What is life insurance?
In life insurance, a large number of people (called policyholders) pay some money (premiums) into a fund managed by an insurance company. When someone in that group of people suffers a hardship, he/she is given an amount of money from the fund to help ease the hardship.
The policy contract
When you buy a life insurance policy, there is a contract between you and the insurance company. You agree to pay a premium for a period of time and, in return, the insurance company will pay your nominee or estate a sum of money upon your demise. In the event you suffer total and permanent disability or loss arising from any other specified situation, the payment will be made to you. In the case of total and permanent disability, the money is usually paid in instalments.
Why should I buy life insurance?
You may want to buy a life insurance policy for the following reasons:
• To ensure that your immediate family has cash and income after your demise so that they can easily pay bills, taxes and other obligations.
• To ensure that your immediate family members are able to maintain their standard of living upon your demise.
• For your children to have money for education.
• For you to have a savings plan for the future so that when you retire, you have a constant source of income.
• To ensure that you have extra income when your earnings are reduced due to a serious illness or accident.
Whatever the reason, you need to be careful when choosing one to suit your needs. Always take time to discuss with the insurance company or its intermediary about the policy that you are thinking of buying.
Income tax relief
You can claim tax relief on the premiums that you pay, subject to certain terms and conditions. For an ordinary life policy, the maximum amount of relief is RM5,000 per year inclusive of any contributions you have paid to an approved retirement benefit scheme, such as the Employees Provident Fund or other pension scheme. For a medical or education policy, the tax relief is RM3,000 per year.
Which policy should I buy?
You must choose the type of policy that best suits your personal circumstances. If you are young and wish to make sure that your spouse and children will be taken care of if you pass away suddenly, a term insurance is most suitable. If you are older and have a more established family, the fixed premium type and those that build up cash value is more appropriate.
You should understand the scope of cover provided under the policy, the various terms and conditions and the cost of the insurance cover.
The basic types of policies are:
• Term insurance – This offers insurance protection for a limited period only. The money will be paid only if you pass away or if you suffer total and permanent disability during the term of the policy.
• Whole life insurance – This offers life-long protection and premiums are paid throughout your life. The money, including any bonuses, will be paid when you pass away or if you suffer total and permanent disability.
• Endowment insurance – This combines protection and savings. The money will be paid at the end of a specific period upon your demise or if you suffer total and permanent disability. If you are still living after the policy matures, you will get the money, otherwise, the money will be given to your nominee.
• Investment-linked – Your premium is used to buy life insurance protection and units in a fund managed by the life insurance company. The price of the units is based on the investment performance of the managed fund. The benefits paid to you or your nominee will depend on the price of the units at the time you surrender the policy or when you pass away.
• Life annuity plan – An annuity is a series of payments paid to you until you pass away. There are two types of annuities:
–Immediate annuity – the payments begin within 12 months after you buy the annuity. Those who are about to retire or have already retired will choose this type.
–Deferred annuity – the payments begin more than 12 months after you buy the annuity. People will buy this type during their working years to provide retirement income later in their lives.
• Supplementary rider/cover – A rider is a supplement attached to the basic insurance plan, such as an endowment or whole life. It gives you flexibility to meet your individual needs, such as cover against accident, disability or hospitalisation. You will need to pay additional premiums.
• Other plans – Life insurance companies also provide medical and health insurance plans.
• Mortgage Reducing Term Insurance (MRTA) – When applying for a loan to purchase property, the borrower may wish to consider insurance protection against the unforeseen events. The insurance cover, normally known as MRTA policy, will cover the repayment of the outstanding loan to the financial institution in the event of the untimely death, disability or critical illness of the borrower. In the event of such contingencies, the insurance company pays the bank the outstanding amount of the loan and in return, the bank releases the ownership of the property to the owner or his beneficiaries.
Most MRTA policies are paid by a single premium when the loan is taken. The premium rates will normally depend on the age of the borrower, the term of the loan and the interest rate of the loan. In the event that the borrower sells the house or decides to pay off the loan prematurely, the bank will assign the MRTA policy back to him and he may choose to continue with the additional life cover or surrender the policy and receive a cash value.
Please read more about Life Insurance in the following site:http://www.liam.org.my/cms/cms_pdf/booklifeinsurans.pdf
If you would like to have more information on Life Insurance, kindly email shpoh88@gmail.com.
