Question:
Hi, I’m Rachel. I have been working for a marketing agency as an executive for 6 months. It is my first real job upon graduating from a local university. As I write, I’m taking home a fixed monthly salary of RM 3,000 and I’m looking to buy a life insurance policy. I have met up with a few friends who are life insurance agents. They proposed different plans and I was confused. I don’t know which of the life insurance proposals are suitable for me. Hence, my question is, ‘Is there a guide to choosing a suitable life insurance policy for fresh graduates?’
Answer:
Let’s assume that Rachel is a nice 23-year old working adult who does not drink or smoke. She has no life insurance policy and is buying her first policy. Here, I’ll share 5 things that fresh graduates like Rachel should know before purchasing a life insurance policy. They are as follow:
1. Purpose
First, let’s be clear about this. Insurance is about protection and nothing else. It is a financial tool that will pay your medical bills or to compensate either you or your beneficiaries an agreed sum of money, if you had been hospitalised or had lost sources of active income due to diagnosis of a critical illness, disability, and death, whichever arises first.
It is not primarily used as a tool to help you make money or to build wealth. So, with that in mind, the idea is to have the highest amount of insurance coverage at the lowest possible premium for your insurance policy.
Tips:
1. Insurance is for Protection.
2. Highest Insurance Coverage for the Lowest Possible Premium.
2. Insurance Coverages
Typically, there are 3 main insurance coverages which you may consider buying. Here, I’ll list them down, briefly state their features, and share how they can be used to protect your personal wealth:
3. How Much Insurance Cover Do I Need?
Let’s go back to Rachel, who is earning RM 3,000 a month as an executive. Here are the next two questions:
a. Which of these life insurance coverages Rachel should get first?
b. How much does she need?
Personally, when I was in my 20s, I had prioritised on getting medical insurance. This is because accidents, minor or major, could happen to anyone regardless. I, with a limited budget at that time, had purchased a standalone medical card as it was the most affordable type of medical insurance at that time.
Note:
Presently, a standalone medical card is still the most affordable type of medical insurance product (below RM 100 a month) and hence, is ideal for young adults who are operating with a tight budget. However, the typical drawback is this – a standalone medical card often comes with a co-insurance element. Let’s say, for example, there is a co-insurance element of 10%. It means, if your medical bill is RM 10,000, your insurer bears RM 9,000 and you pay RM 1,000.
Normally, a medical card which is attached with an investment-linked insurance policy (stated in Point 4) would have no co-insurance. As such, the insurer bears the full cost of your medical bill.
Subsequently, I calculated the amount of life insurance cover that I need, based on the simple formula below:
Life Insurance Cover = Annual Income x 10 Years
So, for Rachel, the amount of life insurance cover is RM 360,000 where the sum is calculated as follows:
Life Insurance Cover
= Rachel’s Monthly Income x 12 Months x 10 Years
= RM 3,000 x 12 Months x 10 Years
= RM 360,000
This means, if Rachel lost her ability to earn income either through diagnosis of a critical illness, or becoming permanently disabled or she had passed on, she’ll or her family shall be compensated up to 10 years worth of her current income.
So, let’s keep the figure of RM 360,000 in mind and move onto:
4. Insurance Products
Basically, there are two main choices of insurance products that Rachel can buy to get a life insurance cover of RM 360,000. They are as follows:
Option 1: Term Life Insurance
Typically, term life policies would cover death and total permanent disability. Its premium amount is either renewable on a yearly basis according to your age or is fixed at the same price throughout the duration of the policy.
I got a quick insurance quote for Rachel from Fi Life and had the following:
Which of the two policies I should choose?
Well, it depends. For instance, if Rachel decides to:
a. Keep it for 30 years, then, it is better to go for the 30-year level term as it will be cheaper in the long run. So, the price is RM 63.65 a month.
b. Upgrade the term policy in 3 years time. In that case, it is better to go for the yearly renewable term, where the price is RM 39.35 a month, very affordable.
Option 2: Investment-Linked Insurance Policy (ILP)
For a start, an ILP is a combination of a term life policy and unit trust funds. The policy allows you to buy critical illness coverage and medical insurance, which is in addition to death and total permanent disability. Hence, by having additional components such as:
a. Critical illnesses coverage
b. Medical Insurance
c. Unit trust investments
The premium of an ILP would be higher than a typical term life insurance policy and the final premium (depending on the components added) shall work out to be a few hundred ringgit per month. This is typical if Rachel wants the following in her ILP:
a. Death and Total Permanent Disability Coverages: RM 360,000
b. Critical Illness Coverage: RM 360,000
c. Medical Coverage: almost RM 1 million in annual limit & no co-insurance
d. Negligible Investment Amount in Unit Trust Funds
5. Affordability
Generally, it is best to keep your insurance expense below 10% of your monthly income. In Rachel’s case, she may start with an insurance plan that costs below RM 300 a month. This will allow her to have more proportions of her income to save or invest to build her wealth for the future.
She can always upgrade her plans when her income increases over time.
So, let’s keep it at RM 300 a month. What are her options?
The answer lies in her choices of medical insurance. If Rachel opts for a medical card that:
a. Has co-insurance (Standalone card)
Her premium on the card (lowest plan) is likely to be below RM 100 a month. In this case, she could pay RM 200+ a month to buy an ILP that has a higher death and total permanent disability and critical illness coverages.
b. No co-insurance
Alternatively, Rachel may choose an ILP that has medical insurance. But, Rachel would trade off the amount of coverage of critical illness (if she opts for it). She may boost her death and total permanent disability coverages by having a term life insurance policy. Quote: Fi Life
Conclusion: If I’m Rachel Today …
Here are some golden nuggets to buying life insurance:
1. Understand the purpose of buying life insurance – It’s for Protection.
2. Get the Highest Insurance Coverage with the Lowest Premium Available.
3. Prioritise having Medical Insurance First.
4. Life Insurance Needs = Annual Income x 10 Years
5. Limit your premium at 10% of your income. Upgrade later if you earn more.
