When it comes to insurance planning, it is best to avoid potential pitfalls which consumers may have overlooked. One of the most common mistake is to combine insurance and investments, thinking that one policy will be sufficient to cover both needs. However, this may not be the best arrangement. Let us elaborate more in the next paragraph.
#Mistake 1: Using Insurance as Investments
Insurance can be expensive for a reason. The premiums that you are paying include commissions, distribution costs, mortality charges, sales charges and others. If you are looking to use your policy to get a decent return, you will be surprised to find out that only a fraction of your premium will get invested in the first few years.
This is why most participating insurance plans (that gets invested into a par-fund), have almost no cash value in the first 2 years, and will would usually come close or break even near the very end of the policy (based on guaranteed values only). If you decide to pull out of the plan early, expect potentially significant losses.
The next point that we would like to illustrate relates to your HR benefits. Most companies provide free group insurance as one of the entitlements when you join as an employee. Now the potential mistake could be relying on the company's insurance coverage and thinking that this is all you need and ignore the whole insurance planning process.
#Mistake 2: Relying on Company's Group Insurance
Many companies cover their employees through a group insurance. Some provide very comprehensive coverage which can be quite attractive. However, have you consider what if you leave the company? What happens when the company gets down-sized and you have gotten retrenched? What happens if your health condition is not in the best state right now?
This is a common trap that many people fall into. By the time they start to look at getting insurance coverage when they are much older, they may not be able to get the coverage they need, or get it at less than ideal terms.
Lastly, we want to highlight the importance of getting the right amount coverage and ensure that we have covered the potential expenses coming along. Nevertheless, under-insured is still a common thing amongst consumers.
#Mistake 3: Under Insured
It is good that you have insurance but not having adequate coverage is another issue that you need to look into. Statistic has shown that up to 90% of the life-insured Malaysians are under-insured which means the insurance coverage may be only at one or two times of their annual income, highlighted by The Life Insurance Association of Malaysia (LIAM).1 The general rule of thumb for life insurance is 10 times of one’s annual income. With a higher sum assured, a family’s livelihood will be protected for a long period of time.
You can easily find out how much is needed by your dependants in the event of unexpected death, total loss of income, temporary or permanent inability to work by using the life protection calculator. Before doing so, it is advisable to have a rough estimation of the information required below:
- Years to provide for family expenses
- Annual amount required: household expenses x 12 months
- Outstanding debts: credit cards expenses, mortgages, personal loans
- Final expenses: funeral expenses, outstanding medical fees etc
- Assets Value (EPF, Savings, Investment)
- Inflation adjusted rate of return
- Existing life protection: the sum assured of your existing life insurance
By keying in the figures, you will know the total amount needed by your next of kin for the upcoming years, the shortfall and the additional coverage needed.
Being under-insured means that your family will essentially be putting all their lives on hold as they will need to focus on clearing the sudden financial burden upon their shoulders.
Did not buy enough coverage as it was too expensive? - This would be easily covered through term insurance plans. You can also enhance your existing insurance coverage to increase the sum assured.
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