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Saturday, June 19, 2010

Is Insurance Really Necessary?

Before we start, how do we define 'need' vs 'want'? Need is something you must have in order to survive; food, drink, sleep and sex!? (cause we need to reproduce to survive ma), very basic stuffs. Want is something you would like to have but is not absolutely necessary but still good to have. With this definition it would be honest to say that insurance is not a need but a want. So next time when you go buy an insurance tell the agent it is not that I need but I want and he or she will ughh?

So what do most people want from having insurance? The answer is love (3rd-level in the Maslow hierarachy of the needs and wants of humans). This means that the act of insuring yourself or any of your loved one is purely an act of love. Sounds romantic? Not so right. If anything unfortunate should happen to you, the money obtained from insurance is supposed to adequately shield you and your loved ones from a sudden financial crisis and generate enough time for you to recover from the loss.

To be frank I still really do not understand, maybe I never will, why that some people do not have any insurance coverage at all. Do they think it is a scam? Do they think it is a waste of money? Do they think it is supposed to generate some wealth for them? Are they ignorant? If I am healthy why do I want it? I will try to answer all these later. For now, accept this statement that having no insurance is equivalent to not loving yourself and your loved ones & your life is worth nothing and I mean it. Nothing, kosong! 

Types of Common Insurance Coverage
Personal Accident Insurance: Easily the most affordable of all coverages, it protects you from accidental risk; injury or death caused by accidents. The charge rate is the same from cradle to grave meaning it is fixed. If you are married, get a Family Accident coverage then which is cheaper than by individual. I have a coverage of RM500,000 for RM500/year, which can be increased to a million for double the price but I don't want that much yet.
  • "If I am healthy I don't want it" - even if you are superbly healthy with big muscles, can that prevent accidents from happening?
  • "Kena accident like hitting Magnum jackpot nia" - then why you buy jackpot in the first place? Because there is a chance that it will happen right. If you kena both also give you money, any difference?

Medical & Hospitalization Insurance: After having met an accident, you could probably end up dead or in most instances land yourself in a hospital and to stay overnight. And this is going to cost you money especially if you are admitted to a private hospital. The coverage includes Room and Board (R&B) usually in RM100, RM150, RM200 and RM300 with some annual & lifetime limit. There is also co-insurance which means you need to pay a certain % from the total claims made, usually 10% with a cap limit. I have R&B RM200/day, Hospital Benefit RM300/day with annual limit of RM75,000 and lifetime limit of RM225,000 which I find adequate.
  • "I go to public cheaper than private" - if you have time ok, but what if you don't have time on your side, can you afford to queue and wait?
  • "This co-insurances sounds like a scam, why I still need to pay a bit" - it is to ensure that you do not under insure yourself.

Critical Illness Insurance: The moment you are diagnosed with any of the 36 critical illnessescheck it out here you will get a cheque for the full amount of your coverage. Usually both medical & hospitalization insurance and critical illness insurance comes together as a single package, such as whole-life policy or the recently more popular investment-linked policy. I am covered with a RM100,000 insured sum for this. Why RM100,000? I am assuming at worst case I get hit by any one of the below just to name a few (by wallet damage). You can easily see that you need at least a bare minimum of RM100,000 coverage.

Heart Attack: up to RM30,000
Stroke: up to RM75,000
Cancer: up to RM150,000
Kidney Failure: up to RM150,000
Pulmonary Hypertenstion (high blood pressure): up to RM120,000
Alzheimer's Disease: up to RM75,000
Chronic Liver Damage: up to RM120,000
Brain Tumor: up to RM120,000
Bacterial Meningitis: up to RM120,000 

Types of Common Insurance Policies 
Endowment Policy: Structured more towards a savings account than an insurance policy, what I call a forced savings. The savings component, you can opt to save for a certain period of 12, 15, 18, ... 30 years. At the end of the period (policy matured) you will receive a cheque from the insurance company.

As for the insurance component, in the event of death or total permanent disability (TPD) you will be paid the insured amount. If you are diagnosed with a Critical Illness, the premium will be continually paid by the insurance company. Hence endowment is very suitable as a passive retirement fund by forcing you to save to pay for the premium and take back the returns when it matures. If you don't have an EPF account, this is a viable alternative a.k.a. Create Now, Save Later concept.

Example paying RM5,000/year for 30 years period with no withdrawals and getting RM300,000 by the 31st year. You create a paper value of RM300,000 for yourself first and then save later to pay for the premium. It focuses on generating cash value and providing minimal insurance benefit.

Annuity Policy: Almost the same as endowment but does not mature at a specific date. Instead it pays out yearly income throughout your retirement more like a pension fund, not a lump sum. I do not have both these policies because I have my own retirement fund via investing & I would probably get an endowment if I have children one day to show daddy's love to them.

Whole-Life Insurance Policy: An insurance contract that goes on until you have drawn your last breath whether accidental or non-accidental. It also comes with TPD. Riders can be attached such as critical illness & accident coverage. Usually a participating policy which means all premiums are tied together for investment and any returns made are redistributed via cash bonuses. Most whole-life insurance policies do not invest in equity market, therefore the risk is very minimal. 

Term Insurance Policy: Very much like whole-life insurance but does not participate in any investment or income-generating activities. This means that 100% of your premium is used to pay for insurance charges. A good alternative if you are on a tight budget.
  • "The returns are so low le" - Cash bonuses generated are supposed to be a method to finance your insurance charges not give you wealth. An insurance is always a risk management tool not an investment tool.

Investment-Linked Insurance Policy: Basically hybrid of a unit trust and the insurance contract. It consists of two major elements - the Policy Contract & Investment Fund. The policy has the usual Basic Sum insured upon death or TPD and can be attached with other riders like Critical Illness or Medical & Hospitalization. At the investment fund element, you have a variety of funds to put your money into; namely Conservative, Balanced or Aggressive. An ILP has very comprehensive coverage at affordable start-up cost. I have this together with my add-ons of Critical Illness and Medical & Hospitalization coverage. The reason I choose is because ILP is very versatile, if I feel that I do not need that much protection, I will funnel some of my premium into the investment fund.

Picking An Insurance Company
You should do a little research on the financial standing of the insurance company before you get a policy from them. Some useful indicators include the financial strengths, company spending and policy claims. All of these can be obtained from BNM Annual Insurance Statistics
  • Financial strength: look at more assets than liabilities, look for more cash & deposits in hand so they are more likely to pay claims easier.
  • Company spending: how much they spend on agency remuneration, management payouts and day-to-day operations. Must be in tandem with their financial strength.
  • Policy claims: amount of claims paid to policy holders in the event that it is claimable. Must be in tandem with their financial strength.
For my view, it does seem that Great Eastern, AIA and Prudential are the sound companies that have strong financial backing. Remember agents are also important not just the company.

"Why some people feel cheated from insurance especially those bought in the 1980s to mid-1990s". This has got to do with Critical Years. What happened was that many agents were convincing people that they only need to contribute to the premium for a number of years (critical years) and after that the policy will be self sustaining. And they said 'guaranteed'. What people don't know is that it is projected and will always be projected and if they have read the policy closely, it never mentions the word guaranteed. If you want a guaranteed return go dump in Fixed Deposit la.

I blame people for listening them 100% and not do research on their own. I will also blame those agents who want to suck in more bad karma and think about their own gains. It is important for you to find a good insurance agent as the turnover rate for this industry is 90%. This is exactly what is happening to unit trust as well, it is the sole reason why large equity funds are so hot yet people still pour in money to get lower than average returns. After another decade, they gonna say they "kena tipu" again but in fact they bluffed themselves. If you are looking for good agents, you can ask me hehe. I cannot stop stressing that you need to do your own research as well or ask your friends opinion who knows investing in and out, remember the 5% kind of people :)

Last Words
The closest reason why I think some people take insurance lightly is because it is a financial tool. Like it or not most people have very little money knowledge, schools don't teach ma. Most people live from paycheck to paycheck, spend more than they make or save too much but don't know how to use it. They don't realize the importance of having it and think that they can always "get it later." Insurance is like the analogy of a parachute: "When you need it and you don't have it, you'll never need it again." People keep on preaching that gambling football or etc is bad, but let me tell you this last statement. Without insurance you are gambling your own life and the protection of your survivors, to me that is the WORST BET that you can gamble and you gamble it every single minute of your life.

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