Life Insurance

• Two types of life insurance

• Weighing whole life Vs term life policies

• Some useful tips

• How to get started?

There are two types of life insurance products (be sure not to confuse them!):

• Term life products last for fixed periods (5-40 years). If anything happens to you within this period, your dependents will be paid a sum of money. However, if something happens to you only after the term of the policy has expired, your dependents will not get anything.

Why is the product structured this way? Think about a parent who earns the money that supports the family. The parent may need this protection for his or her children until they grow up and become financially independent, say for 20 years. After that, if he or she has no other dependents, then it is no longer necessary to have a term life insurance.

For term life insurance, there is no cash payout at the end of the policy if it isn’t used (whereas whole life insurance will give you a cash payout – read on to learn more!).  Because term life insurance has no savings or investment elements tied to it, your term life premiums will be lower compared to a whole life policy!

In general, premiums for a term life policy can range from RM300 to RM600 annually. Do note that the older you are, the more expensive your premiums will be.

• Whole life products last until your death, and pay your family a lump sum amount when you die.

An investment-linked whole life policy combines an insurance policy with a Unit Trust investment product. Part of the premium that you pay is to cover the risk of you dying unexpectedly (the insurance part). The other part of the premium is so that your dependents will receive a certain amount of money even if you die a natural death (the savings/investment element).

Premiums for a whole life policy are usually higher than a term life policy. Your premiums can range from RM1000 to RM4000 annually, depending on the sum you want to insure.

Another difference between whole life and term life policies: because a whole life policy lasts for a lifetime, your premiums stay the same as you age. With a term life policy, should you wish to renew the policy after expiry, your new premiums will be higher.

• Figure out what you need – do you need protection for your dependents for life? Or just for the next 20 years? If you only need the insurance until your children are grown up, then you should go for a term life insurance as it’s cheaper than whole life insurance

• Figure out if you would like a savings element built into your plan – as mentioned earlier, the savings service offered by these plans are not free, so if you can find an alternative method to save, that would be better. You can go for a simple term life policy or a whole life policy with minimal cash payout and minimal investment features.

For example, instead of paying premiums of RM3000 a year on a sophisticated whole life policy, you can pay RM2000 instead for a more basic one and invest the remaining RM1000 on your own in EPF, which has been giving returns of more than 4% for many years! This will earn you more money in the end.

• Factors that affect your premiums include age, pre-existing medical conditions, coverage relative to existing income, nature of job, and number of dependents. Naturally, if your term life policy expires and you decide to renew it, you should expect your premiums to be higher.

• Check if your term life policy has a conversion feature or guaranteed renewals. Perhaps at the end of a 20-year term life policy, you may realise that you are suffering from an illness. If the policy has a conversion feature, you can convert to a whole life policy. If not, you will have to exit the policy and attempt to re-enter, but you may be rejected and no longer be covered.

• Be sure to check the fine print on how much you will get if you surrender the policy prematurely. Sometimes, you could lose the returns from the savings that you have put in all those years before.

• With whole life policies, avoid unit-linked policies. This is an investment feature that ties your cash payout directly to the performance of the underlying investment. In other words, you bear the full risk of your investments that are managed by the insurance company. In such cases, you are better off investing in a particular fund directly rather than through your insurance company.

• For whole life policies, there are participating and non-participating policies. With non-participating policies, your investment returns are fixed and the insurance company bears the risk of the underlying investment. As you can expect, the insurance company will offer you a lower return for this, but it will be less risky for you.

• If you plan on getting a housing loan, make sure that the life insurance coverage does not overlap with any mortgage insurance you get. If you feel that your life insurance provides enough cover in the event you are unable to pay your loan repayments due to death or permanent disability, you can speak to your bank to waive the requirement for a mortgage insurance policy.

You can purchase a life insurance policy through a licensed insurance agent or an insurance broker. But be sure to do your homework carefully before making a decision. Don’t simply rely on the advice of the insurance agent as they are trying to sell a product to you and make a commission from it.

Read our article on “What to look out for when buying insurance” for more help and guidance.