1. What is life insurance?
Life insurance is concerned with events that could happen during a person’s life and the probability of such an event actually taking place. The policyholder pays premiums regularly and this ensures payment of an agreed amount if the specified event – such as death or an accident resulting in death or disability – occurs. Premiums collected from all the policyholders are pooled together to form the life insurance fund. This fund is nurtured with the intention of being paid out as and when required to the dependents of those who have contributed to it. Life insurance normally combines protection with a regular savings programme.
While life insurance cannot prevent any of these events from happening, it can provide for protection against financial loss as a result of these events.
2. How does life insurance affect me?
Life insurance is used for two broad purposes :
a) To provide financial security – provides you and your family with financial protection when unexpected events and hardship, such as disability, critical illness or the loss of a loved one, occur. Once you own a life insurance policy, you and your loved ones are immediately secured against such risks.
b) As a medium to long term savings and investment vehicle – life insurance helps your savings and investment grow so that you can plan for the good things in life, such as a comfortable retirement, a good education for your children, or that dream car, house or holiday.
3. How do I choose the right life insurance policy to meet my needs?
There are numerous life insurance policies available. Here are some basic guidelines that can help you with your decision.
a) The right policy
While there is no universally correct policy, the right policy can be described as one that will provide you with adequate financial protection and is affordable.
b) Knowing your needs
Life insurance should be bought based on meeting your insurance needs. Few people can afford to buy all the insurance they desire immediately. It is therefore necessary to decide which insurance needs are of higher priority. Here are some of the common reasons for buying life insurance.
To provide income continuity in the event of death or disability
Even in a family with more than one income, the family will suffer a financial setback if one of the income earners dies. In the case of a family with only one breadwinner, the hardship will be severe. Similarly, if a person becomes totally and permanently disabled, he or she will not be able to continue working. In addition to loss of income, there will be a financial drain caused by the need to accommodate the condition. The family needs to be protected against such misfortune.
Life insurance provides financial protection for your dependents. It gives them cash to tide them over difficult times. When buying life insurance for this purpose, you should look at the financial commitments of your family.
To provide income for the policyholder if he/she becomes critically ill
Should you be diagnosed with a critical illness, such as cancer, kidney failure or stroke, medical expenses will add up to a hefty amount.
Insurance can help with such expenses as a lump sum of cash will be paid to you once you are diagnosed with a critical illness. This money can help you with medical bills and other expenses arising from the critical illness.
To provide savings or investments
Life insurance is not just about sickness and death, it is also a good savings and investment tool.
You may be saving for a car or a condominium. You may want to go on a holiday or for further studies. Life insurance provides you with stable returns and helps you realise your dreams. It is also a good investment vehicle that can help you build a retirement nest egg.
To provide for your children’s education
Education, especially tertiary education, has become increasingly expensive. Life insurance is one way to ensure that there are sufficient funds for your children’s education. PRUlink education account, for example, efficiently facilitates this need.
Life insurance should be bought based on your financial needs. Few individuals can afford to buy all the insurance they desire immediately, so it is vital to decide which insurance needs are the most important. Generally, higher premiums will bring you more benefits. Thus, it is important to find the right balance between the amount paid and the amount insured for. You should buy policies which satisfactorily meet your insurance needs and which you can afford.
4. What types of life insurance policies are available? What are they used for?
Life insurance policies can be divided into those with profits and those that are non-participating. With profits plans allow the policyholders to share in the profits made by the life insurer. A non-participating plan does not and is therefore relatively cheaper. Most life insurance plans are participating, with the exception of term plans and supplementary benefits or riders. The main types of life insurance plans are:
a) Whole Life
Provides lifetime protection for the life assured. A fixed sum of money – the sum assured – will be payable upon the death of the life assured. Correspondingly, premiums are payable as long as coverage is provided. If the policy is surrendered before that, the policyholder is entitled to the cash value.
Provides protection for the term of the policy. This type of policy can be taken up for a specific period of time, for example 10, 15 or 20 years, or up to a certain age, for example 55, 60 or 65. A fixed sum of money – the sum assured – will be payable upon the death of the life assured. Should the policyholder survive the policy term, he or she will receive the sum assured as a lump sum payment. Premiums are paid throughout the policy term. A slight variation of an Endowment plan, and one which offers earlier partial maturity payment in installments during the term of the policy, is the Anticipated Endowment plan.
Provides protection throughout the policy term. The sum assured is only payable if the life assured dies during the policy term. This plan is affordable for someone who needs protection but may not have the budget. Term plans are usually convertible, that is, policyholders have the option to convert them into whole life or endowment plans without having to provide evidence of health.
d) Supplementary Benefits or Riders
Provide additional benefits that are not usually included in the main plans mentioned above. These include benefits for hospitalisation, medical expenses, advance payment due to critical illnesses, temporary and permanent disability, death or disablement due to accidents and income protection, to name just a few.
5. What is an investment-linked policy? How does it differ from others?
An investment-linked policy (ILP) gives you investment returns on your savings and provides insurance coverage at the same time.
There are two main types of ILPs: regular premium and single premium.
a) Regular Premium ILP
Like the traditional life policy, the regular premium ILP provides financial protection against premature death and acts as a tool of investment. However, the degree of flexibility marks the difference between them. Below is a summary of the differences.
Traditional Policy – the proportion of protection and investment is pre-determined. You can change the mix by surrendering part of the policy or by purchasing additional policies to increase the protection.
ILP – you can increase or decrease the protection or investment element in the policy to suit your financial needs.
Traditional Policy – you have to pay the same premium amount throughout the term of the policy.
ILP – you can decide to increase or decrease the premium amount to suit your budget, subject to certain limitations.
Traditional Policy – premiums are invested at the insurance company’s discretion, subject to guidelines set by Bank Negara Malaysia.
ILP – you can choose from the various investment funds offered by the life insurer, based on your own risk/reward profile and investment time horizon. You can also switch from one fund to another when the investment climate or your own risk-profile changes.
As with all investments, there is a risk factor to consider. You will experience the ups and downs that naturally occur in the investment market. These ups and downs are reflected directly in the value of the funds, thus making the returns under an ILP more volatile. However, in the medium to long term, ILPs are likely to give higher returns than traditional policies due to the greater exposure to equity investment.
In contrast, traditional policies carry minimum cash values prescribed by law and provide more stable returns. Which type of policy to buy depends on your risk/reward profile.
b) Single Premium ILP
A single premium ILP is similar to a unit trust except for the additional life insurance cover provided. Should you decide to surrender the policy, the cash value is based on the prevailing value of the fund. Should you die, you will receive, for example, the sum assured or the value of units, whichever is higher. The death benefit is a salient feature of a life insurance policy and is not available to those who invest solely in unit trusts.
6. If I have a life insurance policy, who will get the money when something happens to me? What do they have to do to claim the benefits?
If death occurs, we pay to:
* the estate if there is no will
* the executor if there is a will
* the trustees if there is a nomination/trust, or
* the assignee if we have been notified of an assignment
A non-Muslim policyowner may nominate a natural person(s) (i.e nominee(s)) to receive policy moneys payable upon his death under his policy at any time by completion of a nomination form. Where a nominee is spouse, child or parent (where there is no spouse or child living at the time of nomination), a trust shall be created automatically.
If the policyowner is a Muslim, the nominee shall act as an executor. He shall distribute the policy moneys in accordance with Islamic Law.
If there is a living benefit claim, such as disability or critical illness, we will pay upon total and permanent disability or diagnosis of a critical illness.
The person claiming the policy money will have to notify the life insurance company and provide documentary evidence to substantiate their claim.
7. What are the important aspects of financial planning?
There are four aspects of financial planning :
* Insurance planning – you use insurance plans to meet the financial security needs of yourself and your family, should any mishap happen to you and/or your loved ones.
* Investment planning – you have your money work for you and reap the returns according to your risk profile.
* Retirement planning – you ensure that you are able to continue with a comfortable lifestyle and do the things you want to do after retirement.
* Tax planning – you ensure that appropriate taxes are being paid without having to make large sacrifices.
8. I am having financial difficulties right now; should I surrender my policy?
There may be times when you might meet with financial difficulty and consider surrendering your policy. You should, however, evaluate the various options available before surrendering.
When you surrender your policy, the amount of money you receive (known as the surrender value) may be more or less than the total premiums you have paid. This will depend on the age at which you bought the policy and the terms of the policy.
Remember that an insurance policy is a medium- to long-term investment. You are likely to lose some of your premiums if you surrender your policy after a short period, while you stand to gain attractive monetary rewards if you can continue your investment over the medium to long term.
More importantly, you must also consider the insurance coverage that you will lose at a time when it is needed most. When your financial resources are low, every income source is crucial to your family. If you surrender your policy now, your family will have to make ends meet without either your income source or any insurance proceeds should something unfortunate happen. Generally, you have 2 options.
a) If you have difficulty paying your premiums, you may want to consider going on a ‘premium holiday’ instead. Once your policy has acquired a cash value, you can go on a ‘premium holiday’ during which you do not pay premiums but still receive insurance coverage. This is possible as long as your policy has cash value that can be used to pay your premiums. Only when the cash value is depleted, will your policy lapse.
b) 2 Alternatively, you can convert it to a ‘paid-up’ policy where you stop paying premiums but maintain the validity of your policy with the reduced sum assured.
It is important to think it over carefully before making the decision to surrender your policy. You may want to take up one of the two options above rather than LOSE your investment and financial security for your family.
9. How can life insurance help me with my mortgage(s)?
Most people would have taken up a mortgage loan when they purchased a new home. It is important to take up mortgage insurance so that your family can still continue to live in the home that you have provided for them, even when you are no longer around. The sum assured of the mortgage insurance will pay for the mortgage loan.
10. What is an assignment? Can a life policy be assigned? If so, how should I do it?
An assignment means to transfer the rights of personal property to another person. A life insurance policy can be assigned as it is regarded as a form of personal property.
The assignment can be done via a Deed of Assignment signed by the assignor (policyowner) and the assignee (the party receiving the rights of the policy).
For the assignment to be effective, notice of the assignment must be given to the life insurance company.