Saturday, August 27, 2005

Reduce your life insurance premium

Your life insurance agents will not tell you this. He probably hopes you will never find out.

How to cut your life insurance premium for more than 60% from RM1800 per annum to less than RM663 per annum without compromising your real protection needs? Here's how.

I called my friend, who works as an life insurance agent for quotations. I gave my profiles and details.
Profile : male, non-smoker, healthy, age? young :-)
Insurance coverage: RM50,000
Period: 30 years

He recommended
Investment-linked life insurance
Premium: RM1,800 per annum
Benefits: RM50,000 coverage, level coverage, crisis cover with critical illness, investment value at RM245,745 upon 30 years maturity

After much drilling and pestering, reluctantly he gave me further quotes
Term life insurance
Premium: RM662.50 per annum
Benefits: RM50,000, level coverage, crisis cover with critical illness, 30 years term life without cash value or investment value

I told him that he can do much better than that. Finally he quoted
Term life insurance
Premium: RM283.50 per annum
Benefits: RM50,000, reducing coverage, without crisis cover on critical illness (oops!), 30 years term life without cash value or investment value

This is the explanation:

1. First thing first, why I don't need investment-linked products?

I don't have to stuck my investment with one insurance company. I do my own investment outside an insurance products. I can choose my own unit trusts , stocks and properties. I can decide when to invest and when to stop.

Just think. Between the first two policies above, with annual premium RM1,800 and RM662.50, there is a big difference of RM1,137.50. Why can't I invest this amount elsewhere? Why should I stuck my long term investment with one insurance company?

To pay extra RM1,137.50 annually for the next 30 years would earn me a lump sum of RM245,745. A quick calculation shows that the annual rate of return is 11.43% for 30 years. Is it good? Yes, a consistent 11.43% ROI for 30 years is fabulous. But this is pure guess and estimation!! The agents and the insurance company cannot guarantee such return! Just like any other investment, there is no guarantee here. You may end up with RM1,000 instead of RM245,745 after 30 years.

"This is our fund managers' historical performance", my agent friend argued. Sure, what if your fund manager leaves? Is he going to stay in the same company for next 30 years? If I ever invest in a managed fund, I will move my money to follow a good fund manager. Investment-linked life insurance policy does not allow me to move out from this investment commitments without incurring expenses.

2. Why I don't need Whole Life insurance policy?
Because there is NO such thing as whole life coverage!! I will have to pay extra premium every year as compared to term life insurance. This extra premium is my savings in the life insurance. After 30 years, the extra premium I would have paid and its return (usually at a rate equal to fixed deposit rate) would be accumulated to a large sum. Anything happen to me then I will get paid, sure, not from the insurance element of the policy but from the savings element of the policy. (Hey, that's my own savings and not "benefits" from the insurance company.)

"But after several years you don't have to pay the premium for whole-life policy", my friend reminded me. Off course I don't have to pay then because whole life insurance policy makes me pay the extra premium up front!!

So what makes it look like a whole life protection is that such "financial protection" actually comes from my own savings. It is from the extra premium that I paid. So call "whole life" is truly misleading.

3. Why I don't need level coverage?
From level coverage to reducing coverage I could cut down further RM379 premium (RM662.50 less RM283.50). For level coverage, my life insurance coverage stays at RM50,000 for the next 30 years. For reducing coverage, my life insurance coverage will reduce every year from RM50,000 right up to NIL at the end of the 30 years.

There are specific reasons why people usually need reducing but not level coverage.
  • The purpose of life insurance is to protect the loss of future labour income. When we get older our remaining working days reduce and therefore "future labour income" to be protected reduce, too.
  • We would have built sufficient financial assets that could replace our labour income, therefore less coverage required.
  • Our dependents would have grown up and become financially independent from us
  • Buying level coverage policy, generally, addresses your life insurance WANT, i.e. you WANT to leave RM500,000 to your family in case anything happen to you regardless your actual earning. Buying reducing coverage term life addresses actual insurance NEED.
  • More reasons on reducing coverage here.
4. Why I stick to level coverage? Frankly, I didn't want to. But I need the crisis coverage.
The only reason why I could not reduce further to opt for the reducing coverage policy above is because the policy does not have crisis cover. Crisis cover for critical illness is too important to sacrifice for cheaper premium. Well, this is how insurance companies force us to buy what we don't need (the level coverage) by bundled it with something we must have (critical illness coverage). (sound pretty bitter here. :-) )

Edited: There is one general insurance company in Malaysia, American Home Assurance, that insures critical illness only, without attachment of life insurance. In such a case, I can choose the last option with premium RM283.50 and buy RM177 critical illness RM50,000 coverage from AHA. In total RM460.50 premium per annum, a reduction of 74% from the first option's RM1,800 or a reduction of 30% from second option's RM662.50.

5. Isn't it good if we can get back some cash value after all our payments?
We must know that WE DON'T GET BACK WHAT WE PAY FOR PROTECTION. Insurance is an expense, regardless whether it is term life, whole-life or investment-linked, life insurance company WILL NOT pay back the premium that goes to financial protection. We only get back the extra premium paid that goes to savings or investments.

If you understand the essence of risks management, focus on protection needs (not wants), and have your own plan in growing your financial assets (e.g. properties, shares, deposits, etc.), life insurance premium can be dirt cheap.

If you have been buying investment-linked, in your next life insurance policy, you can either cut the premium down by more than 80% or quadruple your coverage with the same premium. :-) You can now using the extra premium that you save to pay for higher coverage.

Part 1: Reduce your life insurance premium
Part 2: Reduce your life insurance premium (2)
Part 3: Reduce your life insurance premium (3)

Other web resources
Read what the expert says about life insurance, Term or Whole Life?

Thursday, August 04, 2005

Life insurance and unit trust: Investment linked

When we buy investment linked insurance products we are not buying insurance alone. We are buying insurance and unit trust. We are not just paying the premium for the insurance protection of loss of income; we are paying for unit trust investment too. In fact, if you look at the section of Investment Linked prices in newspaper that is usually below unit trust prices, you can actually call such products an Insurance Linked Unit Trust. :-)

In investment linked products, life insurance and unit trust are bundled into one financial package. You may argue that unit trust investment is, too, a form of insurance to protect against loss of income. This is mere twist of words. The fact is that insurance gives you protection that you have not earned, i.e. you pay RM400 now and you will get to claim RM50,000 upon incident. For unit trust investment you get what you have paid for and the return it gives, i.e. you pay RM400 now and you will get RM400 plus investment's return back.

This is the 2nd key concept you must know in managing risks through insurance. Insurance protection covers what you have not earned. Investment pay you what you have earned.

Functionally, therefore, insurance and investment are different. You don’t call investment as insurance. The word investment itself spells clearly that it will give you future income. It is not “a form of insurance” that gives you future income.

To distinctively differentiating the mechanism between the two is critical in managing risks. Insurance addresses your current needs for financial protection. It is about NOW, the imminent and pressing requirements to be protected financially NOW. While investment can only provides for your FUTURE financial needs when the investment grows big enough.

Tuesday, August 02, 2005

Life insurance - Basic (2)

A simple and basic life insurance will do the job of insuring our possible expenses and possible loss of income perfectly well.

What about Investment Linked Life Insurance? This is financial package that includes investment. There are two parts in this financial package, one is insurance and the other one is investment in unit trust. The investment part addresses one investment needs. We must not mix it up with insurance needs.

What about Whole Life Insurance 's cash value? This, too, is a financial package that includes savings. There are two part in this financial package, one is insurance and the other one is savings in cash. It addresses your saving needs beside your insurance needs. However we really can handle saving ourselves and we must not mix up our savings needs and insurance protection needs.

I am particularly critical of the life insurance products that come with saving and investment elements like Investment Linked or those Whole Life with cash value. By mixing insurance and investment/saving, we confuse ourselves. We tend to think insurance is expensive while, in fact, more than half of the "expensive" premium we pay goes to investment/saving instead of insurance. Insurance is actually affordable, but with investment/saving elements it gives the wrong impression of being expensive.

Precisely because of this, it deprives us from buying sufficient insurance coverage! If we stop paying for the investment/saving element of our life insurance, we could probably afford to triple our insurance coverage/ financial protection.

Do you realize that? Did your agents tell you that?

Life insurance - Basic (1)

We must understand what exactly insurance is for - it covers our financial losses arising from certain events. Nothing more.

And there are ONLY two kinds of financial losses
a. Extra expenses, i.e. medical expenses, repairing expenses, etc., money that you have to pay out of your pockets, and
b. Consequential loss, i.e. job loss, loss of income generating assets, etc. loss of future income

This is the 1st key concept that worth repeating. No matter what names are given to an insurance product, it essentially covers our
a. Extra expenses that we need to pay out of our pocket NOW, and/or
b. FUTURE income that will be lost and will no longer come into our pocket,
arising from certain unfavourable events.

Life insurance covers loss of FUTURE INCOME and its medical rider covers OUT OF POCKET IMMINENT extra expenses. Critical illness of a life insurance cover loss of FUTURE INCOME but medical insurance cover OUT OF POCKET EXPENSES.

Education fund insurance, life insurance for SARS, etc. are packaging. It varies the payments and claims mechanism (which include reasons of claim) to provide us essentially similar financial protection.

So, your child education insurance covers your loss of FUTURE income, just like any other simple life insurance. A life insurance for SARS , covers your loss of FUTURE income just like any other life insurance. Mortgage Reducing Term Assurance (MRTA) on your home loan repayment covers your loss of ability in generating FUTURE income (to pay back home loan), just like any other life insurance.

With this in mind, it is easy to cut through insurance speeches that don't make sense.