1. Not understanding the difference between the 5 basic types of life insurances
There are 5 flavors of life insurance most commonly found today:
- Whole Life Participating Plan (aka Endowment Plans)
- Whole Life Non-Participating Plan
- Term Life Plan
- Reducing Term Life Plan
- Investment Linked Plan (aka Unit Linked Plan)
Each of them offer different components (insured amount, savings and dividends component, cash value, units etc.) and very different premiums payable. Buying the wrong plan for the wrong purpose is a sure way of over paying for features you may not want / need.
If you do not already know the differences, start by reading this article. In fact, this is the MOST IMPORTANT step to avoid mistakes. Learning these differences is the best thing you can do for yourself when it comes to buying life insurance. (Don’t wait. Start here.)
2. Not having a clear objective of why you are buying insurance
Generally, aside from tax savings, there are 4 reasons that people buy life insurance policies
- To protect your loved ones against your death
- To protect yourself against Permanent Disability / Critical Disease
- Forced savings
- As an investment
Before purchasing a policy, always ask yourself why you are purchasing the policy. It can even be a mixture of objectives. Then choose and customize the right policy for your objectives.
For example, if the only reason you want insurance is for the protection element, then why buy a Whole Life Participating policy where up to 80% of the premiums paid goes towards a savings component?
3. Thinking it is expensive, complex OR can only be bought through agents
Only 56% of the Malaysian population have life insurance. For something so important, why do such a large percentage of Malaysians still not have life insurance? The reasons given by the public provide an interesting picture.
Some cite its complexity or affordability. Some are skeptical because of prior experiences with misleading, pushy or aggressive insurance agents. Surprisingly, an oft cited reason is that some people do not like feeling obligated to buy from the agents whom they meet.
The good news is, purchasing a life insurance policy doesn’t always have to cost an arm and a leg. It can also be hassle free and pressure free. You can get instant quotations and purchase insurance online at as cheap as one fifth what you have to normally pay thanks to lower underwriting and commission costs. (We found out that a RM 500,000 life cover from UForLife.com.my costs less than the premium you would pay for a RM 100,000 life cover quoted by agents we polled).
4. Thinking the higher / lower the premium, the better the policy
Higher premiums do not equate to better policies. Insurance agents are compensated via commissions and are generally better incentivized towards selling policies with higher premiums. On the flip side, paying as little as possible for the same amount of insurance cover is NOT a sure sign of being smart with your policy selection.
Frankly, both schools of thought are dangerous.
The best policy is the one that suits your needs like a glove. If you have to compare prices, compare only between comparable policies that have already been customized to suit your needs.
5. Thinking I am unmarried / have no dependents, hence no need for life insurance
Here’s some food for thought.
Did you know that about 30% of life insurance claims are because of disability / critical disease and not because the policy holder has died?
6. Thinking you will need life insurance for the rest of your life
This belief is a common cause of over-insurance during old age.
If your purpose is to ensure that your dependents can sustain their current lifestyle upon your death, then you may not need it when you are no longer the primary bread winner AND no longer have any unsettled debts.
7. Being under-insured / over-insured
In Malaysia, the average coverage amount is lower than RM 50,000. Considering the cost of living in 2015, most people are grossly under-insured. Contrastingly, many people are over-insured. Unknowingly, they purchase multiple life insurance policies packaged as savings plans, investment plans or MRTA / MLTA when taking on a new home loan or personal loan.
So, how much coverage should you be insured for?
The general rule is to have a death benefit worth 5 to 10 times of your annual income to sustain your family financially for a few years after your death.
We hope that through this article, you will have a clearer view on what type of life insurance you will need for you and your family. Now go and get your life insurance like a pro!