I have spent quite some time trying to understand how to make the decision and figured that someone else may be going through the process and this may help.
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After multiple discussions with my very experienced insurance agent. Here are my conclusions.
Before that, some background about myself so that you can put this into context. I'm a serial entrepreneur, now running my third business, a SalesTech startup, creating an innovative lead management system for lead-to-sale (L2S) industries. I have recurring income from my first business and also some residential properties that I have invested in. I'm in my early 40s as at writing and I'm married with a 3-year-old son and I'm the sole income bearer for my family.
As I structured my will and made myself familiar with the process and timeline of how the estate will be distributed to the beneficiaries, I realized that there is a gap. In Malaysia context, the most immediate monies that the beneficiaries can access to is EPF (KWSP) and insurance payout, assuming it is a clear death (as opposed to cases like those lives lost in MH370). The beneficiaries will have access to this monies in 2~4 weeks time.
I'm the sole income bearer for the family and I have to make sure my family has enough monies to cover monthly expenses, including rental, utilities, education, grocery, monthly instalment to properties (so that they don't have to go through fire sales or auction), etc.
As it may be hard for my wife to go back to the work force with a young kid, I plan to leave behind estate enough to cover 10-year of expenses for my family. I took count of net property value (after loan) and fill the gap with life insurance policy.
Now, the challenge is that the insurance premium may shoot through the roof (relative to my income) so I looked for ways to reduce the premium while having the payout enough to cover what I wanted.
As part of the insurance premium goes to investment to sustain the policy, the longer I want the policy to sustain (without top-up and assuming market return is at least as projected), the higher the insurance premium. Example, even though a policy is guaranteed to renew up to 100-year-old by the insurance company, the premium that the agent proposed may only be able to sustain the policy until the insurer is 70-year-old.
In other words, at around 70-year-old, the insurance cost may have been higher than the premium and the previously invested amount (with accumulated return) is not enough to cover the difference. This is when the insurance company will ask you to increase the insurance premium.
I figured that as I grow older, my kid grows up, my property value appreciates and mortgage loan get repaid, my responsibility and monthly expenses when I'm around 65 will be different. My kid should be (fingers crossed) done with education, making his own monies, my rental/utilities usage will be much lower, and my mortgage loan instalments would have been paid off. Just the unencumbered properties should be sufficient to be left behind when I passes.
I will most likely no longer need the life insurance when I'm around 65 year-old. By then, I will surrender my life insurance policy at the age of 65-year-old and withdraw whatever cash value left in the policy.
Having a clear "exit" allowed me to increase the payout coverage with same insurance premium, instead of aiming for the insurance to be sustainable until 100-year-old.
Critical illness coverage
I concluded that critical illnesses coverage is mainly to make up for the lost of income if any of the critical illnesses hit. As my main income are passive income, I opted out from critical illnesses. If any of the illnesses strikes, I won't be able to get any payout, but my medical card will cover me for all the hospitalization and treatments. If your income is mainly coming from your salary, I would advise you not to follow my strategy on critical illness.
To me, this is the most important coverage for my own self, as life insurance is more for people that I left behind. Most of the latest medical card nowadays have more than a million ringgit annual limit and unlimited lifetime claim. Well, to be honest, I don't think anyone could really claim that much as the body may not be able to endure million ringgits worth of medical treatments. I chose the more entry level coverage with RM200 room, of which I can top up if I want a better room.
As I tried to increase the payout while keeping the premium low, I opted out for the riders/waivers as I believe I can still pay the monthly premium even with the critical illnesses.
I also minimized the investment portion of the policies as I personally invest in my own businesses, other startups and stock market.
There is a new plan introduced by an insurance company this month (July 2019) that offers non-claim bonus (NCB) and also optional deductible. I noticed that I have not made any claim in the 20+ years that I am insured, NCB and deductible make full sense for me.
I plan to go for the RM5,000 deductible, which means that I will need to fork out RM5,000 per policy year if there is any claim, but this significantly lower the insurance cost and premium by around 30%. In other words, claims below RM5,000 will no longer make sense and I will personally have to absorb those medical expenses. This is fine for me as I mainly get the medical card to cover bigger claims and I don't bother to go through the claim process for less than RM5,000.
In conclusion, different person may have different need for the insurance policies, but most people may not realize that the need changes as we go through different phases of life. Instead of signing up for plans thinking that you need it to sustain until your end of life, it may make more sense to think of when realistically you need the plan to cover until and with that additional variable, you can either get higher/wider coverage or lower premium.
What's your personal insurance strategy? Do share.