Let’s assume Rachel is a 23-year-old working adult who earns RM3,000 a month. She does not drink or smoke. She has no life insurance policy and is buying her first.
Here are five things that fresh graduates like her must know before purchasing a policy.
1. Figure out your purpose
Insurance is about protection and nothing else. It is a financial tool to pay your medical bills or to compensate either you or your beneficiaries an agreed sum of money, if you are hospitalised or lose your sources of active income due to diagnosis of a critical illness, disability, and death, whichever arises first.
It isn’t a tool to help you make money or to build wealth. So, you should have the highest amount of coverage at the lowest possible premium.
2. Learn about the types of insurance coverage
There are three main types of insurance coverage.
3. Decide on how much insurance cover you need
You can calculate the amount of life insurance cover you need based on the simple formula below:
Life Insurance Cover = Annual Income x 10 Years
So, for Rachel, the amount of life insurance cover is RM360,000 where the sum is calculated as follows:
Life Insurance Cover
= Rachel’s Monthly Income x 12 Months x 10 Years
= RM3,000 x 12 Months x 10 Years
This means, if Rachel lost her ability to earn income either through diagnosis of a critical illness, or becoming permanently disabled or she passed on, she or her family shall be compensated up to 10 years’ worth of her current income.
4. Get to know the various insurance products
Basically, there are two main insurance products Rachel can buy to get life insurance cover of RM360,000.
Option 1: Term Life Insurance
Typically, term life policies cover death and total permanent disability. Its premium amount is either renewable on a yearly basis according to your age or is fixed at the same price throughout the duration of the policy.
A quick insurance quote for Rachel from Fi Life produced the following:
Which of the two policies should Rachel choose? Well, it depends. For instance, if Rachel decides to:
a. Keep it for 30 years: Then, it is better to go for the 30-year level term as it will be cheaper in the long run. So, the price is RM63.65 a month.
b. Upgrade the term policy in three years’ time: In that case, it is better to go for the yearly renewable term, where the price is RM39.35 a month, which very affordable.
Option 2: Investment-Linked Insurance Policy (ILP)
For a start, an ILP is a combination of a term life policy and unit trust funds. The policy allows you to buy critical illness coverage and medical insurance – which is in addition to death and total permanent disability – by having additional components such as:
a. Critical illnesses coverage
b. Medical insurance
c. Unit trust investments
The premium of an ILP is higher than a typical term life insurance policy and the final premium (depending on the components added) shall work out to be a few hundred ringgit per month. This is typical if Rachel wants the following in her ILP:
a. Death and Total Permanent Disability Coverages: RM360,000
b. Critical Illness Coverage: RM360,000
c. Medical Coverage: almost RM1 million in annual limit and no co-insurance
d. Negligible Investment Amount in Unit Trust Funds
5. Consider affordability
Generally, it is best to keep your insurance expense below 10% of your monthly income. In Rachel’s case, she may start with an insurance plan that costs below RM300 a month.
This will allow her to have more proportions of her income to save or invest to build her wealth for the future. She can always upgrade her plans when her income increases over time.
So, let’s keep it at RM300 a month. What are her options?
The answer lies in her choices of medical insurance. If Rachel opts for a medical card that:
a. Has co-insurance (Standalone card)
Her premium on the card (lowest plan) is likely to be below RM100 a month. In this case, she could pay RM200+ a month to buy an ILP that has a higher death and total permanent disability and critical illness coverage.
b. No co-insurance
Alternatively, Rachel may choose an ILP that has medical insurance. But, Rachel would trade off the amount of coverage of critical illness (if she opts for it).
She may boost her death and total permanent disability coverage by having a term life insurance policy. Quote: Fi Life
Here are some golden nuggets to buying life insurance:
- Understand the purpose of buying life insurance – It’s for protection.
- Get the highest insurance coverage with the lowest premium available.
- Prioritise having medical insurance first.
- Life Insurance Needs = Annual Income x 10 Years
- Limit your premium at 10% of your income. Upgrade later if you earn more.
Ian Tai is a financial content machine, dividend investor and author of over 450 articles on finance featured in KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’, and ‘Small Cap Asia’ in Singapore. He is a regular host and presenter of a weekly financial webinar with KCLau.com.
Source: Google | Insurance News