aside from ensuring protection, life insurance can also be used as an investment portfolio, and also as a retirement fund.
Types Of Life Insurance Policies
There might be more branches of policies available out there, but generally, life insurance is split between these two: Term Life Insurance (non-permanent) and Whole Life Insurance (permanent).
Term Life Insurance (Non-Permanent)
What is Term Life Insurance?
As the name suggests, this type of life insurance is not permanent.
Therefore, if you choose to purchase a term life insurance, the most basic fact that you need to know is that your beneficiary will be paid only if you occur death during the contract period only. Similar case applies if you happen to contract any critical illness during those period.
Lets use Maisarah as an example again: what happens if Maisarah (the policy owner) is still alive and kicking at the end of her ten-year contract period? Unfortunately, if Maisarah decides not to renew her insurance contract, no sum will be paid to either Maisarah or her kids (beneficiaries) in the event of her death or critical illness in the future, and the premiums paid throughout the years will have gone to waste.
What kind of protection does Term Life Insurance provide?
In a nutshell, term life insurance provides protection coverage only, with no added cash balance or investment values. So if our policy owner, Maisarah, purchased a term life insurance for RM 50,000, the insurance amount will be the same throughout her contract period.
The pros of Term Life Insurance
Like everything else in the insurance business, each products have their own pros and cons. Let's review the benefits of purchasing Term Life Insurance before we reveal the drawbacks:
Lower Premiums: Term life insurance has the lowest premiums compared to other types of life insurance - you can get maximum amount of protection for the least amount of premium. For example First Life offers a term life insurance premium starting from RM 175 per annum (for those aged 18 - 45). For this premium, the sum insured is RM 40,000 (natural death) and RM 80,000 (accidental death).
Flexibility of Application: Because of its non-permanent state, insurance companies are generally more flexible in accepting applications for this type of insurance, especially for those who are under 50 years of age and in good health condition. In fact, most insurance companies do not require a medical examination from applicants.
Flexibility of Policy: Many term policies offer a term-to-permanent insurance privilege.
The Cons of Term Life Insurance
Cost Increment: We mentioned that term insurance can be renewed or changed to a permanent life life insurance, but this might cost the premium to increase--dramatically. This depends on several conditions such as the age and the health condition of the policy holder, and the policy's term and conditions.
Age Restrictions: Unlike a permanent based insurance, age matters when it comes to term life insurance. Typically, insurers won't allow people from the age group of 50/55 and above to buy a term life policy.
No Cash Value: As we have mentioned, term life insurance focuses solely on life coverage and has no investment value--therefore there will be no added cash value in your coverage sum.
Cash Value is the amount of money that you will get back if you cancelled your policy.
Whole Life Insurance (Permanent)
What is Whole Life Insurance?
Term life insurance is pretty straightforward; In Maisarah's case,
she gets a life protection coverage for a certain period of time, and her children will be given an agreed sum of money if she dies during the insurance period.
But whole life insurance has two added properties: Savings and Investment. Whole life Insurance typically is a combination of Protection, Investment and Savings.
What kind of protection does Whole Life Insurance provide?
Whole life insurance still provides life protection coverage (beneficiaries will be given a sum of money in the case of death, critical illness or disability) but with added investment characteristics to it. To summarise, the whole life insurance has these characteristics:
- More than just protection coverage: Provides more than life coverage- can be used as a retirement fund.
- Permanent tenure insurance: does not expire as long as the premiums are paid.
- Higher premiums: Premiums are typically higher than term life insurance premiums.
- Income tax relief: Policy holders can claim for tax relief of up to a maximum amount of RM6,000 per year for an whole life insurance policy. The remaining balance from this RM6,000 is after deducting contributions policy holders have paid to an approved retirement benefit scheme such as the Employees Provident Fund or other pension schemes.
- Reclaiming cash value of policy: Unlike term, the policy holders can still receive a sum of money upon policy termination (cash value). If the policy holder chooses not to terminate the insurance policy, what can he/she do with the cash value?
- Can be taken out as a loan
- Can be used to pay off future premiums
Varieties of Whole Life Insurance
In Malaysia, There are three varieties of Whole Life Insurance; Investment-linked, Endowment Insurance, and Life Annuity Plan.
Investment-Linked Insurance (Investment + Protection)
As the term suggests, insurers set aside a specific fund from your premium for investment purposes.
What type of investment funds are available for the investment-linked insurance?
Typically, you will be given the choice of investing in either equities (higher risks) or bonds or fixed income securities (lower risks), or the combination of both. Depending on the insurer, some insurers disclose how many percent goes to the insurance side and how many percent goes to the investment side, But,
Here's what you need to know about Investment-linked insurance: Your investment fund is fully managed by the insurance company, which means it is impossible to tell what the actual return on investment will be.
Here's another shocker: Most insurance companies actually deduct some of your investment money to be used for several other charges. These charges include the policy fee and fund management fee. So before you decide on getting an investment-linked insurance, study the risks and ensure that you have the best protection for your future.
Endowment Insurance (Savings + Protection)
Endowment Insurance is an agreement between the policy holder and the insurer that a sum of money will be given to the policy holder or the beneficiaries at the end of the policy period. Basically, endowment is similar to term life insurance, but without the expiry date.
Eg: Sarah purchased an endowment insurance to ensure that she will live comfortably in her retirement years. If she is to die before the end of the contract period, her beneficiaries will inherit her endowment benefit. But if she is alive and well when the contract expires, the benefit will be given to her.
What makes the endowment policy different from Term Life is that it guarantees that either the policy holder or his/her beneficiaries will receive the sum of money at the end of the contract period, or upon his/her death.
How do my money grow in an endowment insurance policy?
Most endowment policies provide a savings plan that can help accumulate your cash value (although not as much as annuity or investment-linked insurance).
Life Annuity Plan (Investment + Savings)
Life annuity plan differs from other life insurance in a way that it does not provide life protection coverage (does not compensate for critical illness and other life coverage). Life annuity plan is simply a retirement fund that you can purchase to ensure financial stability in the future. In the event of the policy owner's death, the annuity will be paid to the beneficiary, or spouse, depending on the type of annuity that was purchased.
Types of Annuity:
Immediate Annuity: Payments begin 12 months after you purchase the annuity.
Deferred Annuity: Payment begin any time after the 12 months period and the premium can be paid as a lump sum, which will be left to accumulate by the insurance company, or can be paid in a series of payment up to retirement.
Takaful vs. Life Insurance
The common questions that most people ask when it comes to buying an insurance is this: What is the difference between Takaful and Life Insurance? Basically, Takaful is based on Shariah (Islamic Law) principles, and the general concept of a Takaful is :
A group of people (or in this case, policy owners) contribute a sum of money to a takaful fund in the form of participative contribution (tabarru’). These policy owners will undertake a contract (aqad) for them to become one of the participants by agreeing to mutually help each other, should any of the participants suffer any form of misfortune, either arising from death, permanent disability, loss, damage or any other such misfortunes as covered under the takaful you personally undertake.
Here is a basic example of how Takaful works:
Eg: Sharifah and Shafawati contribute RM 100 a month to a Takaful fund for ten years.During that period of time, should any one of them suffer from any misfortunes (or death), the benefit will be taken out from the fund that they contributed in, and not from their individual accounts.
So how is this different from Life Insurance? We highlight the top insurance issues in Takaful and Life Insurance, and their differences:
|For Life Takaful, there are two accounts namely, Personal Accident (PA), which is treated in line with the principles of al-Mudharabah; while the other account is Participants' Special Account (PSA), which is treated on the basis of al-Tabarru||In life insurance policy, the collected premiums are credited into the account known as life insurance account or fund.|
|Paid from the defined funds under joint indemnity borne by participants||Paid from the funds legally owned by the company|
|Takaful contract specifies from the outset how the profits from Takaful investments are to be shared between the operator and the participants.|
This shall be in accordance with the principle of al-Mudarabah, and the share could be in the ratio of:
i.e 5: 5 or 6:4 or 7:3 etc. as agreed between the participant and the operator in the contract regardless of the amount of investment profit made during the year.
|May offer bonus or profits in general terms only especially with profit policies, that is, there is no exact specification with regard to the profit sharing in the contract.
The rate of bonus itself can vary from year to year and is up to the discretion of the Board of Directors of the company.
|In a life Takaful policy, if the risk occurs, the beneficiary(s) shall have the right to claim the policy value from the PSA besides the accumulated entire amount from the PA. |
But if in this category of policy, the participant survives at the maturity of the policy, his/her claim shall be confined within the amount available in the PA.
|In a life insurance policy where the risk occurs, the beneficiary (s) shall have the right to claim whole amount named in the policy.
But, if in case the risk does not occur, the insured shall have the right to claim the policy value at maturity together with the interest if any.
So there you go, the basic guides to Life Insurance and its different components. We hope that you are more enlightened and ready to face insurance agents with these guides!
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