A quick but important lesson on insurance

Many people are substantially underinsured or have no insurance policy at all. (Rawpixel pic)

This article focuses on life insurance matters. Why? Assume you’ve built a sizable investment portfolio. However, if you are hospitalised for medical treatment, and have no insurance, who do you think will foot the bill? You.

Many people are substantially underinsured. Perhaps, it is due to a general misconception about insurance being expensive and unaffordable which stems from a lack of financial education among consumers and from agents who are only interested in selling expensive products for commissions.

Thus, here are five life insurance hacks you should know before buying your insurance policy:

1. Improve your health condition

Your proposals to buy new policies will be either rejected or given a conditional acceptance if your current health condition is questionable.

Here are three things that you can start doing now which can help boost your chances of getting a straight acceptance for your next purchase of an insurance policy without incurring additional charges:

2. Calculating your age

Your insurance premium is calculated based on your “age next birthday”. So, if this is being written on Feb 10, 2018, and if you were born on:

  • Jan 1, 1988: Your age next birthday is 31.
  • June 1, 1988: Your age next birthday is 30.

In general, your premiums would be lower if you buy your policies at a lower age next birthday.

Ideally, you should reassess your insurance needs at a minimum of three months prior to your birthday. This allows you adequate time to get a new policy before the arrival of your birthday.

3. What you should buy first

If you are a fresh graduate earning under RM3,500 a month and intend to get your first insurance policy, adequate medical coverage should be your top priority.

Get yourself other types of life insurance products as your income increases over time.

To get higher medical coverage from an investment linked policy, request a low-term insurance and unit trust investment value for your policy.

Your premiums would be greatly slashed as you are not paying for the term insurance and investing in their unit trust funds.

Today, you can get one policy like this for RM200 a month where the medical coverage is set to be for almost RM1,000,000 a year, with no co-insurance and lifetime limit.

Hence, if your current medical coverage is below RM1,000,000, you can shop around and consider an upgrade if the deal is good.

4. Understanding the high coverage-to-premium ratio

The coverage-to-premium (CTP) ratio measures the amount of coverage per RM1 in premium.The rule of thumb is to get the highest possible CTP ratio for your insurance products.

The ideal CTP ratio varies according to your age, gender and health conditions. For instance, if you are currently under 35, you may aim for a CTP ratio of 150 and above.

Here’s the formula:

This means, if you can afford a monthly insurance premium of RM150, you may aim to buy a life insurance policy that covers at least RM270,000 in the event of death, total permanent disability and 36 critical illnesses. Of course, that is if you are under 35 years old.

5. Understanding the meaning of minimum cash value

“But Ian, if I go with a high CTP insurance policy, what about its cash value?”

Obviously, it would be low. There is not much cash value after 20 or 30 years of paying your insurance policies. Why? Shouldn’t you expect to receive some “investment returns”? No.

This is because insurance policies are solely meant for protection, not investment. Here’s a simple comparison:

Fictitious quote

An investment-linked policy is preferable over a whole life policy. This is because you would save RM3,200 a year in insurance premiums which could be invested for higher returns than a whole life policy.

As a matter of fact, you can even build an investment portfolio that funds this policy by itself.

For instance, you’re making about 6.5% a year in dividend yields from your stock portfolio. Thus, you would need to increase your stock investment by RM27,692 so that it can “self-fund” this policy for virtually forever as it makes RM1,800 a year in dividends.

In this way, you are able to upgrade your insurance policies without being overly-burdened by new commitments.

Of course, this method only works if you invest for cash flow, not capital gains. As inspired by Robert Kiyosaki, it is good to invest in cash generating assets to pay for your expenses.

This article first appeared in kclau.com

Ian Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia.