The Essentials Of Life Insurance In Malaysia

The Essentials Of Life Insurance In Malaysia

Life is often uncertain and unpredictable, hence it is necessary to ensure you and your family are protected from these unpredictable and inevitable life events. Whether it is planning for retirement, or protecting your loved ones in your absence, life insurance is a necessary protection plan.

However, there are still many Malaysians who do not prioritise life insurance in their financial planning. The 2012/2013 Protection Gap Study by Life Insurance Association of Malaysia (LIAM) found that only 56% of Malaysians are covered by life insurance.

If you are not covered, or if you are thinking of getting the right life insurance coverage, here is everything you need to know about getting a life insurance policy in Malaysia.

How does Malaysia life insurance work?

For the uninitiated, a life insurance policy is a contract with an insurance company, where you the payor/insured will pay a set amount of premium monthly, quarterly, bi-annually or annually, in exchange for a lump-sum payment, known as a death benefit, to beneficiaries upon the insured’s death.

Most life insurance nowadays also provide compensation for Total Permanent Disability (TPD), to protect the insured and his/her family in the event of the loss of ability to generate income.

The best part of life insurance for you and your beneficiaries is that death benefits from all types of life insurance are generally income tax-free.

Why do you need life insurance?

To figure out if you need life insurance, you need to think through the worst-case scenario. If you pass on tomorrow, how would your loved ones fare financially?

If someone will suffer financially after your death, chances are you need life insurance. This death benefit replaces your income and can help your family meet many important financial needs.

Would they have the money to pay for your final expenses, such as medical bills, funeral expenses, taxes, debts, lawyers’ fees? Would they be able to meet ongoing living expenses like rent or mortgage, food, clothing, transportation and healthcare – at least in the beginning? What about long-term financial goals? Without your contribution to the household, would your surviving spouse be able to save enough money to put your children through university or retire comfortably? And would you want to leave something to your children or grandchildren?

Life insurance policy in Malaysia is most suitable for those who have financial dependents, and hence, it is not compulsory for children or retirees who are no longer earning an income or have financial dependents.

Life coverage helps make sure that the people you care about will be provided for financially, even if you are no longer around or lost the capacity to care for them. Your family can afford to make the choice that best preserves their quality of life when they are adequately protected by insurance.

Above that, you can claim for tax relief of up to RM6,000 per year for a life insurance policy together with your Employees Provident Fund (EPF) contributions.

Types of life insurance

Types of Life InsuranceDescription
EndowmentA combination of protection and savings whereby the money will be paid at the end of a specific period upon your demise or if you suffer total and permanent disability.

Best for: Savings, wealth transfer, preservation and, tax-deferred wealth accumulation.
Investment-linked insuranceIt combines investment and protection, where your premiums will be divided for life insurance cover and investment in specific funds of your choice. You can choose the premium allocation ratio.

Best for: Savings, wealth transfer, preservation and, tax-deferred wealth accumulation.
Life annuityThe insurance company will pay you over a set period of time until you pass away. Types of annuity include immediate annuity or deferred annuity.

Best for: Retirement savings and tax-deferred wealth accumulation.
Mortgage Reducing Term Assurance (MRTA)It covers the repayment of an outstanding property loan to the financial institution in the event of untimely death, disability or critical illness of the borrower.

Best for: Estate planning and asset transfer.
Supplementary riderA rider is a supplement attached to the basic insurance plan such as endowment or whole life. The common riders are medical, personal accident and critical illnesses.

Best for: Medical, personal accident and critical illnesses coverage.
Term insuranceFor a limited period only, e.g. 10 years. It’s usually cheaper than other forms of life policy.

Best for: Income replacement in working years.
Whole life insuranceIt is designed to provide lifetime coverage, hence it usually has higher premium payments than term life. Premium amount is typically fixed, it has a cash value, which functions as a savings component and may accumulate tax-deferred over time.

Best for: Wealth transfer, preservation and, tax-deferred wealth accumulation.

What are the factors to consider?

Life insurance should be for life, hence it makes sense to do your research and consider all aspects before making your purchase. Here are some important factors you need to consider in your quest to find the best life insurance plan in Malaysia to fit your needs.

1. Financial goals

Identify your financial goals. Knowing what your goals are will help identify the type of life insurance policy you need. While the most common reason for getting a life insurance is to continue to financially support your family after your demise, a life insurance policy can also help you with other goals too. You could be looking forward for a lump sum of maturity benefit in retirement, or sponsoring your child’s overseas education, or it could be one of the ways to reduce tax burden with the increase of family responsibilities. Whatever your goal is, it will play a significant role in helping you choose the most suitable type of life insurance.

2. Premium cost

While life insurance is purchased to accomplish your various financial goals and protect your family, it should also be affordable for you. Paying a high premium that you can barely afford will lead to a lapse policy, eventually, or worse – a financial meltdown later on.

According to financial planners, your insurance premium should comprise only 6% of your income. For example, if you are earning RM5,000, your monthly insurance premium should not be more than RM300.

Like shopping for anything, you need to do your homework and look for the best affordable life insurance policy.

3. Policy value

Determining how much life insurance you need does not have to be complicated.

Work with your insurance agent by using the following 3-step plan to find out how much insurance protection you require today to protect your loved ones.

Let’s assume you are a 30-year old professional, married with one child – this is roughly how much life insurance you will require:

life insurance

Choosing the right life insurance

Choosing the perfect life insurance depends largely on your and your family’s personal financial needs for today and tomorrow.

life insurance

Life insurance is an important coverage – for most people! As previously explained, it is best for individuals with financial dependents, and the more dependents you have the more your policy value or sum assured should be.

It is not just important to get a life insurance policy, but also an adequate one, as to not leave your dependents high and dry, if anything unfortunate were to happen to you. The average mortality gap per dependent is between RM100,000 and RM150,000. This is the average amount that a person needs to sustain his spending/lifestyle for the next five years upon the death of the breadwinner of the household.

Identify how much and what kind of life insurance you need to avoid getting stuck with inadequate coverage or expensive coverage that you don’t need.

When it comes to choosing a policy, always consider a policy that best suits your life stage and understand the scope of cover provided under the policy. One of the most common mistakes people make is not reviewing their policy throughout their lives. Our needs change over time, and our life insurance coverage should reflect that.

Adding a child to the family, for example, will change the monthly need for income as well as long-term plans, such as the child’s education plan. It is important for adults to review their life insurance coverage every few years to ensure that they have adequate coverage.

No amount of money can ever replace a person. But more than anything, life insurance can help provide protection for the uncertainties in life.

Getting life insurance can be one of the most important decisions in your life. But there is more to it than just what your agent tells you.

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