Friday, October 31, 2014

Insurance 101 RELOADED!

Insurance is meant for protection, NEVER was it meant for investments. As the word suggest, the word Insurance means 'to insure'.

In the context of Insurance, even if the plan is called Investment Linked Policy (ILP), it does NOT mean that it is for investment!

The main purpose of ILP over the traditional plan is that the premiums being paid are subjected to the performance of the underlying funds and it in turn will generate cash values over time. 

Since the insurance charges will go up as we grow older, the cash values generated along the years can be utilized to pay off the higher insurance charges at older age in order to maintain the policy. Think of it as a form of financial planning for taking care of your insurance needs at older age.

That said, it does not perform like pure unit trust as the accumulated cash values are subjected to insurance charges when pure mutual fund is not.

If you read the proposal form you will see a very clear wording in bold that says that your insurance charges will go up by age. Even if your premium payment does not go up, your insurance charges will.

Insurance is a business of risk management. Based on the ascertain risk and the premium payment, the insurer agrees to 'underwrite' and provide the necessary coverage.

The risk here can be in the form of age (the older we get the higher the chances of us claiming), smoking statusgenderoccupation (a construction worker has the higher chance of being involved in work prone accident vs an office worker) & health status during the inception of the policy.

An example is the car insurance. For cars that are over 10 years and above a loading (extra premium) may be imposed and can be as high as 100%. In addition, do note that as long as you want to drive the car, the premium will need to be paid. 

On the health insurance, if the medical card is to cover a term of up to age 80, the insurance charges will also need to be paid till age 80.

Take note that I mention insurance charge, not the monthly premium.The projected insurance charges is outlined in the quotation together with the projected cash values (high and low).

As I said, the insurance charges goes up by age, for example when we are in our 30s, the insurance charges may be in the range of Rm 1500 per year. This means if we are paying a premium of Rm1800 year, it is sufficient to cover for the insurance charges. However, when we are 60-65 the insurance charges is now Rm3,000 per year!

This means our premium of RM1800 is not sufficient to cover for the insurance charges at later years. When that happens, the variance of the insurance charges will need to be deducted from your cash values accumulated throughout the years, or you will need to do a top up.

Otherwise your policy may be at risk of lapsing even before the end of the term even if you are still paying the premium.

Sure, some agents will say that you can opt to withdraw the accumulated cash values, this is pure sales talk, whereby clients always like to hear when they get money, who doesn't, right? If you were to withdraw the cash values and when the insurance charges goes up, the policy may lapse prematurely and you’ll lose the protection benefits even more earlier than expected.

Always buy insurance with PROTECTION in mind, NEVER for investments. There is no investments here in the context of insurance, only protection.

To the readers of this blog, it is sad when insurance product is being sold as investments, and it is not only being practice in insurance companies, but banks who sells insurance plans. Go up to any bank and ask for good savings plans. Most probably you’ll end up with an insurance plan that promise to give you an exorbitant returns but when you calculate the Returns Of Investments (ROI), it may even be worse than the bank Fixed Deposit Rate (FD)!.

However, if you had bought any insurance plans, my advise to you is that do not cancel the plan until you had the chance to do a review and understand what it was meant to cover for.

Whether you buy the insurance from Prudential or from other insurance company, no matter how good or bad the agent’s explanation is to you, one fact still remains, you buy it for its protection values.

Also the claims are being paid by Prudential or the insurance company, and not the agent. We are all humans, and cannot run away from serious illness. We will eventually need to seek treatment at the hospital using the medical card sooner or later. I frequent hospitals almost daily.

Having seen a sight of relieve for having a medical card cover for having a heart bypass that costs RM50k is very common. THIS IS WHAT INSURANCE IS ALL ABOUT.

Feel free to leave a questions if you have any :-
Email: stevenung1971@ gmail.com 
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