Life Insurance is invented to protect buyers from personal risks. Several types of life insurance products are created for these purposes. There are 5 dominant personal risks any individual bears :
PREMATURE DEATH
- One dies when he is still able to earn income. For example, salaried individuals usually retire at 56, but they die before that, this is called premature death.
- The concern is at the implication : How the dependents (wife,children) can maintain current lifestyle and survive. The died person can work until 56 but dies at, say, 45, so potential income he should earn for remaining 11 years is lost.
REDUCED / LOST ABILITY TO EARN
Ones may be sick or injured. The sickness or injury may cause him to stop working, or work at reduced capacity. The implications are the same as premature death. It affects not only survival of dependents, but the need to main himself.
COVER MEDICAL EXPENSES
- If a person become disabled or sick, he need to cover medical expenses for treatment or nursing care. This can be overcomed by either lump sum receipt or claiming for actual expenses.
- For life insurance, you can fix certain amount.
- Once you become disabled or sick, you will get that sum. If expenses are more than that, you cover by yourselves.
- Another version is indemnity. You will be covered against all actual hospital expenses up to certain limit.
Above 3 risks are necessary to be covered by life insurance. You should buy insurance products to cover against above. They are either Term Life, Whole Life Without Cash Value, medical card, or riders under investment linked insurance. Do Not Ever Buy Any Other Form of Life Insurance. Do not buy any saving/endowment type, and do not buy whole life with cash value.
The pure life insurance that you buy are then adjusted in term of their value. Value depends on premium you pay. Please take note, any money you spend for life insurance must not exceed 5% of your gross income.
Now, as life insurance companies becoming more sophisticated, they venture into saving, annuity, and investment businesses. These are directly translated into products they offer to public – unit trust investment, annuity, saving, retirement fund, and education fund. These are often expensive because you not only pay for protection, but you also contrbute some for forced saving/investment.
There are 2 types of those.
Clear borderline between cash and protection
Example for these are 2.
- First, investment linked insurance (ILP). Despite the word “investment” or “portfolio” within the product name, ILP is actually a pure insurance protection, which means it is good. Usually, ILP is a form of whole life (without cash value) that covers death and disability. Then. you can choose to add riders such as critical illness or hospital card and so on. More riders, higher premium you pay. Bigger coverage, higher premium. You can choose to pay more than the premium. the excess will go into unit trusts and you can select which to buy. So, the premium for protection and amount for investment are clearly distinguished. Premium you pay, agent will get normal commission (35%,25%,20%,15%,10%) while the investment part, agent get 2.5% only.
- Secondly, although rare, there are companies that offer pure annuity or pure investment schemes. Such product is good because it is purely distinguished investment without mixture of protection.
No Borderline Between Saving and Protection
- These are popular because first, the premium is huge which means agent commission is huge, and secondly, they are easy to sell, because Agent can tell buyers that they can get their money back.
- These products are endowment, but of course, to people, they are packaged under more beautiful names like “Education”, “Saving” or “Retirement”.
- Such saving policy by life insurers is no good because premium you pay, is not distinguished between protection and saving.
- You think that the premium you pay will go into saving (since you are promised you money back in the future), but the whole amount will be subject, for instance, to agent normal commission (35%,25%,20%,15%,10%).
- The protection you get is very low, and saving is also low. Therefore, you are not achieving any of your goal during most of the insurance term.
In early of my article, I explain 3 types of personal risk you should cover under life insurance, namely : Premature Death, Disability & Sickness, and medical Expenses (but all in total must not exceed 5% of gross income).
But there are 2 more personal risks covered under life Insurance products. I would like to clearly stress here, you should not cover these 2 risks. You must not buy any Life Insurance products covering these !!!
EDUCATION PLANNING
- You may worry by the time your children reach the age 18, you may not have enough money to send them to further study in university (saving insurance).
- You may also worry if you face premature death, will your children have enough money to study in university (protection insurance).
- Education insurance try to settle these problems. However, education insurance is just an endowment aka saving policy plus some riders. Endowment policy as I explain before is no good.
The alternative for education insurance is Term life. You can maximize coverage for death and disability, premium is also cheap because the term is not even 15 years. For accumulating enough money by they reach 18, there are various high return investment vehicles out there that gives a lot higher return than education policy.
RETIREMENT
- If you live too long beyond 60, you may not be able to earn income anymore. Thus, during your earlier working life, you need to accumulate enough fund to cover your living expenses during retirement.
- There are many life insurance solution out there for this, but are based on saving / endowment policy.
Endowment Policy
- No definite portion will go into saving or protection.
- Protection coverage is very low.
- Contract only promises to pay certain amount (cash bonus) after 2 or 3 years. You, then, will receive annual interest for this cash bonus. You get cash bonus every 2 or 3 years. Every now and then you get reversionary bonus or performance bonus. After 15 years, for instance, you get terminal bonus. Upon completion of whole term, you get maturity bonus. By the time you finish the term, nowadays, insurers try to give most of your money back, if not all.
- Within the same period, you can actually get triple of that amount if you invest elsewhere.
Filed under: Financial Planning, Insurance
