A new perspective on types of insurance

Are insurance policy types doing your head in? A simple look at the kinds of policies available courtesy of Lieu Ching Foo; founder of How to Finance Money and advisor for Fin Freedom.

Are you confused about the types of insurance policies in the market? With so many plans to choose from, it is very likely that you feel helpless when it comes to answering this question - “What do I need and how much is enough?” More often than not, you don’t know what you don’t know. Hence, I would say, most people are at the mercy of insurance agents, who are probably more interested in how much they can earn from a product rather than putting your interests first. Not to generalise, but it happens more often than we think.

I want to make it real simple by using a laddering process. From the very top level, there are 2 types of insurance. One is participating and the other is non-participating. A participating policy, as the term suggests, participates in the insurance company’s profit. A non-participating policy does not. Therefore, the premiums for a participating policy are always more expensive, ceteris paribus.

Participating policies

Participating policies can be either a whole life plan or an endowment plan. A whole life plan is a plan which offers you protection until age 100. Normally there would be bonus or dividend declared every year by the insurance company and this would add into a policy basic sum assured payout. To a certain point, say after 15 or 20 years (not a rule, but a norm), the compounding effect of this accumulated bonus and dividend would be sufficient to cover for the policy annual premium. When this happens, the policy can be self-sustaining, in which a policy owner can request for APL or Automatic Premium Loan. Endowment policies aka savings plan, meanwhile, works similarly but the duration of coverage is normally fixed at 20 or 30 years. On top of that, there is a guaranteed schedule which pays the policy owner a regular cash value. Due to this feature, the sum assured for endowment is normally lower than a whole life plan, ceteris paribus. It is marketed as having the best of both worlds.

Non-participating policies

Non-participating policy can be either a whole life plan, investment-linked plan, hospitalisation and surgical plan or a personal accident policy. Whole life non-participating plans have a schedule of guaranteed surrender values, so you know exactly what you are paying for and how much you are getting back at the end of the day. Compared to traditional whole life non-participating plans, an investment-linked policy is even more cost effective. The cons of it is that the policy sustainability very much depends on the non-guaranteed performance of the unit trust funds managed by insurance companies. However, there are ways to mitigate this risk. Hospitalisation and surgical policy aka medical card is very much like your debit card with a predetermined limit on the annual and lifetime inpatient medical expenses. Finally, there is nothing fancy about a P.A. policy as it is just a subset of a life policy where it only pays if the covered event is due to accident.

Lieu Ching Foo is the founder of Malaysian personal finance blog HowToFinanceMoney.com, and an advisor with independent financial advisory firm Fin Freedom.

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