Under Age of Majority Act 1971, those who are below 18 are considered minor. Age of minority relieves these kids from some responsibilities but also restricts them from some actions. Contract Act 1971 governs all agreement binding in Malaysia, it stipulates that for any contract to be valid, the participants must have legal capacity, among others, ones must be at the age of majority.
Nevertheless, insurance industry is further governed by Insurance Act 1996. There are 2 aspects here that divert itself from normal contracts. Section 153 (Insurance Act 1996) stipulates that minors who attain the age of 10 but not yet 16, can enter into valid life insurance contracts with the consent of parents or guardians. Section 153 also states that minors who are 16 can enter into life insurance contracts in his personal capacity.
Most life insurers provide premium rate for persons at the age of 16. In this respect, any child below 16, who applies life insurance contract would be rated / priced as if the child is 16. All above matters cause some contractual and legal issues concerning the status of minors.
Life insurance companies always want very big profit and do not want to bother so much about their customers’ complications. But they know there is a huge opportunity to make money out of children related insurance policies. Parents want to buy insurance to protect their children, that’s a fact. So, rather than selling products for children, life insurers sell product to parents, but labeling this policy as Education Insurance or Children Saving Policy.
Well, they intend to deceive us and they are very successful. Parents are made to believe the policy is for their children, although the education / children saving insurance policy, legally are designed for parent themselves.
Life insurers have a lot of money and they can hire brilliant advertising teams. They are very creative in coming out with names for the products that make people think these insurance products are great for children future – usually the name varies from education, children, saving and so on. Such labels reflect noble idea and make them easier to sell.
For such policies, the policyholders must be adult, usually one of the parents. In the absence of parents, legal guardians or any close relative of the children can apply for life insurance cover on the life of the children.
Opps !
Let’s understand how life insurance contract works …
Life insurers prepare blank proposal forms – This is part of Invitation to Offer, it means nothing contractually.
- Customers fill up the Proposal forms – this is Offer from us to Insurers – valid first step legally
In general insurance like car insurance, Offer plus cash can bind insurers to a contract, but here in life insurance, Offer from customers cannot bind insurers yet. Customers who fill up the form is the Proposer.
2. Insurers read the form and accept the offer – this is Acceptance
There is no contract established yet, but once the customers know about it, the acceptance cannot be reversed.
3. Customers start paying premium – this is Consideration, it forms valid contract
Once life insurance contract is formed, the proposer is called policyholder.
Yes. Legally, minor between 10 to 17 can become policyholder. But to make things easy for life insurers, they make these plainly like normal life insurance for adult, the only thing is the name – the name must be beautiful ! So, that’s why we see policy such as Education / Saving / Children etc.
There are 2 forms of such policies – Protection & Saving
Protection
The parents as the policyholders die, the children nominated as beneficiaries get the insurance claim.
This function is exactly the same as the cheap Term Life insurance. Rather than buying the expensive Education insurance that is attached to many unnecessary riders, parents can just merely buy normal Term Life and nominate the children as beneficiaries. It is just the same thing !
Before your children get into universities, you want protection if anything happens to you. If your child is 2 years old, you can buy Term Life for 20 years.
Education Saving
This is actually plain endowment or saving insurance. The only difference is they give you more cash saving but with much lesser insurance coverage. Then, policyholders nominate children as the beneficiaries.
Firstly, let me explain how saving insurance works. Usually, people are misled by insurance agents that payers will get all their money back even nothing happens. Actually, this is a lie. All money paid is put into insurers’ account. Every 3 years, they will bank in some cash into payer’s account, usually not even 5% of what they spend. The rest of money is invested by insurers in “High Risk” securities (since Low Risk only gives low return). If performance is good, payers get other type of bonus. This saved money grows at compounding basis at fixed rate, usually 5 or 6 %. In normal situation, they get 70% of money spent (non-guaranteed).
For education saving, since it is sinking fund to get enough money to fund education within 15 years or so, insurers invest money in much higher risk securities to get higher return.
Usually, education policy is more costly because of the waiver of premium rider. You pay more for such useless thing. Such rider is attached to saving policy. Say, if anything happens to you, this rider will not give you any immediate cash. Waiver of premium means saving policy continues but insurers pay the premium for you. You have to go through the same painful process of saving insurance. So, no immediate cash although your children really need it.
Rather than saving or education policy, it is a lot better for you to unit trust, Amanah saham Bumiputera or holding shares in blue chip companies.
Furthermore, if your children is below 18, they do not receive the insurance money, it is frozen for a while before put into a Trust managed by Amanah Raya (Amanah Raya will take a big part of the money as a fee!)
If you are Muslim, things are worse. Before above stage, your money will go to troublesome court process, and then to Mahkamah Syariah and others for Faraid.
Filed under: Financial Planning, Insurance, Investment
