Sunday, May 07, 2006

More about reducing coverage

When we buy life insurance, there is one important reason why most of us should go for reducing coverage: most of us have limited budget in paying for insurance, reducing coverage gives us higher value of protection as compare to level coverage, at least for the first few years. This makes all the difference if anything happen to us now.

We begin with a simple example. You and your insurance agent calculated that you will need a coverage of RM400,000. But you can only afford to pay for premium of either
a. RM300,000 protection in a reducing coverage term life, or
b. RM200,000 level coverage protection term life, or
c. RM100,000 level coverage protection with RM100,000 savings/ investment (full life/ investment linked)

The logical choice is to buy the term life insurance RM300,000. Anything happen to you now or the next three years, you and/or family will get RM300,000 or close to RM300,000.

What about ten years later when your coverage reduces half to RM150,000?

Risk management is a process to review periodically. Just three years later your financial position would have changed, i.e. you have a higher salary, you have more kids, you have saved more money, you have more investment, you have more ownership in your home, etc. You can decide three years later whether to increase your coverage or to reduce your coverage. You can decide then whether to dump your current policies and buy a completely new plan for your entire protection need or just to buy new policies to top up your current coverage.

Just like corporate risk management, personal risk management requires periodic review. Personal risk management is something you can never do once and say enough.

Using the above method you are going to pay higher insurance premiums through out your life time. Some of the plan you add in your older age may be more expensive. However, you and your family protection are maximized based on your limited budget. You increase your insurance premium and protection when your financial situation improves and when your family grows.

If there is no financial constraint that you are rich enough to buy sufficient protection at level coverage, then you should buy level coverage. However, most of us probably cannot afford the premiums. (Insurance agent would say, "Therefore you should buy more now...since it will be more expensive in the future..." They are blind to say such things. Driven by peers pressure, targets to acheive and group commitments, most insurance agents refuse to recognise our financial limitation.)

Read more about reducing your life insurance premium without compromising protection.