When we sign off on the mountain of forms and hand our insurance agent the cheque each time we purchase an insurance policy, do we actually know what we’re getting ourselves into?
Do we know if we’re really buying what we need, and not a collection of insurance products specially packaged to optimise for our agent’s commission? Are we aware of the various insurance products and investment vehicles provided by insurance companies that might help us build our investment portfolio?
When something unfortunate happens, do we know how to go about submitting our claims or withdrawing our savings? What if your servicing agent is no longer in the industry (which is quite common), or is nowhere to be found, what would you do?
The simple solution, of course, is to find a good and dedicated servicing agent.
Read Also: How Should I Start Investing?
However, it would be helpful if we knew a thing or two about the financial products provided by insurance companies ourselves. Ultimately, we are the ones paying for our policies and are also the ones who will suffer the consequences should anything go wrong.
Here is a simple list of things that everyone should know about some of the common financial products offered by insurance companies in Malaysia.
#1 Traditional Plans vs Investment Linked Plans (ILPs)
Traditional Plans are conventional insurance contracts such as whole-life insurance policies, termed-life insurance polices as well as endowment funds. In a nutshell, the terms of the payout in terms of sum assured, survival bonuses, accrued cash value and years to maturity are all set in stone in the insurance contract.
On the other hand, Investment Linked Plans or ILPs are insurance contracts that are attached to various investment funds managed by the insurance companies from which customers can pick and choose and are often more flexible.
Contract Dictated vs Market Forces
The key difference lies in the way the cash value of the insurance contract is derived.
In Traditional Plans, the cash value and payout value of the insurance policy at any given time are strictly dictated by the terms of the insurance contract, whereas for an Investment-Linked Plan, the cash value of the policy at any given time would depend on the day-to-day market value of the investment units in addition to the contracted payout amount should death or total permanent disability occur.
Rigid vs Flexible
In short, Traditional Plans are fixed and rigid contracts between the insurance company and the policyholder whereas Investment-Linked Plans are contracts whose investment cash value is affected by the day-to-day performance of the managed funds that it is invested in.
Investment-Linked Plans also tend to be much more flexible in terms of tenure, contribution amount, coverage and can be tweaked to suit the needs of the policyholder over time.
Which Is Better?
At first glance, Investment-Linked Plans might seem the risker option, which is true to a certain extent, since its cash value varies from day to day depending on market performance.
But to savvy investors, most would prefer the flexibility and generally higher return rates of Investment-Linked Policies. Insurance funds are generally very well managed and have consistent performance over the years. If the policyholder is more risk-averse, they can still opt to link their Investment-Linked Plan to a low-risk Fixed Income Fund that consistently gives a 4% to 6% rate of return every year. Most however, would probably opt for a balanced fund that typically gives a 8%-15% average return per year.
Fund performance would vary from fund to fund and from insurance provider to insurance provider. It is up to the consumer to do their own research and analysis on the fund performances over the years and their respective prospectus to determine which fund they would like to select for their Investment-Linked Plans.
It is also important to note that for balanced-funds and high-growth funds, it is not uncommon for the fund to lose value and have a negative return rate during a bad year such as a global economic recession, which would affect the policyholder’s ability to withdraw funds on that given year.
However, a seasoned investor and policyholder would also know that the market almost always rebounds and a well-managed fund would eventually reflect that rebound once the market recovers. Hence, most of them are perfectly fine with choosing an Investment-Linked Plan over a Traditional Plan.
Investment-Linked Policyholders also have the option to withdraw cash from their cash value, add additional riders or coverage to their policies, reduce their contribution amount or alter their policies as and when they want, as long as a minimum requirement in cash value is met. Some policyholders might even treat it as an investment or savings account.
Compared to the rigid terms of a Traditional Plan and a fixed bonus payout of around 3% – 5% per annum, an Investment-Linked Plan is definitely the more flexible one, albeit it being risker.
#2 What Is Life Insurance?
Life Insurance is a contract between the policyholder and the insurance provider, where the policyholder agrees to pay a yearly fee (premium) to the insurance provider until the contract duration ends (maturity).
At this point, the insurance provider would return the premium paid over the years to the policyholder with interest in one lump sum should the person whose life is insured (life assured) not die or suffer from total permanent disability during the duration of the insurance contract.
If the life assured dies, the insurance company would pay a pre-determined amount (sum assured) to the beneficiaries of the insurance policy, at the same time terminating the contract.
To put it in a crude way, it is basically a bet on a person’s life with the insurance company. If the person (life assured) dies, the beneficiaries get a pre-determined large sum of money. If the person doesn’t die, the money gets returned at the end of the contract with interest (unless it is a pure life insurance contract with lower premiums and no cash value), by which time the insurance company would have already made plenty of money by investing the money held during the contract duration in other investments.
But of course, it would be inappropriate & insensitive to explain it this way, for the the intentions of purchasing a life insurance policy would never be to bet against one’s life. On the contrary, the purpose of a life insurance policy is usually to protect loved ones from financial uncertainty should anything happen to the sole breadwinner of the family. It is usually an act done out of love and care.
To Protect The Livelihood Of Your Loved Ones
A life-insurance policy would be useful for someone who has dependents or is the sole-breadwinner of a family. This helps them ensure that their loved ones will be able to sustain themselves financially should anything happen to them.
It is not too late to only get a life-insurance policy once you have dependants, but it would be much cheaper if you got one when you’re younger. Thus, if you can afford to get one at a younger age, it wouldn’t hurt to get one earlier. Furthermore, you could also use it as an investment or savings vehicle if it is an Investment-Linked Plan.
Life Insurance can come with Traditional Plans or Investment-Linked Plans and generally covers a person until they reach the age of 99.
#3 What Are Endowment Plans?
Endowment Plans are a type of life insurance contract that have a shorter term than a whole life policy.
More emphasis is usually placed on the cash value of the contract with the aim of attaining a certain cash value at the point of maturity (end of the contract). As a result, they usually come with higher premiums due to the shorter duration (insurance companies would have less time to invest and “roll” the money) and the higher percentage that goes to the cash value of the policy rather than insurance charges.
A Medium Term Forced-Savings Plan
Most people tend to use it as a medium term forced savings plan or to save up for their children’s education.
Endowment plans are typically traditional plans and their cash value can be drastically affected if the policyholder chooses to terminate the plan before maturity (length of the contract), which makes them perfect as a forced savings plan, since one stands to lose a lot of money if they stopped saving before the plan reaches maturity.
#4 What Are Medical Cards?
Medical Cards are insurance policies that protect the life-assured against most medical and hospitalisation costs up till a certain age, usually up till 70 years old (there are some that cover certain costs up till the age of 100).
Sum Assured, Annual Limit & Life-Time Limit
They usually come with a sum assured (the amount payable if the life-assured dies), an annual limit (the maximum amount claimable per year), and a lifetime limit (the maximum amount claimable over the years for the duration of the life assured’s lifetime).
Riders & Additional Features Don’t Come As Standard
It is also important to note that most Medical Cards do not automatically come with a lump sum cash compensation or survival allowance if you get diagnosed with one of the 36 critical illnesses. A standard Medical Card would only cover hospitalisation and medical costs as charged by the hospital, which includes things like room costs, kidney dialysis costs, costs of surgery and costs of medication.
Lump sum cash compensations upon diagnosis of critical illness or daily cash allowance upon hospitalisation usually requires the addition of a rider (extra feature), which would add to the monthly or yearly premium of the Medical Card. Hence, if you’re expecting those benefits, do make sure that your insurance agent includes them in your policy.
Possible Claims You Might Not Know About
Outpatient accident benefits however, are usually included in standard Medical Card Policies, which usually cover anywhere from RM1,000 to RM3,000 per year. Hence, if you’d accidentally twisted your ankle or fell down the stairs, you could actually claim your medical expenses from that provision, provided that you have enough room in your lifetime claim limit.
Do also remember to look out for co-insurance charges, which may come as a surprise when you submit your claims. If you would prefer not to fork out any cash from your pocket whenever you get hospitalised, make sure that you pick a Medical Card that does not have a co-insurance clause.
The terms and conditions of each Medical Card may vary; hence it is always best for you to check and double check the terms and clauses with your agent and by reading your policy document.
#5 What Are Annuity Plans?
Annuity plans are usually used for retirement planning, where the customer pays a single lump sum or a series of payments over a period of time with the view of withdrawing a fixed amount every year in the future, starting from a certain year.
#6 What Do You Mean By “Sum Assured”?
“Sum Assured” is the amount agreed upon that would be paid out by the insurance company to the beneficiaries of the insurance policy should the life assured (person insured) die or suffer from total or permanent disability (TPD). It is usually the first and biggest sum you see stated on the policy document.
#7 What Does “Maturity” Mean?
An insurance policy reaches “maturity” when it reaches the end of its contract. For example, a 20-year endowment plan would reach “maturity” at the end of its 20th year if the premiums were paid in full and on time every year, at which point the insurance company would return the pre-agreed amount plus cash bonuses to the policyholder.
#8 What’s An Annual Limit?
An annual limit in a Medical Card is the maximum amount a Medical Card holder can claim in medical and hospitalisation fees per year.
This amount is important because treatments such as chemotherapy for cancer can cost astronomical amounts per year. The cost is also likely to continue to rise over the years. Hence, it would be wise to choose a policy that has a high annual limit to account for the price inflation by the time you need it should you ever need it.
#9 What’s A Life-Time Limit?
A Life-Time limit in a Medical Card is the maximum amount a Medical Card holder can claim in medical and hospitalisation fees for the duration of his or her entire life (or the amount of years where the Medical Card covers). It is important for the Life-Time limit to be sufficiently high because organ failure & diseases usually come one after another during old age once the cycle starts.
#10 What’s Co-Insurance?
Co-Insurance is a term found in most Medical Cards where the policyholder is expected to foot part of the medical and hospitalisation bills, typically from 10%-25% of the total amount charged. To avoid such surprises when checking in to a hospital, be sure to pick a Medical Card that doesn’t have a Co-Insurance term.
#11 What Are Insurance Funds?
Insurance funds are like internal mutual funds only accessible by policyholders of an insurance company. There are high-growth funds, balanced-funds, bond-funds and fixed-income funds that are professionally managed by fund managers according to their prospectus.
Funds invest the cash into a portfolio of investments according to the risk profile and description of the fund and reflect their portfolio performance in the fund’s unit price. These are also the funds that consumers can pick to be linked with their Investment-Linked Plans.
You can monitor their fund performances on Bloomberg, financial magazines or internal brochures by the insurance companies.
#12 What Are Riders?
Riders are additional features and benefits that can be attached to various policies for an extra charge in the premium. Things like cash compensation for 36 critical illnesses, premium waivers should you get diagnosed with a critical illness and co-insurance waivers can come in the form of riders.
Pitfalls To Avoid
Insufficient Sum Assured
A “Sum Assured” of RM 100,000 or RM 1 million may seem like a lot today, but might not be a lot in 20 to 30 years time when an emergency actually happens due to inflation. Make sure that the “Sum Assured” is sufficient to support your loved ones & their livelihood 20 or 30 years from now should anything happen to you then.
Insufficient Annual & Lifetime Limit
Chemotherapy treatment can cost up to RM 300,000 per year at a private hospital today. Hence, be sure that your annual limit has room to accommodate such a cost with room to spare to account for inflation
Not Checking For A Co-Insurance Clause
10%-30% of a big bill can amount to quite a lot of cash that you would need to cough up should you get hospitalised. We recommend that you choose a Medical Card that has no co-insurance clause or pay a premium for a rider that does away with the co-insurance clause.
Assuming That Critical Illnesses Riders & Others Are Automatically Included
You might be in for a rude shock if you were expecting to get lump sum cash payouts should anything happen to you if you’re on a standard Medical Card.
Be sure to check with your agent if you’d like to have these benefits added to your Medical Card.
Selecting The Wrong Insurance Funds
High-growth funds can be quite risky and can lose quite a bit of its value during a bad year, so it would be worth it to spend some time studying the available insurance funds in the market and their track record over the years, before choosing which insurance company and Investment-Linked Plan to go with.
Also, be sure to check that your agent has selected the correct funds you’d want your policies to be linked-in with as an error in filling out the forms might cause your policies to be linked with the wrong funds.
Terminating Traditional Plans Or Life-Insurance Plans Pre-maturely
You would most likely end up losing a significant amount of money if you terminate a Traditional Insurance Plan pre-maturely simply because they are designed to make sure that you have the discipline to save religiously every single year until the policy reaches maturity.
So, before you sign up for a Traditional Plan, make sure that you are prepared to commit to it financially until the date of maturity 10 to 30 years from now.
Missing A Payment On Your Traditional Medical Card Policy
Since most Medical Cards are linked to an investment-linked plan where its cash value can be used to pay for the insurance charges of the Medical Card nowadays, this shouldn’t be too big of a concern.
However, if you’re opting for the cheaper standalone Medical Card, you’d need to make sure that you make your payments on time. This is because your Medical Card would be terminated once you miss a payment, and you’d be forced to take out a new Medical Card at a higher price based on your latest age.
In the unfortunate event that you’ve been diagnosed with any kind of serious diseases, you might not be eligible to take out a Medical Card anymore should your existing Medical Card be terminated due to you missing a payment.
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DollarsAndSense Malaysia is a website that aims to help people make better financial decisions, one interesting, bite-sized article at a time. Like us on Facebook to stay in touch with our latest articles.