Welcome to the final part of the Investment-linked Policy Series.

So, what’s the big deal with the insurance charges? Well, I am going to cover exactly that, with a little bit of simple maths, don’s worry, no algebras!
Unknown to most, even to the sales personnel that has been recommending investment link products to unsuspecting clients, insurance charges in an investment-linked policies are calculated according to a rising rate. Note the keyword here- rising rate. We will discuss later how this rising rate will affect you not now, but a few more years down the road.

Insurance charges are the cost that is incurred by the Company to take up the risk for a particular coverage. Insurance charges is calculated according to the type of coverage. All the benefits such as Death, Dread Diseases and Disability has different insurance charges rate.

Below is a set of example I’re taken from one of my existing investment-linked policy. You might need to refer to your policy manual to check up the rates or if you can’s find them in the policy manual, ask your consultant to provide one. This rate is very important for you to calculate if your premium you are paying now is enough for your coverage when you get older.

This is the reason why the premium you are paying for an investment-linked policy is not guaranteed.

For example, say you’re now 25 years old, and you’re got yourself an investment-linked policy with a sum assured (death benefit of RM 100,000).
Based on the figure above, the insurance charges you are paying at age 25 is calculated as follow:

100,000 x 1.34 / 1,000 = RM 134.00 per year.
This means that RM 134.00 will be allocated for your Basic Sum Assured (Death Benefit) coverage for that particular year.

Similarly at age 50:

100,000 x 5.37 / 1,000 = RM 537.00 per year.

And at the age of 70, you will need:

100,000 x 29 / 1,000 = RM 2,900.00 per year

just to cover for your Basic Sum Assured (Death Benefit). And this is not including other benefits such as Dread Diseases, Waiver of Premium for Disability/Dread Diseases etc.

While we are at it, let’s also take a quick look at how much your medical card charges will cost you as you get older. The insurance charges table for medical card is shown below in Figure 2.

This figure is much more easier to read, since you can get the total insurance charges for the year you are looking for directly from the chart.

For 25 years old, your medical card coverage will cost you RM 238 yearly in insurance charges.

For 50 years old, similar medical card coverage will cost you RM 438 a year.

And finally at age 70, you are paying RM 1,651 a year for the same medical coverage.

Okie, that’s all for the maths. Now, you might be wondering, “How then, my premium is not guaranteed?” Or you might rebut, ‘rey! I was told very clearly that my premium is fixed!’s You are both right and wrong.

Let’s take a look again at the two tables above. What do you notice? (observe harder’s

Well, you should realize that in the beginning of the first few decades, your insurance charges remain pretty much level. This is the optimistic era of your life, where everything is going well, hopping from one good job to another, driving new cars, moving into new house. Everything is sunshine and lovely!

As you approach mid-life crisis, that’s when the rise of the insurance rate charges kick in, of course, to add to the crisis!

The investment-linked policy is a product designed in such a way that it allows you to buy a very huge sum of protection in the early years with very minimal premium. By now, you should know why. I have seen cases where people can get RM 300,000 protection with a mere RM 150.00 monthly premium. Consumers who don’s read this article will think that they are paying RM 150.00 a month until Kingdom Come.

The Old Age Dilemma

As you get older and wiser, evidently the insurance charges will continue to increase dramatically.

When the premium is not enough to cover, you will receive a letter from the Company to remind you that you either top-up your premium, allow the Company to channel the profits (if any) that you’re made from your investment to cover for the rising insurance charges or in the worst case scenario- terminate the policy.
If your retirement budget does not include this portion of expenses, you either let the policy terminate or you will need to adjust the coverage down to a level where you can afford or remove some of the benefits. Not a good idea, since the older you get, the more you need the coverage.

This is why you might be told that your premium is fixed, but at the expenses of adjusting your coverage/benefits.

Conclusion
That’s why it’s important that one understand the nature of an investment-linked policy before signing on the dotted line. An investment-linked that is tied with many features and is financed with minimal premium is not meant for investment or savings purposes since most of the premium paid by the policyholder will be used up to pay for the insurance charges. Its core function is for protection only. If you are looking for investment return from your investment-linked policy, consult your insurance adviser on how you should allocate your premium.

Ensure that you are not being taken for a ride with the low premium high protection concept! Traditional insurance policies are the only GUARANTEED REGULAR premium insurance products. The premium and insurance charges has been calculated and averaged throughout the entire policy life. This is the reason why traditional policies are slightly pricier than their investment-linked counterparts.

A better risk management strategy would be to ensure that you also have traditional policies covering your life alongside the investment-linked policy. An ILP should be used mainly for your medical card coverage.

What about those who found out that they can’s afford the sudden hike of insurance charges and decided to start a traditional policy? Definitely not a very good idea especially if you realized this problem when you are about to retire (55 years old and above). The premium for any insurance products at that age will be prohibitive.

And that’s that. I am going to wrap up the entire series on Investment-linked Policy with the following advice:

There’s no way you can get high protection with low premium, at least not for long. Ensure that your consultant give you the whole picture of the policy terms, including insurance charges and risk profile of the fund. If the plan is too good to be true, it probably is. Remember, there’s no free lunch!

Articles in this series:
Investment-Linked Insurance Policy: An Overview- Part 1
Investment-Linked Insurance Policy: How Mutual Fund Works- Part 2
Investment-Linked Insurance Policy: Premium Allocation- Part 3
Investment-Linked Insurance Policy: Insurance Charges- Final Part

• Investment-Linked Insurance Policy: Premium Allocation- Part 3
• Investment-Linked Insurance Policy: An Overview- Part 1
• Investment-Linked Insurance Policy: How Mutual Fund Works- Part 2
• Whole-life Insurance Policy
• Surrendering and Replacing Your Insurance Policy
• How Much Insurance Should You Buy?
• Malaysia's Personal Finance Articles
• Comprehensiveness of Coverage