Life is mostly uncertain and unpredictable. One time you can be happy enjoying life with your loved ones and suddenly everything changes. Nobody likes to think about anything bad happening to them or their loved ones but it is always good to be prepared.
Life insurance is vital to ensure that you and your family are protected in case of any fatality or unfortunate event.
However, a big number of Malaysians don’t include life insurance cover in their financial planning. In fact, a 2012/2013 study conducted by the Life Insurance Association of Malaysia (LIAM) established that only 56% of Malaysians have a life Insurance cover.
Life insurance protects you and your family from any unavoidable and unforeseen life events.
How does Life Insurance Work In Malaysia?
A life insurance cover is a contract between you as a policyholder and your insurance company whereby you will be required to pay a set amount of money known as premiums at regular interval i.e. monthly, quarterly, bi-annually or annually or in a lump sum to your insurer. In exchange, if you suffer from any disability, serious illness, or death, your insurer will pay a lump sum amount to you (in case of illness or disability) or to your beneficiaries/nominees (in case of death).
What is covered by Life Insurance?
This is one of the main motives for getting a life insurance policy. If you have people who depended on you financially such as spouse and children, you will want to make sure that they do not suffer if anything bad happens to you and that they can still live comfortably. A life insurance policy will cover death that is caused by old age, accident, illness, or even suicides. However, there is some exclusion to the deaths as a result of suicides that are not covered.
If the policyholder becomes permanently disabled and is unable to work and provide for the family, the life insurance policy kicks in. A Doctor will, however, be required to confirm that the insured person is completely unable to work or perform any tasks to earn an income so as to approve the claim.
What is not covered by Life Insurance?
If the policyholder commits suicide within a year of buying a life cover, the insurance company will not pay his/her beneficiaries. This is due to the clause found in most insurance contracts that clearly state that there will be no payout if the policyholder commits suicide within a year of taking the contract.
Other than that, there are other deaths and permanent disabilities that are not covered by many life insurance providers. These may include:
- Death or disability caused by involvement in high-risk activities such as hazardous sports e.g. bungee jumping, deep-sea diving, motorsport racing etc
- Deaths or disability as a result of war or terrorism
We suggest that you talk to your insurer about this exclusion to find out if it will cover your needs.
Who Needs a Life Insurance?
Nobody knows what tomorrow will bring. To find out if you really need a life insurance cover, think about the worst-case scenario. If something happened to you tomorrow, what would happen to your loved ones? Would they be able to cope financially? Would they afford to pay for your funeral expenses or medical bill? Would they be able to meet their day to day expenses? What about your children’s future? Would your children manage to continue with their education?
If you think that your family would suffer financially if you are not there, then you need to consider getting a life insurance cover. The death benefits help your family meet their financial needs by replacing your income.
Life Insurance ensures that the people you care for are well taken care of financially even if you are not around or have lost the ability to do so.
Life Insurance policy is most suitable for anyone with financial dependants and therefore is not necessary for retirees who no-longer have people who depend on them financially.
In Malaysia, you are able to claim a tax relief of up to RM 6,000 annually for a life Insurance policy and also your Employee Provident Fund (EPF) contributions.
Types of Life Insurance Available In Malaysia
When choosing a Life Insurance, you can opt to choose the ones that offer a share in profits or those that don’t. Those that don’t share profits tend to be relatively cheaper.
- Whole Life Insurance
Just as the name suggests, this option is designed to provide life-long coverage where the policyholder pays the premiums throughout his life. Payment of the sum is given to the beneficiaries only after the death of the policyholder or in case of total and permanent disability of the policyholder. It is the best life cover for those who want to ensure that their families are well taken care of in case of their own demise.
- Endowment Life Insurance
It provides a combination of savings and protection whereby the money and the bonuses earned are paid upon the demise of the policyholder within the term of the policy. If you survive the policy period, you will receive the sum accumulated and bonuses once the policy is over. You can choose to have an endowment plan for varying periods over 10 years or up to a certain age.
This plan is best suited for savings, wealth transfer and preservation, and tax-deferred wealth accumulation.
- Investment-Linked Life Insurance
This provides investment and protection whereby your premiums will be divided for life cover and investment fund of your choice to increase your returns. You can decide on the ratio of your premium’s allocation.
This option will also provide you with savings, wealth transfer and preservation, and tax-deferred wealth accumulation.
- Term Insurance
This is only available for a specific period e.g. 10 years and the sum is only paid upon the demise of the policyholder within that set period. If you survive the policy period, you will not receive any payment even if you had paid all your premiums.
This option provides the highest instant cover at the cheapest price.
- Life Annuity Insurance
In this option, the insurance company pays you over a set period of time up to the day you die. There are two types of annuity which include the immediate or deferred annuity. Immediate annuity starts within 12 months after you have bought the annuity. It is mostly taken by those who are about to retire or those that have already retired. Deferred annuity, on the other hand, starts in more than 12 months after you buy it. People mostly buy this while they are still working so that they can receive payment when they retire.
This plan is best for retirement savings and wealth accumulation.
- Mortgage Reducing Term Assurance(MRTA)
This is designed to repay an outstanding property loan in case of the untimely death, serious illness or disability of the borrower. In the event of such eventualities, the insurance company pays the outstanding loan amount to the financial institution which then releases the property owner to the owner or his/her beneficiaries.
- Supplementary Rider
This is a supplementary attached to a basic plan such as Whole life and Endowment. Most common riders include critical illness, medical, and personal accident.
Why Is Life Insurance Important?
- To financially support your family – Leaving your family behind without protection can be quite devastating for them especially if you were the breadwinner. That is why it is important to have an affordable life cover that ensures that your family will continue being taken care of even when you are not there.
- To pay debts- In case of your demise, all your debts including property and personal debts are automatically transferred to your family if you are not covered. A life insurance policy will help your family to pay off the debts which will save them from creditors.
- Funeral Expenses- Funerals can be quite expensive and may cause a strain to your already grieving family. A life cover takes care of all your burial expenses to allow your family to mourn in peace.
- Saving plan- Most insurance products have riders that include saving features which allow you to claim your cash value after your policy matures.
- Reduce income tax- Buying insurance provides you with tax relief of up to RM 6000 each year.
- Fund your children’s education- You can use your life insurance as an alternative to pay for your children’s education when you are not there. You can also opt to surrender your policy with an endowment plan.
- Secures your assets and savings- When you have a life insurance your family will not be forced to liquidate your assets or use up your savings in order to pay debts. Instead, they will enjoy more benefits that will have been acquired from the cover.
Factors to Consider When Choosing a Life Insurance Cover
Insurance is for life so you don’t want to make mistakes that might eventually cost you or your family. When choosing the best life cover, do your research and consider all the important aspects before you buy. Here are a number of aspects that you should consider before buying a life insurance plan that best suits you.
- Financial Goals
Determining your financial goals will help you decide on the best life insurance to buy. Although the most common reason for buying life insurance is to continue financing your family after your demise, there are still other ways that a life insurance cover can help you. You can take a life insurance plan that gives you a lump sum amount on maturity when your retirement or you can even save towards financing your child’s overseas studies. Whatever the goal is, it will help you towards picking the best-suited policy plan.
- Cost of Premium
You should be able to comfortably pay your premium. Paying high premiums will strain you and will eventually lead to a lapsed policy. Financial planners recommend that your premium should not be more than 6% of your income. This simply means that if your income is RM 6000, your insurance premiums should not exceed RM 360.
When choosing a policy do your comparison and make sure that you will be able to afford it.
- Value of Policy
The next factor to consider is the amount of coverage you need. There are some online calculators to help you determine how much your dependents need. However, the best way to determine just how much coverage you need is with the help of an agent who will assess your needs based on your situation and financial goals.
Choosing the right insurance plan is greatly influenced by you and your family’s current and future financial needs. Other factors that determine the type of insurance plan that you should have include marital status, married with children, age, and income.
It is not enough to just get a life insurance policy; you should get a policy that will completely cover your whole family in case of any unfortunate event.
Importance of Disclosure
When applying for a life insurance policy, you should make sure that you completely fill the form truthfully or your policy will be void. If your agent is the one that filled the form for you, make sure that you read and understand all the requirements before signing it.
What to do if you can no longer afford to pay your premiums?
If you encounter some financial problem and you are not able to pay your premiums, the policy contract offers a “grace period” which gives you more time after the due date to pay the premium. This grace period is normally 15 days for a monthly mode of payment and 30 days for other modes (semi-annually and annually).
If the grace period is over and you still cannot afford the premium, you have an option to keep the policy active by using a “non-forfeiture loan” which simply utilizes the cash value that your policy had earned to pay for the premiums. Your policy will lapse once the cash value is finished.
On the other hand, you can opt to change your policy to a “paid up” policy whereby the policy and the sum assured is active up to the last time you paid your premium. You will not be required to pay any more premiums but your policy’s validity will only be up to the amount you had paid which means that the sum assured will reduce.
If your policy lapses, you may revive it within a set period under specified conditions including declaring your health status at the time.
We recommend that you speak to your insurance company for more details on the options available to you if you are having problems paying your premiums.
What happens if you cancel Your Life Insurance Policy?
Purchasing a life insurance cover is a long-term commitment. If for one reason or the other you decide to cancel your policy, you will not get the full amount that you had paid in premiums up to that date. This is because the surrender value (value of your policy when you cancel it) is less than what you had paid.
It is also not advisable to replace your current policy with a new one because there is a likelihood that your new policy may have a higher premium and will also incur some additional costs. Therefore, before terminating, replacing, or borrowing on a policy, discuss with your insurance company to find out more about what you will be forfeiting.
You can however still get a refund of your premium if you cancel your policy within the 15 days ‘free look’ period. You can do this by returning your policy to your insurance provider after receiving the policy document.
What you need to keep in Mind
- Your life insurance policy may lapse if the premiums are not paid on time, therefore, it is important to note when your premiums are due.
- Always insist and keep a receipt as proof of payment which you may need when there is an investigation if your agent fails to forward your payment to your insurance company.
- Make sure that your age is correctly stated in the insurance proposal form because it may affect the amount that your insurance company gives to your nominees in case of your demise.
- Keep your insurance form in a safe and secure place and write the basic information of the policy such as the type of policy, policy number, and your nominees’ names in another place.
- Ask your insurance company for clarification of anything that you don’t understand in the policy document.
It is important to have a life insurance cover especially if you are the breadwinner in your family. Make sure that you tell your nominees about your life insurance policy and where you keep the documents. Also, keep them updated on any changes you make on the documents. Having a secondary nominee is also important in case your main nominee passes away before you.