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Investment linked insurance and insurance savings plan

August 2nd, 2019 by dimpledbrain

I think many people get confused over this topic so let me pen this down:

  1. Any plan with the word insurance inscribed to it like investment linked insurance or insurance savings plan means just that – it is an insurance plan, i.e. a protection plan that covers you for any untoward incidents.
  2. When you buy an insurance plan, e.g. a medic card insurance, it will cover you from the moment you purchased it
  3. It will not insure you when you are 80 years old.
  4. Put differently, if you buy insurance in 2019 and nothing happens to you in 2019, that portion of premium you paid for 2019 is lost forever (the insurance company will take this as their profit)
  5. If you have been buying insurance for 20 years and nothing happens to you in these 20 years from the moment you first purchased, then the insurance company profits from the premiums you paid.

Standalone medical card insurance vs investment linked medical insurance

  1. Standalone medical insurance means the insurance company is collecting premium for the year/month insured. Nothing more and nothing less
  2. Say for instance for now, an RM300 Room and board + RM300K annual limit for hospitalization, the insurance premium that one has to pay is as follows:
  1. A 36 years old will have to pay RM107/month vs a 66 years old who will need to pay RM493/month for the same coverage as #3 above
  2. If both made the payment for 2019 and nothing happened to them, then the insurance company will profit ALL from the premiums paid
  3. Investment linked insurance simply means that instead of RM107/month or RM493/month, one pays more so that the excess (not the full insurance premium paid) will be invested (usually back into KLCI or fixed deposit – to return about 3-5% per annum, if you are lucky. It can go negative return as well.)
  4. As you are paying through out the years, the insurance premium will be increased. This is due to cost claim ratio, inflation, medical cost etc
  5. Insurance savings plan has the same concept as above and is usually linked to a term insurance. What this means is also the same – one portion will be paid for insurance and the balance will be reinvested, and hence the name insurance savings plan
  6. For example if you pay RM100 into this plan, RM40 will be paid for insurance and RM60 will be reinvested. That RM40, since it is for insurance will be lost forever if nothing happens to you in the year the premium is paid. (in reality the amount for reinvestment will be lower after deducting agent fee etc)

Conclusion

  1. Do not buy insurance products for savings or investments – go for unit trusts, fixed deposit etc for investment
  2. Insurance, when you buy it, covers now. If you buy now, the premium you pay will not cover (it wont be sufficient to cover) when you are 30 years from now
  3. You only insure now, NOT the future
  4. What IF something bad happens to me – this is also another fallacy which we need to tackle in a separate post
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