Insurance Hacks 101

I’m an advocate of one achieving financial freedom through savvy investing.

Now, with that said, I too believe that not everyone is ready to invest. I opine that one must first be financially fit in order to invest. This means, before we hunt for the next stock or property deal, we should get our financial house in order. In general, this involves having:

– zero or negligible outstanding credit card debt or personal loan.

– savings to fund at least 6 months worth of living expenses.

– a comprehensive life & medical insurance plan.

In this article, I’ll focus on life insurance matters. Why? Let us assume, we’ve built ourselves a sizeable investment portfolio for ourselves and are proud of it. If we met with a misfortunate event such as being hospitalized for medical treatments, without insurance, who do you think will be footing in the bill? I think, it makes sense to have the insurer to take care of it, and thus, avoiding the need to liquidate our portfolios to pay for it.

Most of us do get the idea. But, many are still substantially underinsured as I write today. Perhaps, it is due to a general misconception where insurance is expensive and unaffordable which stemmed from lack of financial education among consumers and from agents who are only interested to sell expensive products for commissions.

As such, I’ll share, from my viewpoint:

– how to get the best insurance deals in the market today?

– how to save or slash your insurance cost by 30 – 50% a year?

– how to fund your premiums by using investment income?

Thus, here are the 5 Life Insurance Hacks that you need to know before you buy your next policy:

#1: Improved Your Health Condition

Recently, I’ve just met up with my insurance agent. From him, I’ve learnt that 30% of his clients have received either a rejection or a conditional acceptance on their proposals to buy new policies from his insurer. In general, this is due to the current health condition of his clients.

Perhaps, you may think, ‘Ian, is it because your friend’s clients are old uncles and aunties?’ The answer is nope. His clients are relatively young where their age are below 40. Here, I’ll share 3 things that you can start doing now which can help to boost your chances of getting a straight acceptance for your next purchase of an insurance policy without incurring additional charges:

Tip 1: Body Mass Index Below 30

Here’s one of the main reasons why insurers reject a new customer: Obesity.

Presently, if you are overweight, don’t worry. I’m not here to condemn or to ask you to go on a food fast or a massive workout routine. Instead, I think it is helpful for you to have a 1-Year Plan filled with simple activities that help to reduce weight. This includes taking nice strolls in the park and to replace your diet to a much healthier one (not necessary a full green one).

Tip 2: Blood Pressure

If a new customer is found to have hypertension, he would pay at least 20% higher insurance premiums than one who doesn’t. If you found yourself to have nearly 140/90 in your blood pressure reading, then, it’s time for you to adjust your lifestyle and diet to reduce the reading. It can be salvaged.

Tip 3: Quit Smoking

It’s healthier. It saves you money. Your premiums would be cheaper by 10% – 15%. I won’t elaborate further as this is already a widely known fact.  

#2: When is Your Birthday?

Your insurance premium is calculated based on your ‘Age Next Birthday’. So, as I write today which is on 10 February 2018, if you are born on:

– 1 January 1988: Your Age Next Birthday is 31.

– 1 June 1988: Your Age Next Birthday is 30.

In general, your premiums would be lower if you buy your policies at lower age next birthday. Ideally, I would reassess my insurance needs at minimum of 3 months prior to my birthday. This allows me adequate time to get a new policy before the arrival of my birthday.

#3: What to Buy First?

If you are a fresh graduate where your salary is below RM 3,500 a month and intend to get your first insurance policy, I would suggest you to get adequate medical coverage as your utmost priority. You can get yourself other types of life insurance products as your income increases over time.

There are two types of medical cards you can buy today.

Standalone Medical Cards

This is quite affordable. Most college students can afford to get one of these cards as the price is around RM 50 – 80 a month for basic medical coverages. It comes in handy if you are on a tight budget.

Investment-Linked Cards

Nowadays, the ‘better’ medical cards are sold in a bundle with an investment linked policy, where it packages term insurance, medical cards and unit trust investment into one policy.

Here is what I did to get higher medical coverages from an investment linked policy. I requested for low term insurance and unit trust investment value for my policy. Your premiums would be greatly slashed as you are not paying for the term insurance and investing in their unit trust funds. Today, I think, you can get one policy like this for RM 200 a month where the medical coverage is set to be for almost RM 1,000,000 a year, with no co-insurance and lifetime limit. Hence, if your current medical coverage is below RM 1,000,000, I think you can shop around and consider an upgrade if the deal is good.  

#4: High Coverage-to-Premium Ratio

Last Tuesday, I’ve attended a 1-Hour Live Webinar conducted by Peter Lim. I learnt a concept from it and I think it’s worth sharing to all. It’s known as the coverage-to-premium (CTP) ratio, which measures your amount of coverage per RM 1 in premium.

The rule of thumb is to get the highest possible CTP ratio for our insurance products. The ideal CTP ratio varies according to our age, gender and health conditions. For instance, if you are currently under 35, you may aim for CTP ratio of 150 and above. Here’s the formula:

Month Premium = RM 150

Annual Premium = RM 1,800

CTP = 150

Minimum Sum Assured = RM 1,800 x 150 = RM 270,000

This means, if you can afford a monthly insurance premium of RM 150, you may aim to buy a life insurance policy that covers at least RM 270,000 in the event of death, total permanent disability and 36 critical illnesses. Of course, that is if you are under 35 years old.

#5: Minimum Cash Value

‘But Ian, if I go with a high CTP insurance policy, what about its cash value?’

Obviously, it would be low. I’m not expecting much cash value after 20 or 30 years of paying for my insurance policies. Why? Shouldn’t I expect to receive some ‘investment returns’? Nope. This is because insurance policies are solely meant protection, not investment. Let me give you a simple comparison:

Fictitious Quote

Personally, I prefer the investment-linked policy over a whole life policy. This is because I would save RM 3,200 a year in insurance premiums which could be invested for higher returns than a whole life policy. As a matter of fact, you can even build an investment portfolio that funds this policy by itself.

For instance, I’m making about 6.5% a year in dividend yields from my stock portfolio. Thus, I would need to increase my stock investment by RM 27,692 so that it can ‘self-fund’ this policy like virtually forever as it makes RM 1,800 a year in dividends. By this way, I was able to upgrade my insurance policies without being overly-burdened by new commitments.

Of course, this method only works if you invest for cash flow, not for capital gains. As inspired by Robert Kiyosaki, it is good to invest in cash generating  assets to pay for your expenses.

Conclusion:

There you go, the 5 Insurance Hacks that allows you to slash your premiums, increase your coverages and to raise capital faster for investments which puts money into your pocket.

If you have any comments & enquiries on insurance matters, please feel free to drop them at the commentary box below: