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Have you got yourself protected?

Wanted to post this sometime ago but was too busy. This post is base on my personal view, from a pure consumer point of view and is just for sharing!

Since I have started working, responsible comes and the next logical thing is to buy insurance to protect my families and of course myself.

First lets talk about the basic type of insurance:

1. Hospitalisation plan
2. Accident
3. Life coverage / Income protection

Always get a hospitalisation plan above anything else. This is basic and similar across many companies so I won’t say much about this. A doctor’s pill can heal your illness but the bill can take your life!

Next, accident, this for I won’t talk much about it as I feel is not 100% necessary if you have 1 and 3, for me is a good to have. (provided you have savings to tide through, so regular saving is important)

Focus of the post is on life coverage / income protection. There are 3 main kind of life plan:

1. Term plan
2. Traditional whole life plan (WL plan)
3. Investment Link Plan (ILP)

There are many saying nowadays…some says buy term and invest the rest. Some say buy ILP…some say wholelife plan. Basically all plans have its own pros and cons and suits different needs. However, one should be very clear why he/she wants to buy insurance.

Firstly, most of us always like the idea that we can get back our $$. So many felt that term plan is throwing $$ into nowhere. But the truth is, whatever you buy, you have to pay for it! A WL plan or ILP cost alot more than a term plan, so the additional $$ is used for investment and insurance company will use that earning to give you the $$ upon termination.

So then why people still buy WL or ILP? Because not everyone of us is an investor! If you only put your money in bank with interest rate lower than 1% per annual, then you might not want a term plan if you can afford a WL or ILP.

Another thing is insurance don’t make you rich, so just buy enough. Enough can be 5 years of your income or 10 years depending on your need. For me I judge differently, I base on my dependents…which is very different.

Term plan
Cheap and affordable but no cash value. So you get nothing when you terminate. Term life plan usually covers till only 65 or 70 years old. (WL or ILP usually covers whole life).

So why buy a term plan? I think is good in the following situation:

- need temporary additional coverage
- you do your own investment or have better investment plan than mixing the investment with insurance.
- you don’t invest much but a WL / ILP is too expensive for your and yet you need the coverage.
- don’t need the coverage beyond age of 65/70. (Wondering why? is simply because your medical bills will be covered by your hospitalisation plan and by then you should have less/no burden of children / parents). So technically you don’t need to leave $$ for anyone.

WL Plan
This usually comes in limited years of payment, e.g. 15/20/25 years. I won’t advise getting unlimited years WL plan as I compared the premium before, I don’t think the differences worth it.

Why I think limited WL plan is good:

- have guaranteed cash value (but the ROI is very low for guaranteed portion)
- covers whole life yet I only need to pay for 25 years or less (strictly speaking you are just paying for future, but then I don’t like the idea that I have worry about so much premium after I retired).

Feel is a stable low risk plan (i won’t say risk free…as the guaranteed amount is only as stable as the company! if the company is gone….your $$ most probably gone too!)

ILP
It have higher expected ROI (but non-guaranteed) than WL Plan and the premium is cheaper when you are young. But many people may not have notice this, the mortality charges ( something like insurance charges) actually increases tremendously after you reach a certain age, e.g. 50).

when you will consider a ILP:

- when you intend to terminate the plan on or before age 65.
- you can take the risk that upon age 65, you might not have that much $$ in return. (If you buy it early, risk is spread across 40 years, so I wouldn’t say you might lose everything. But I prefer to be more prudent in things that are not guaranteed).

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Overall, in general I don’t really like ILP, because personally it feels like a term plan + buying mutual funds. So if I can do this myself, why do I get a ILP and pay lots of commission to the company/finanial planner? If you intend to keep the plan for WL, you can’t withdraw much of the $$ earned because the mortaility charges after age 65 is so high….that if you don’t keep all the money inside to continue the investment, your returns might not be enough to cover it. (for 100k coverage, per month can be 700 plus when you are old (@ abt 70-80 yrs old I think) so your monthly premium of 100-200 is not enough to pay for the charges required!)

So in comparison, I prefer WL Plan / Term plan over ILP. So next how to chose between term plan and WL plan? If you think you do not need coverage after age 65/70, I would think term plan might be better. As for myself, why I think is necessary to cover beyond age 65/70? Because a 100k now is only worth abt 1/3 of its value or even less by the time I reach that age. So I would take the basic 100k coverage beyond age 65/70 as $$ that is good to have for my important person / for my own funeral.

Also, Term plan wise..the claim rate is as low (i think 1%? ) thus meaning that your chances of claiming is low thus very likely your $$ will become nothing. Thats why I like a WL plan cos is almost guaranteed return.

But that doesn’t mean that a Term plan is not good. One would need more coverage before age of 65 in general? Why? For people who are dependent on you, e.g. your parents / kids. In my view, insurance is not so much for yourself, is to take care of those loved ones who are dependent on your and also not to trouble people when you become ill. So during this period when you are still taking care of someone, you might want more coverage but you know you won’t need it beyond age 65, this is when I think term plan is good.

I must emphasize, my view of insurance may not be suitable for everyone, so in my own cases…where I am part of a bread winner at home, I felt to be responsible for my parents, I should get myself covered. Thus I got myself a limited WL plan + term plan. Though I am covered for 200k, I still feel that it is not enough, but thats what my current financial capabilities allows only.

How do I deem enough? Is not by how many years of income I need. Is by how many years I think my parents can live and how much they need. I would think my parents can live for about another 30years, which I hope to give them 1k / month at least, thus i sum that to 12 k x 30 years = 360 k. And all these excluding any loan which we need to pay, which is about 100k. Thus I actually think I should get myself covered for  460k!

But I can guaranteed you, no financial planner will plan like that, just that I am not convinced enough with their way of calculating so I decided to do my own maths

But even till now, I still have some consideration abt Term plans ( well cos I grew up in a traditional family, so though logically i know WL plan is not free…I still find it expensive to spent few hundred/thousands away every year….without any returns/cash value on Term plan with chances of claiming is low….not that I wanna claim anyway!)

Tags: Insurance