Rockwills Wealth Planner

Insurance Planning

Important: When taking insurance cover, do try to seek expert advice. Insurance is a very complex subject and scope of coverage, terms and benefits vary from company to company. Contact an experienced insurance agent or financial planner with regard to all insurance issues.

Insurance planning is like checking the tyres, water, battery and fuel tank before driving on a long journey.

The primary purpose of insurance is to protect a person from loss in the event an identified risk actually happens. It is the most cost-effective way to protect against loss. By spreading the cost, of a loss happening to an individual, among a large population of participants, the cost (being now the premium) becomes only a fraction of the possible loss to the individual. Otherwise, self-insurance would require one to save enough for each possible loss and that would be really impractical and inefficient.

In life insurance, besides protection, there is also the savings element. However, the discussion here is confined to protection of major risks for individuals from a financial standpoint only. Discussion on the savings element of insurance is covered under the wealth planning section.

The first step in insurance planning is to examine the risks one is most concerned with and see which should be protected against. This determines the insurance needs. A checklist such as the one here would be useful for this purpose.

Checklist of insurance needs for the individual

Protection Need	Possible Solution	Remarks
Death benefit for dependents	Term assurance
Old age care	Endowment policy
	Non-participating whole life policy
	Annuity plan	Annuity in perpetuity is not available in Malaysia
	Long term care plan	Currently not available in Malaysia
Death Benefit & old age care	Universal life policy
	Investment-linked policy
	Participating whole life policy
Health care	Hospital and surgical plan	Yearly renewable or Guaranteed renewal H & S policy
	Hospital income plan
	Dental plan	Currently not available in Malaysia for individuals
	Vision plan	Currently not available in Malaysia for individuals
Critical Illness Benefit	Critical illness insurance
Loss of income	Long term disability income insurance	Income in perpetuity is not available in Malaysia
	Short term disability income insurance
Exposure to third party liability	Employer's Liability insurance
	Public Liability insurance
	Professional Indemnity insurance
Liability cancellation	Reducing term assurance	This is most appropriate for term loans with set repayments
	Level term assurance
	Investment-Linked policy
	Universal life policy
	Whole life policy
Asset protection	Fire insurance
	Houseowners' insurance
	Householders' insurance
	All risks insurance
Car loss/damage	Third party motor insurance
	Third party, fire & theft motor insurance
	Comprehensive motor insurance
Accidental death/injury	Personal accident insurance
Travel accident, medical, baggage loss	Travel insurance
* The table above is meant to serve as a guide only; it is not an exhaustive list.

Next look at what is available in insurance to meet these needs. There is a large variety of products available as choice and the market is sufficiently developed and sophisticated to provide most if not all insurance needs.

Then consult with those knowledgeable about which insurance companies to choose, the particular insurance types, the coverage inclusions, exclusions, amount of cover and cost. In choosing, remember that the cheapest is not necessarily the best. Features offered will differ from company to company and one should be clear as to the limitations and omissions before purchase. Assessing the financial strength of the insurer is also very important since the insurance purchase may be a very long term commitment.

The problem with insurance is that one can never buy it at the time it is needed so it is bought in advance, even though it may never be needed later.

While different persons will be concerned with their own unique set of risks, there are three major risk groups that most people would have to address because the actualisation of any one or a combination of such risks may cause heavy suffering and financial impact for the person or the dependants. These risks concern premature death, loss of wealth and loss of earnings and/or additional expenses.

The most serious one would of course be the possibility of premature death, i.e. death before life expectancy is reached. (According to a Bernama March 2007 report, the average life expectancy for men is 72 while for women it is 76.)

When a person is dead, the game is up. For a family with young children dependent on a person who is the sole or major breadwinner, death would be financially devastating and could seriously affect the children's chances of getting a good education.

Next would be the risk group concerning the possibility of loss of wealth. Loss of wealth can be due to any number of reasons. Lack of saving, compulsive spending or gambling, bad choice of investment, victim of a swindle, guarantee for a loan turn bad, divorce settlement, etc. Note that these are mostly avoidable or controllable.

One that is not so controllable would be lawsuit damages and that can make a big hole in one's pocket. Liability to a third party for an accident or an oversight can happen to anyone.

Then, there is the physical loss of assets, such as in the event of a fire, flood or other natural calamities, which are not controllable risks. Lack of insurance in this area is a major contributor to loss of wealth.

The third major risk group would be to do with loss of earnings due to disability or loss of employment, and/or increase in expenses from health or long term care needs.

Disability can arise from disease or injury. It can be partial or total. It can be temporary or permanent. Whatever the situation, not only is there a loss of income and earning power, there are additional expenses to cope with the disablement.

Loss of earnings can happen from a loss of job due to retrenchment, liquidation of business, relocation, scaling down, early retirement or other reasons. (According to the Holmes and Rahe Stress Scale, job loss is among the top ten highest causes of stress; and stress as we all know can lead to illness.) The worst is for loss of earnings to happen at a time of indebtedness when the bank or creditor has a charge/lien over assets of value.

What can be done about such risks besides avoidance?

Well, one can't avoid death. This is where insurance planning is essential.

In the case of the risk of premature death, the most practical solution would be to take life insurance cover as well as personal accident cover (particular if the work involves a lot of travelling). Life insurance is for lifelong cover while personal accident cover is in case death occurs by accident.

When wealth has not been accumulated yet, it would be risky to start a family and have young kids without the protection of insurance. Or if the parents are retired and dependent on the person for living expenses.

For a relatively small cost, one can have life insurance cover for a reasonably sizeable sum assured. This amount would be payable on death to the family and that could keep the loved ones going - an amount that would otherwise take many years of savings to build up.

The following may also be looked at as needs to cover upon death:

Final expenses
funeral rites and burial expenses
Estate administration expenses
probate or letter of administration process costs
Survivor income
number of years' support for surviving spouse and dependants
Debt liquidation
clearing outstanding liabilities
Special financial needs
special needs child, infirm parents care, etc.
Emergency fund
for immediate cash flow needs

The rule of thumb that insurance planners usually go by for minimum cover for a person below 40 would be 8 to 10 times annual earnings. Thus, if earnings are RM 60,000 per annum, the sum assured to go for would be at least RM 500,000 to RM 600,000. However, the extent and type of coverage to be taken really depends on what the person's affordability is like. Even factoring salary increments and a high savings rate, it would probably take a person at least 15 to 20 years to save enough to equal the death benefit amount.

One can have a stripped down no frills term assurance cover that is very cheap. This, and personal accident insurance, can even be taken to higher levels of cover, such as 15 to 20 times earnings. Note there is no cash value though for such policies.

While term assurance is cheaper than whole life, it can work out to be more expensive in the long run because it expires after a term and renewing at that point will be expensive, compared to whole life that allows for level premium throughout one's lifetime. The alternative is to take term assurance with a renewal option that allows the insured to renew at his original rate. This will entail a higher premium though.

Another way to work out the extent of life cover needed, that is perhaps more reliable than a thumb rule, would be to calculate the estimated financial needs that arise after the breadwinner's death, less existing financial resources, as set out in the attached format.

Insurance cover calculation

The following is a format to help determine how much insurance cover one should take:

Insured:		999,999,999.99	999,999,999.99
		RM	RM
Needs:	Final - funeral rites and burial expenses
	Estate administration - probate or letter of administration process costs
	Emergency fund - for immediate cash flow needs, etc.
	Survivor income - number of years' support for spouse and dependants
	Education - school or college education costs
	Debt liquidation - clearing of outstanding liabilities
	Special financial needs - special needs child, infirm parents care, etc.
	Others*
	Total Needs (N)

Existing resources:	Savings and investments
	Properties and other assets
	Total Resources (R)

	Shortfall: Needs less resources (N - R)
	Less: Group life and other life insurance (G)
	Life insurance cover needed (N - R - G)**

* May include protection for permanent disability and/or critical illness.
** This does not take into account anticipated costs after inflation because it is assumed that the savings will grow or at least keep up with inflation.

In the case of loss of wealth, there is no insurance for those risks that are considered to be within an individual's control, such as overspending, nor for risk of market fluctuations (although there are techniques to mitigate such risks - see Wealth Planning).

But for protection against liability to third parties, there are a variety of solutions. For example, liability to a third party for an accident would be protected through a comprehensive motor policy. An employer would cover himself against damages to employees for workplace accidents through an employer's liability insurance and against damages to third parties through public liability insurance. Protection against damages for defective products would be done under products liability insurance and, for professional service rendered, there is professional indemnity insurance.

Again, for a relatively small cost, physical loss of assets can be guarded against through insurance such as fire and all risks policies. And these can cover for loss of just about any physical asset of value, be it jewellery, cash, property, household content, car, even family heirloom.

In considering the sum insured for physical assets, two insurance principles need to be observed - the average principle and the indemnity principle. The former means if there is under-insurance, payout of a claim will be reduced in proportion to the extent of under-insurance; and the latter means if there is over-insurance, the portion that was over-insured will be ignored in calculating the payout for the claim.

As for loss of earnings, this is not so remote a possibility as some may think. SOCSO statistics to 2004 indicate that occurrence of workplace accidents is approximately 1 in 100. Insurance statistics indicate that a person has a 60% chance of being disabled for more than three months after the age of 40. And it is common knowledge that Malaysia has one of the highest traffic accident rates in the world.

There is insurance cover for disablement but not for loss of job. Disablement through injury, temporary or permanent, partial or total, can be covered through a rider to a life policy or as a separate personal accident policy. The extent of cover for disablement depends on the insured's budget, the type of disablement and period he/she is looking at, the level of compensation he/she is comfortable with and what is already in place under SOCSO and/or group insurance schemes or health plans that the person participates in.

Besides loss of income, increased expenses often arise because of treatment for disease or illness.

For death or disablement through disease, there is critical illness (or dread disease) cover if one suffers from any one of those diseases defined as a critical illness. Such definitions vary from insurer to insurer but most would cover the following 36 dread diseases: Alzheimer's Disease/Severe Dementia, Angioplasty, Aorta Surgery, APALLIC Syndrome, Aplastic Anaemia, Bacterial Meningitis, Benign Brain Tumour, Blindness, Cancer, Coma, Coronary Artery By-pass Surgery, Deafness, Encephalitis, Fulminant Hepatitis, Heart Attack, Heart Valve Surgery, HIV (occupationally acquired or due to blood transfusion), Kidney Failure, Liver Failure, Loss of Independent Existence, Loss of Speech, Lung Disease, Major Burns, Major Organ Transplant, Motor Neurone Disease, Multiple Sclerosis, Muscular Dystrophy, Other Serious Coronary Artery Disease, Paralysis, Parkinson's Disease, Poliomyelitis, Primary Pulmonary Hypertension, Progressive Scleroderma, Stroke, Systemic Lupus Erythematosus, and Terminal Illness.

When it comes to the amount of cover, twice the annual earnings figure is often applied. Thus, if earnings are RM 60,000 per annum, the sum assured to go for would be at least RM 120,000. However, the extent and type of coverage to be taken really depends on what the person's affordability is like, what his needs are and what is already in place under group schemes that the person participates in.

There is also the facility available for those who take a life policy, through an accelerated death benefit rider, that allows the insured to claim a portion of the policy's benefits ahead of death, to meet medical and living expenses.

Then there are various health plans (or riders to life policies) available to cover hospitalisation and surgical costs and/or long term care. Hospitalisation plans cover the cost of hospitalisation for private hospitals on a per diem basis and can cater for inflation if on an ‘as charge' basis. Long term care policies pay for qualified long term care services (including medical) needed by one who is old and no longer able to take care of himself/herself.

For those seeking insurance based on syariah principles, there are takaful solutions for every one of the risk protection needs mentioned earlier.

As can be seen, risk planning is vital if one is to prevent erosion of wealth and avoid financial disasters. It would be most tragic for a lifetime of hard work to go to waste because of lack of insurance.

There are so many other aspects of insurance planning that can be discussed but this is beyond the scope of WealthBox. Consult an experienced insurance agent or financial planner to know more about the solutions to insurance needs.

Insurance Planning FAQs

What is Insurance Planning?

Insurance planning is the identification of risks that one is concerned with because of the significant financial impact, and the insurance solutions which can provide protection against such risks.

How do I ensure that all material risks have been considered in Insurance Planning?

You can make out a list of your own about what risks concern you most. Together with your insurance consultant, work out from there what insurance policies you have in place and what cover is missing. The checklist provided by WealthBox may be useful for this.

What sort of protection should an average family look at?

Insurance protection needs may vary depending on individual circumstances and priorities. Typically, one would look at the following:

i.	Asset protection. If you own a car, protection against collision, fire, theft and third party liability. If you own a house, protection against fire, robbery, liability and if appropriate for your circumstances against flood.
ii.	Income protection. Life insurance, travel and personal accident insurance if you are the breadwinner of the family.
iii.	Medical protection. Long term medical protection and care to counter inflation and unexpected afflictions.
iv.	Liability protection. If you are providing a professional service, professional indemnity is important to protect against third party claims.

How much cover should I take?

That depends entirely on you. Before you decide, consider priorities and affordability. You may not want to cover every risk you can think of. You may want to consider dropping those that do not have much financial impact to you or those that are already provided as part of your employment benefits. You may want to consider dropping those risks outside the scope of your activities if cover would add to your cost unnecessarily. For example, you only need to take travel insurance only for the period of travel.

For amount of cover, consider your scale of activities and work on a range that you feel will adequately compensate you if the risk envisaged does eventuate. Oh, and do not forget the average principle and indemnity principle of insurance.

What is the basic protection that I need?

Read the article on risk planning in Wealth Garden. It talks about the three basic risk groups that individuals normally cover for.

If you are a businessman, there are a lot of other risks that are not covered here that you would need to consider. Consult your insurance expert. Also, please take a look at Business Succession Planning which is very important to the businessman.

What is the difference between term assurance and whole life?

The differences are that term assurance does not have a savings element, does not provide a cash value and is only for a specified term, not for life.

Why do insurance companies make such a fuss about disclosure of particulars?

Because insurance is based on the principle of utmost good faith. If you, as a proposer for insurance, want an insurer to accept your insurance proposal, you need to declare honestly all relevant particulars, including any previous health problem you have in the case of life assurance. This enables the underwriting department of the insurer to fairly decide whether they want to accept the underwriting risk, the limitations, excesses and/or exclusions, and the premium rate to charge.

What will happen if I fail to pay the premium for a life policy in time?

You will be given a grace period (usually between 30 to 45 days depending on insurer and mode of payment) to make the payment and have the policy regularised. Even after failing to do that, when the policy has lapsed, you can still revive the policy by paying up arrears and a penalty, but this has to be done within the period of time stated in the policy.

Can I get a refund on premium paid if I change my mind about purchasing a life policy?

Yes you can cancel the policy within 15 days (free look period) of purchase less medical examination cost if any.

10.

When is my policy effective?

The cover runs as soon as the insurance proposal is accepted by underwriting and premium received.

11.

How do I assess which health plan is good for me?

Look for the one that provides you coverage you need, benefits you want, flexibility and competitive cost. In particular, see if the private hospitals you prefer are covered in the approved panel under the plan. Also consider carefully provisions in clauses covering co insurance (where the insured has to bear part of the cost of the insured risks), deductible (where the insured has to bear part of the hospital bill if he checks into a hospital at a level higher than his entitlement) and annual/lifetime limit (this is the overall limit of claims that the insured may not exceed regardless of circumstances). Most importantly, ensure that the policy has a guarantee renewal feature that enables the policy to be renewed so long as the insurer is involved in this line of business, the age of the insured does not go beyond a specified expiry age and the claims have not exceeded the lifetime limits, subject to premium increase that applies to all participants in the plan.

12.

If I have insured my apartment for fire under a master policy with the management company for the apartment property, must I take the mortgage reducing term assurance (MRTA) policy for my mortgage loan?

It is advisable that you take an MRTA policy unless your lender bank is prepared to take an assignment of your life policy.

A fire policy and an MRTA policy serve different purposes.

The fire policy protects you from loss in case of fire damaging or destroying your property. If your lender bank wants you to take out fire cover or houseowner insurance through them for the apartment, then this is not necessary since you can assign the benefits of the cover in the master policy to the lender bank.

An MRTA policy, on the other hand, protects your family by discharging your mortgage debt in the event of your demise.

13.

Is the MRTA policy taken for my housing loan adequate insurance?

It is the minimum that the lender bank will require to protect them from the risk of loan default in the event of your demise. However, if you wish, you could take a higher amount of cover. Any surplus out of the death benefit after settling the loan will be paid to your estate after your demise.

14.

Is the driver or his passengers covered for accidental death in a comprehensive motor policy?

Not covered. For that, a personal accident rider is required.

15.

What is the difference between participating and non-participating whole life?

A participating (or with profits) plan shares with the insurer the profit actuarially determined to be generated from the designated insurance pool arising from a more favourable experience than assumed in the pricing of the product. Such share of profit is not guaranteed and is declared as bonus or dividend.

16.

If I want to terminate my life policy later, what can I get?

You get what is called the cash value or surrender value. This is the amount that is left after putting aside, from your premium payments, the cost of commission, cost of insurance, overheads and appropriations for contingency and profit. There is usually no cash value in the first year of a life policy but after that cash value accumulates together with interest and/or bonus declarations.

17.

Can the sales illustration presented to me by the insurance agent be relied on?

The sales illustration is simply what it is - an illustration for sales. The numbers you see in there are projections based on assumptions that may or may not happen and if there is a shortfall in accumulation of cash value because assumptions are out, there is no obligation to make good such shortfall, unless categorically stated as a guaranteed amount, be it sum assured, premium or cash value. In considering such sales illustrations, it is always better to be conservative.

Approaches: Risk Planning > Business Succession Planning >>

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