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Investment-Linked Insurance Policy: Insurance Charges- Final Part

Posted in Health & Medical, Malaysia Investment, Malaysia Personal Finance, Malaysia Retirement, Malaysia Risk Management & Insurance |


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’t 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’ve 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’t 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.

Insurance Charges Table for Basic Sum Assured

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’ve 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:

Sum Assured x Insurance Charges Rate / 1,000

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.

Insurance Charges Rate for Medical Card

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, “Hey! I was told very clearly that my premium is fixed!�? You are both right and wrong.

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

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’t 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’ve 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’t 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

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Viewing 9 Comments

    • ^
    • v
    my gawd... if THIS is simplified, no wonder I didn't get the real thing either. I guess people like me are the agent's dream :) just pay and sign without reading anything. hehe...
    • ^
    • v
    I was about to sign on the dotted line for ILP too, well for the high coverage with low premiums. But then again after reading your articles, I better called up my insurance agent....tks....:D
    • ^
    • v
    Actually, ILP is not necessarily a bad tool for the public. It's all depends on a person's insurance planning, whether he wishes to cover his whole-life (up to age 100) or focussing more on covering "working period" (period when he is busy working, generating money). This can be up to age 55 or 60 to most people.

    For those taking ILP, paying low premium and getting higher coverage, like RM100 monthly for RM250,000 death & disability coverage (at age 35), they are actually using ILP to replace Term Insurance (or Level Term). ILP can be cheaper than Term Insurance, if you are dealing with the right company like MAA Takaful (where coverage can be pushed as high as you want, as long as your cash value is enough to cover the insurance charges).

    At low return of 2-3% per year, this ILP policy can last up to 20-25 years (enough to cover working period), and some more, still have some cash value in return, especially if the rate of returns is higher.

    Hence, you can invest the rest to accumulate wealth.
    • ^
    • v
    Another way to save on Insurance charges in ILP, is by dumping a lump-sum of money into a "Top-Up" rider (lump-sum investment rider). Since ILP has its unique feature of premium holiday (where you can pause payment for a period of time), you can use this feature to your advantage.

    For example, Mr SmartAss (age 35) pays RM100 per month for RM250,000 death & disability coverage, with RM7,000 funeral expenses coverage from MAA Takafulink. He first paid RM100 x 2 months, to get the policy approved. He then, uses the "top-up rider" and dump in RM10,000 and stop paying the rest of the regular premium of RM100 monthly.

    That RM10,000 will be put into the lump-sum investment rider, same as putting money into unit trust.

    For coverage of RM250,000, it cost from RM330 per year only for age 35 (even cheaper than the rate given in the above table). For funeral expenses coverage of RM7,000 (whereby RM2,000 is paid within 24 hrs, and additional RM5,000 later), the insurance charges is only RM10 pear year. Policy fee (management fee for policy) is only RM5 per month (RM60 per year).

    Hence, your total cost is only RM330 + RM10 + RM60 = RM400 per year as compared to paying RM1,200 per year, having to pay up to 60% service charge (to pay agents commission) and other charges.

    The returns from your investment (bonus unit) can someway subsidize the cost of insurance charges each year. Hence, making your ILP insurance, work harder for you, instead of working hard to pay agent's commission.

    ** This time coming from me, an insurance manager some more, LOL **
    • ^
    • v
    I even noticed that you bought an Investment Policy too. If you think that this type of product is not good enough..then why you bought it ?

    I have seen an ILP from an IC which ranked 15 in Fortune 500 proviced an ILP product with guaranteed premium ( Investment + Death & TPD Benefit ). Even a dread disease rider is premium fixed. The only thing that didnt fixed is their medical card.
    • ^
    • v
    Sorry if i am being too calculative, but for what SimpanDuit said in the example about cost of RM400 a year for a protection of RM250,000 , has u forgot the RM200 u have to pay initially? And how long does this RM10,000 can last to sustain the protection if let's say u can guarantee the return of the fund? Furthermore, if u cant guarantee the return, will it affect the period of the protection?
    Don't forget, the insurance charges is increasing every year, so is the cost of RM400/year fixed forever?

    Correct me if i'm mistaken, even though u can see TPD benefit as a separate definition in the policy but it's already has been absorbed as a single "thing" with death benefit in most of the Malaysia IC's plans. That means if u buy any life plan, u already have the TPD inside, unless stated don't have. That's why the premium is fixed.

    Cant really say whether the ILP is good plan or not, just depends on the needs and situation. What do u say if a fresh graduate with limited budget but wanna get comprehensive package, then i see it as a good start-up plan. But ofcoz u would not to offer the same thing if the consumer is a multi-millionaire boss, right?

    But if we are to consider deeper and more details, i would prefer to be calculative on the premium allocation and policy fees. As you are not just get the plan for only 7 years but you plan for a lifetime right? Or at least > 30 years lar! So this minor minor thing would give u a big difference if we do not consider wisely when we sign up.
    • ^
    • v
    Thank you for your feedback Mr ConsumerWise.

    I did not forget the RM200. The RM200 initial payment is to get the policy approved. Normal insurance procedure requires policyholder to submit minimum 2 months monthly payment, in order for the policy to be approved and printed. This RM200 goes into what we called "Regular Premium" Insurance account whereby it will be divided according to allocated premium for the first 6 years of policy. Allocated premium means, "how much actually goes into our investment account, after deducting sales service charge, but before deducting insurance charges and policy fee".

    The point i want you to see is my money saving tip, by using Top-Up Rider, instead of paying at your regular-premium account. If you pay RM100 per month, RM1,200 per year, after 6 years you already paid RM7,200. But, due to allocated premium rules, only RM 4,860.

    1st Year = 40% saving, 60% service charge. = RM480
    2nd Year = 50% saving, 50% service charge. = RM600
    3rd Year = 70% saving, 60% service charge. = RM840
    4th Year = 70% saving, 50% service charge. = RM840
    5th Year = 85% saving, 60% service charge. = RM1,020
    6th Year = 90% saving, 50% service charge. = RM1,080
    ----------------------------------
    Total cash value = RM 4,860 before deducting insurance charges.
    Total payment 6 years = RM 7,200
    Total service charge paid = RM2,340.

    Service charge for Top-Up Rider = 5%
    ----------------------------------
    If top up RM10,000 = service charge would be RM500 only.
    Cash value in account = RM9,500 before deducting insurance charges & policy fee.

    So, by comparing between paying thru regular premium account, and paying thru top-up rider account, you can save some money on the service charge, provided that you have money to dump-in into the top-up rider.

    Even if you put in RM20,000 to be invested in top-up rider, the service charge is only 5% = RM1,000, lesser than the service charge you paid thru regular premium.
    ------------------------------

    Insurance charges for Takafulink of course, will increase gradually according to age.

    Insurance charges for Male age 35, RM250,000
    Remains at RM330 per year until age 40.
    Age 41, insurance charge is RM363,
    Age 42, RM396
    Age 43, RM429
    Age 44, RM495
    Age 45, RM561
    Age 46, RM657
    Age 47, RM729
    Age 48, RM831
    Age 49, RM936
    Age 50, RM1,074
    Age 51, RM1,200
    Age 52, RM1,203
    Age 53, RM1,371
    Age 54, RM1,479
    Age 55, RM1,659
    Age 56, RM2,121
    Age 57, RM2,361
    Age 58, RM2,721
    Age 59, RM2,757
    Age 60, RM3,075
    --------------------------------
    Investment return of course, is not guaranteed. But of course, rate of return in long term would be greater than 0, otherwise, all companies, be it insurance or unit trust, will be closed down as there is no point investing money with them, when money doesnt grow.

    How long will the protection last? Depends on the rate of return and amount you top-up. For example, if you want coverage for 20 years, meaning you need to pay RM1,200 x 20 years = RM 24,000.
    If you have RM20,000 to dump-in, then you can use this top-up rider, which will only deduct 5% = RM1,000, instead of paying RM2,340 of service charge under regular-premium a/c.

    Out of RM19,000 that will be invested for long term, insurance will only deduct its charges according to the table above. You dont have to pay service charges for 6 years, dont have to pay agent's commission and all.

    --------------------------
    Would this plan suitable for multi-millionaire boss?
    YES - why not?
    After all, he requires a term plan to protect his asset from financial losses.

    Instead of taking the conventional term loan, using Takafulink, incur less insurance charges as insurance is quoted based on group term, rather than invidual term. And he could also save some money from paying extra service charge (by using top-up rider).

    Bare in mind, for takaful industry, there is no RM5,000 annual premium limit for investment-linked. So I can collect premium RM60,000 per year, without being restricted.

    TPD benefit is of course built-in the same plan. TPD is not given freely. It is only given free IF you are 100% healthy (standard case) and under the amount set by insurance company. For MAA Takaful, TPD benefits is given free up to RM2.5 million coverage (std case only). More than that, you need to apply the ITPD rider and pay the rider cost. To me, there is nothing to argue about TPD benefit as all companies in Malaysia offer the same thing. You pay 1 time, you get 2 benefits together. Ok wat?

    ------------------------
    Period of protection, depends on policyholder's planning. Normally people would want to cover their critical years only, which is their working period until age 55-60 only. By then, they would survive thru their retirement investments. This is where my RM100 plan comes in, with low premium, higher coverage, better than the conventional term plan.

    Insurance product is recommended based on needs as per sample given.
    • ^
    • v
    Simpanduit,
    Excellent way to save on the commission charges! However I'm on Great Eastern's ILP. Can i do the same manouvre? Wonder how is my insurance agent gonna react to that! haha.
    • ^
    • v
    You can do the same thing with any investment-linked plans, be it conventional or takaful, provided that :-

    1) There is a rider called "Top-Up" Rider, which operates as a lump-sum investment rider.

    2) You know it helps to cut down service charges for the initial 6 years only. So if your policy is 7 years or above (or in some companies 5 years or above), there is no point in doing so.

    3) You always check cash-value of your I/L policy each year so that policy does not become insufficient to pay insurance charges and lapse.

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