Unraveling Insurance Speak

Do you have a nagging feeling that your insurance agent did not tell you the whole story about the policy he/she wanted you to buy?

Do you feel like something is wrong but you couldn’t say exactly what it is?

Well, you are not alone, and even a Financial Advisor like me needed to be hyper vigilant to filter what is really a good feature and what is considered sales pitch.

First thing first is that insurance is protection. It is NOT savings. Any agent who alleges otherwise can challenge them to report to Bank Negara. If they are so confident definitely they won’t mind explaining their rationale to the regulator.

How much insurance is enough?

Commonly agents will argue it should be a certain percentage of your salary. This is not correct.

Sometimes agents will help you to restructure your old policies and replace them with new ones with better features… at the same premium. This is also not correct.

Insurance premium to be based on your status/job title/love for your children. All wrong answer.

Insurance is to be based on protection needs. What are the needs?

  1. Medical – What is the usual amount claimed by an individual over a lifetime?
  2. Critical illness – What is the replacement income to recover from a critical illness? (in other words: monthly expenses X months to recover)
  3. Life – What are your liabilities in case you’re gone? (in other words: loans + no. of dependents X years to support)

How many years to pay the premium?

Sir/madam, you should pay your premium for 7/10/20 years. Just pay a limited number of years to enjoy a lifetime of coverage!

It’s a terrible tragedy that insurance commissions are based on premium paid. Did you know that commissions are paid out to agents for ~7 years? If I can get you to pay for 7 years, I will earn just enough from you and on the 7th year you will complete your payment and I will see you again to propose another policy so that I can re-earn my commissions. If you pay your premiums beyond year 8, I will get nothing and yet I have to service you, truly a bad deal.

commissions

example illustration: direct distribution cost until year 6/7.

But I don’t want to pay my insurance forever!

Actually you shouldn’t. At a certain point, the insurance cost is just too high. The concept of insurance is pooling of risk. At a certain age, it is cheaper to keep a sum of money to self-insure rather than to pay the escalating fees and costs.

escalating cost

for example, at age 37, the insurance charge is ~RM1600 for a 200k coverage, but at age 66, the insurance charge is ~RM11000 for the same coverage.

Woohoo! this means I’m paying RM4,800 for a RM11,000 worth of coverage at age 66, I should buy insurance as early as possible to lower my premium!

Actually no. The premium paid in early years there is extra after minus insurance charge. The earlier you start, the more extras. Obviously the more extras, the lower the premium will be. No free lunch.

My agent told me old policies have this Automatic Premium Loan thing where you can’t simply withdraw cash, there will be interest charged. New policies I can withdraw cash as I like, win!

First of all, insurance is for protection. If you need to withdraw cash from your insurance policies, you’re doing your savings/emergency funds wrong. Anyway policies that have withdrawn too much cash and do not have enough cash values will be automatic lapse. If lapse and buy another policy, thanks for paying another round of fees and commissions. Also, this does not automatically mean newer policies are better.

Old medical card coverage until age 80, new medical card cover until age 100!

… see insurance cost answer above. No free lunch. Seriously, please read your charts and policies.

This insurance policy can get 25% return! Pay RM10k for 5 years, Year 1-5 get income RM500/year, Year 6-13 income RM1.3k/year. Total income received RM12.9k! And then also get RM50k back! RM12.9k/RM50k = 25% return!

Rule no. 1 – insurance is not savings. Anyway correct answer to question:

time value money

Actual interest earned = 4.21%. Time-value of money concept is a totally legit thing. Look it up. Also, no free lunch.

What about this insurance with “Suregain” product? Guaranteed minimum fund price! Sure gain!

Ok, so I bite the bullet and tested this one. Fund price on 9/4/2019 is 0.8147. (actual product name withheld to protect the innocent) But, guaranteed fund price is 1.4221! Almost 50% return guaranteed! wow, what a deal, wait… guarantee is for year… 2035. Apply time-value of money, compounding return of… 3.39% per annum only… oh dear. What’s that? No free lunch? Yup, what a surprise.

To be clear, this does not mean you should not get insurance. Studies show that Malaysian population as a whole generally are still under insured. Only that there is a proper way to insure yourself. Get educated and look for a proper intermediary who looks after your best interest.

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