What is the First Insurance Policy We should buy for our Child? | Case Study

Recently, I received an email from a reader who is a young mother who is looking for the first medical policy for her daughter. I previously wrote to her this email:

Regarding your question about medical insurance for your daughter, I am
more than happy to give you the information you need. There are
currently 2 kinds of medical insurance ( so called “medical card” )
available from Great Eastern.

1. Great Medicare (GMC)
– This is a standalone card which means you don’t have to purchase any
other plan. It can be bought alone just for Hospitalization and
Surgical benefit (H&S). There are 4 packages available. I will just
list down the most affordable one herePremium: RM440/year
Hospital Room & Board : RM100/day
Annual limit: RM60,000/year
Lifetime limit: RM200,000/year10% co-insurance ( means patient pay 10% of medical bill or RM500 whichever lower)

2. Investment-linked Health Protector (ILHP) – this is a rider which can only be attached if you buy an investment-linked plan which is as low as RM100/month.Here is a compatible plan compared to GMC above:

Premium: RM246/year (cheaper),
must be included Investment-linked policy as low as RM100/month
Hospital Room & Board : RM150/day (higher, thus better)
Annual limit: RM50,000/year (RM10k lower than GMC)
Lifetime limit: RM150,000/year (RM50k lower than GMC)
no co-insurance ( means can claim all medical expenses except the standard government tax and some take-away medicine which is not claimable)

Almost 90% of my clients prefer plan 2 (ILHP) because it also gives extra coverage such as life, and critical illness, plus the investment saving for education purposes.

She would like to know more about Plan 2 above. These are the further questions regarding the investment-linked policy of Great Eastern Life Assurance Malaysia, taken from her email:

a) I think there is a certain risk involved in investment link products and currently the unit trust market is facing the pressure of dropping in view of the downward adjustment in share market, what are the likely risk for taking up the said plan now?b) What is the term of the plan, i.e. how long do I need to service it, i.e. RM100/month? Please confirm whether the medical premium will increase in accordance to my child’s age increases.

c) You mentioned that the said plan includes life, critical illness, does it mean that my baby will be insured against the 36 critical diseases as the normal one? How is the life insurance works?

d) Is my investment guaranteed?

e) How is the return like? Any chart to show?

f) What is the entry age?

g) Does it mean that the total to pay is RM1,200 + 246 = 1,446?

h) I understand that some plan will be like auto payment of premium after some time of servicing. Is this plan works in the said manner?

Thank you.

Risk Involved in Investment-linked Policy

This part is going to answer the query of question

a) I think there is a certain risk involved in investment link products and currently the unit trust market is facing the pressure of dropping in view of the downward adjustment in share market, what are the likely risk for taking up the said plan now?

Yes, investment always comes with risk. Investment-linked fund works almost similar to unit trust fund except that there is no trustee involved in the process because insurance companies are governed by Bank Negara Malaysia (BNM) directly. There are many rules and regulations that they have to follow that are set by BNM to ensure that insurance companies do not play the fools with policyholders’ monies. However, when the fund is invested, the biggest risk is that it will cost the policy to lapse when there is no sufficient funds to pay the relevant insurance charges.

The important thing is that we should manage our investment-linked policy (ILP) well so that the risk involved can be minimized. I wrote an article before about how to prevent the lapsation of investment-linked policy. For details discussion, please refer the article. I summarized some points here:

ILP might lapse because of the following:
1. High insurance charges
2. Low investment value
3. Paying low premium for too much protection
4. Premium not guaranteed

The preventive measures are:
1. Read your investment-linked policy financial statement to ensure sufficient cash value at all time
2. Reduce your protection when you don’t need it
3. top up investment value by injecting more premium, either regularly or in one lump sum
4. swicth investment fund to lock the capital gain
5. pay monthly or quarterly, instead of yearly to apply the Ringgit Cost Averaging strategy.

Furthermore, Great Eastern designs a buffer in the quotation generated. There is a certain investment value remained in the policy no matter how bad the markets perform. If you keep paying the insurance premium on time, the policy will be doing ok for the rest of the term.

How long is the term of servicing Investment-linked Policy?

This part will be answering the question:

b) What is the term of the plan, i.e. how long do I need to service it, i.e. RM100/month? Please confirm whether the medical premium will increase in accordance to my child’s age increases.

In this case, there are two options for you:
1. Greatlife Portfolio Insurance (GPI) – term is up to the child attains age 99
If you are not going for the tax relief of RM3,000 per year for education policy, it is better to get this plan because your child can continue to own the policy when they attain majority age (18 years old). Since the medical card is guaranteed renewable, the child can still enjoy the medical benefit.

2. Greatlife Education Insurance (GEI)– term is up to the child attains age 25
If you want to take advantage of the tax relief, the policy bought have to mature when the child attain age 25. The “education” wording must appear in the plan name, and also payer benefit must be added as a rider too. This GEI plan is actually similar to GPI plan above. The only difference is that it have to mature when child attains age 25 to qualify for tax deduction. The downside is if the child is not healthy after the policy matured, it might be a trouble for her to get another life insurance protection.

Medical Premium Increase

Medical premium, in this case we call it insurance charges for hospitalization and surgical benefit. In order to give you a clear picture, I would have to show you how the investment-linked policy works. Refer Figure 1.

Figure 1: Illustration of Expected Benefit & Projected Investment return

Column (A) – Premium paid per year. In this case, RM1200 per year equals to RM100 per month.

Column (B) – Allocated premium.
Allocated premium is the portion of premium allocated for your policy. How about those unallocated premium? The unallocated monies is the acquisition fees, which will goes to the underwriting fees, agents commission and overriding commission.

Premium allocation is shown in the following table:

Figure 2: Premium allocation schedule

Year 1-2 – 42.75%
Year 3-4 – 76.00%
Year 5-6 – 85.50%
Year 7 onwards – 99.75%

Thus, you will see the first figure in Column (B) is RM1200 x 42.75% = RM513

Column (C) – Sum Assured.
In this quotation, sum assured is RM50,000 when the child attains age 5. There is a standard child lien as follow:

Figure 3: Child lien – Full life cover will be given from age 5 next birthday onwards.

Column (D) & (E) – Insurance charges
You will notice that the figure of Column (E) increase from RM292(age 2) to RM347(age 21). So now we come back to your question about the medical premium increment. It is correct that the medical insurance charges will increase. But when you notice Column (A) – premium payable will not increase. The insurance schedule charges for Investment-linked Health Protector is shown in Figure 4.

Figure 4: Insurance Charges of IL Health Protector 150.

If the agent says premium will not increase, he is correct.
If the agent says insurance charges will not increase, he definitely misunderstood how ILP works.

You can refer my previous article about Investment-linked policy versus Traditional policy.

Column (F) – Policy fees
Great Eastern charges a flat RM6/month policy fees which comes up to RM72/year.

Column (G) – Cash Value
Here is the formula to derive the cash value ( technically known as the total investment value, TIV)

(A x allocation) = B
Cash Value (G) = B – [(D+E+F) x projected return]

For example, look at the first line:
B = 1200 x 42.75% = 513
G = 513 – ( 67 + 292 + 72 )(5%) = 85

Now you know how an ILP works. Regarding the question

g) Does it mean that the total to pay is RM1,200 + 246 = 1,446?

Answer: You just need to pay RM1200/year, not RM1446/year because riders charges will be deducted from you allocated premium.

Life insurance & Critical Illness Coverage

In this quotation,

Figure 5: Rider details

The basic sum assured is RM50,000 which covers death and total permanent disablement.
The Critical Illness Benefit Rider (CIBR) covers 36 Dread Diseases RM30,000 until age 99.
The Payer Benefit Plus (PB-PLUS) covers payer in case the payer got strike with death, disease or disability, Great Eastern will waive the premium.
The Waiver Premium (WP-DD) is a benefit when the child is diagnosed with any 36 critical illnesses, Great Eastern will continue paying the premium on your behalf, up to age 70.

Is the Investment Return Guaranteed?

Investment return is never guaranteed. However, there are pass history about the return which you can refer to. If you can’t take much risk, it is advisable to invest in lower risk fund such as the Lion Fixed Income Fund, Dana Sejati, Lion Balanced Fund (Medium risk) or Lion Strategic Fund.

All the figures of cash value shown in Figure 1 is just an illustration based on moderate conservative return. The actual return will depends on your investment strategy. You can choose which funds to invest your premium. You can also instruct in details how you want to allocate your premium portion in the Supplementary Investment-linked Strategy Form.

How is the returns like? More info.

For very precise details, all the propectus and annual investment report can be downloaded here.

Figure 6: Annual investment-linked report

For a quick reference, here is the summary of the pass history of investment return:

Figure 7: Great Eastern Investment-linked funds returns reference 2002-2006

Entry Age

The child must be one month old in order to qualify for assurance under the investment-linked plan. However, to be eligible to purchase IL Health Protector rider, the child must attain 6 months old.

Auto Payment of Premium

When you asked about auto payment, I would have to refer it to premium holiday. Premium holiday means we pay for a period of time, then stop paying. You may continue to pay after a some times later, which is known as short premium holiday. If you opt to stop paying altogether, it is called permanent premium holiday.

Premium holiday

These are three situations that can cause an investment-linked policy to cease:
1. There is no more cash value left
This means Column (G) equals zero ( G = 0)

2. When the life assured passed away.
All death benefit will be paid out to the beneficiary or the policy owner. The amount is in Column (H) in Figure 1. H = G + sum assured.

3. The policy owner request to surrender it
When the policy is surrendered, TIV which is equal to G will be paid to the policy owner.

Investment-linked policy is a very flexible plan. Let’s say you are having financial difficulty and stop paying premium at year 10. The cash value is RM7034 referring to Figure 1. The insurance charges and policy fees is RM67+295+72 = 434. Great Eastern will deduct that amount from your cash value (RM7034) by selling off the unit equivalent to the value of RM434. Deduction for insurance charges are done every month instead of a year regardless of your payment mode.

Now we come back to your question about auto payment of premium.

h) I understand that some plan will be like auto payment of premium after some time of servicing. Is this plan works in the said manner?

The answer is: As long as your policy cash value is enought to pay for the insurance charges and policy fees every month, the policy will keep going on until G = 0. You can continue to pay the policy to boost up the TIV (Total investment value) anytime. You can even pay extra or make advance premium.

This means you can take short premium holiday whenever you like as long as there is enough money in the policy. Permanent premium holiday might be possible if there is a substantial amount of cash value, when the return itself is already adequate to pay for the insurance charges.

There is a lot of technical dicussion in this post. In case you want to know more infomation, please ask in the comment section. We will have a great dicussion over here.

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