April 2, 2018

Using Insurance or Takaful as an Investment Tool?

Using Insurance or Takaful as an Investment Tool?

Why do we buy insurance plan or subscribe to a takaful plan?

Generally the main objective of buying an Insurance plan or subscribing to a Takaful plan is to protect oneself against unexpected incidents or to protect against the adverse financial consequences of untimely death or disability of the breadwinner.

 

Many people buy Insurance plans or subscribe to Takaful plans to get facilities like:

  • Medical Card
  • To protect income (Income Protection)
  • To settle debts (Debt Settlement)
  • To preserve assets (Asset Preservation)
  • Hibah (for certain Takaful products)

All these facilities are good as long as we know the reasons on getting these plans.

 

The Formula

When we pay our Insurance premiums, we are paying:

Cost of Insurance/Takaful + Cost of Riders + Cash Value in Units

To help reduce the annual or monthly premiums, we are advised not to add so many riders to our plan.

 

The Benefits

In Malaysia, one of the key benefit that a lot of Insurance/Takaful subscribers are getting is the Tax Benefit. Please refer to the latest annual tax schedule by the Inland Revenue Board (LHDN) to see how much we/you can save.

Other benefits include Approved Claims, Cash Value at Term Completion, Surrender Value if subscribers end the policy/certificate early.

For certain Takaful plans, if the Takaful operator(s) is/are doing well, the company may decide to offer profit sharing to its subscribers, also known as Mudharabah.

There may also be other benefits given to the Insurance/Takaful subscribers. These benefits are normally stated inside the Insurance policy book or Takaful certificate. Please ask your agent(s) or consultant(s) to explain to you about the benefits (if any).

 

The Risks

Just like any other investment instruments, a legit and regulated investment products will come with risks. Before we start investing, do take note that Insurance/Takaful plans will only pay if there are claims or once the Insurance/Takaful term ended.

These are scenarios where claims for Insurance/Takaful plans will not be paid:

 

Lapsation or Early Termination

Why? Because when the plan is not paid, the cost of Insurance/Takaful for that month will not be paid. Insurance/Takaful companies are business entities and they need to make sure that the subscribers honour their monthly or annual commitments before the companies honour their commitments to their subscribers.

 

Non-disclosure of an existing illness

Why? The Insurance/Takaful companies have the right to hold our request for claims if we are found to be dishonest by not disclosing any pre-existing illnesses that we may have when we first apply our Insurance/Takaful plans. It is important to be honest when we fill up the Insurance/Takaful application form.

 

The Wrong Plan

Why? A good scenario is if we decided to take up a Personal Accident plan but we are claiming for one of the Critical Illness. Please check our policies/certificates after receiving our documents. In Malaysia, if we are not satisfied with the plans mentioned in the received policies/certificates, for life plans, we have the right to get full refund within the Free Look-Up period, which is normally 7-14 days upon receiving our policies/certificates – please check with your respective agents/consultants for the plan that you took.

 

Over-Insure Or Under-Insure

Based on a lot statistics by many providers, a lot of those who take up Insurance and Takaful plans are UNDER-INSURED. This means, if an incident occurs for example death of the breadwinner, the sum cover received is not sufficient to cover the liabilities left behind by the deceased. For the case of OVER-INSURED, the subscriber need to commit to a high monthly or annual premium, because of the high cost of insurance/takaful.

 

Met a Scenario in the Exclusions

Why? Insurance and Takaful companies are risk management companies. They have defined a list of scenarios where the plans that we take will be covered or not. For most plans, claims during war are not covered. For investment-linked plans, claims for difficulties during pregnancies are not covered, but plans designed for ladies, claims for difficulties during pregnancies are covered. Please read through the exclusions listed in the policies/certificates.

 

Nothing happened

Why this point is a risk? Many people buy Insurance plans or subscribe to Takaful plans, the main intention is to get the sum cover proposed by the agents/consultants. Let’s say, a scenario, a subscriber decided to take a $1 million policy for a 30-year term, because of the high premiums that he is paying due to high sum cover and the unnecessary riders, the cash value that he accumulated throughout the insurance term, which is 30 years, and so fortunate that nothing happened during the term, the subscriber will only receive the cash value that he accumulated with compound interests, but not the $1 million that he intended to get. So plan properly.

 

Conclusion

Do our due diligence before start investing. Remember the advise that Insurance/Takaful is an important tool to have to help protect us against unexpected incidents and to help protect against the adverse financial consequences of untimely death or disability of the breadwinner.

Please talk to your agent(s) or consultant(s) about your Insurance/Takaful plans. Do periodic review and upgrade when necessary – to make sure that the plans are relevant as time progresses.

If you need to find out more about other investment instrument, particularly unit trust investments, please do talk to me, by clicking the Facebook icon on the scroll bar or click here to leave me a message, and I’ll be glad to introduce you to a platform that allows you to have a single account to access funds from various unit trust companies.

Read my post on The Common Terms Used in Insurance and Takaful to get more information on some common terminologies used in the industry.

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