The 5 most common life insurance policies you see in the market today are:
- Whole Life Participating (aka Endowment Plans / Savings Plans)
- Whole Life Non-Par
- Investment Linked Policies (aka Unit Linked Policies)
- Reducing Term Life
- Regular Term Life
1. Whole Life Participating (WLP)
At the start of a policy, Whole Life Participating (WLP) policies (more widely known as endowment / savings plan) have the highest built in overpayment of premiums compared to Cost of Insurance. After deducting costs (E.g. Admin fees, Cost of Insurance, commissions), the overpaid premiums are allocated to Savings, aka Cash Value. This Cash Value is guaranteed.
These savings are invested by the insurance company. A unique feature of WLP policies is that policy holders participate in the earnings of the company in the form of dividends / bonuses. In essence:
Total Cash Value = Current Cash Value + Cash Bonus + Terminal Bonus + Any Other Bonuses
2. Whole Life Non-Participating (WLNP)
For Whole Life Non-Participating (WLNP) policies, it also accumulates guaranteed Cash Value like WLP policies from the overpayments at the start of the policy. However, the policy holder simply does not participate in the earnings of the company. Therefore, its Cash Value will grow slower than participating whole life insurance.
Total Cash Value = Current Cash Value
It should not be surprising that WLNP policies have a lower premium than WLP policies.
3. Regular Term Life Insurance
What difference have you noticed from this graph compared to the one for the whole life insurance
The most obvious one would be the absence of Cash Value. Typically, little to no cash value is accumulated at all (though there are exceptions in some variants).
The second difference is the lower premiums you pay compared to whole life insurance. The absence of cash value is the trade-off for the lower premiums you enjoy.
The final difference is that it is usually for a shorter, fixed duration compared to Whole Life policies (which covers you till a ripe old age). Once it expires, if you wanted continue coverage, you would have to re-purchase a new policy. The risk when buying new policies that the underwriting terms may be less favourable than before.
4. Reducing Term Life insurance
Reducing Term Life insurance is defined by gradually decreasing insurance cover that eventually reaches zero upon maturity.
This kind of policies are very commonly taken up by people who seek protection so their children can complete their education. Or with MRTAs and other loan insurance, where people just want to guarantee that their housing loans and personal loans (where the principal reduces gradually) are paid off in the event of their demise.
5. Investment Linked Policy (ILP)
Investment Linked Policies are essentially Term Life Insurance + Unit Trust. After deducting costs, the remainder of your premiums will be invested into the Unit Trust Funds of your choice. The Cash Value depends entirely the Net Asset Value (NAV) of your funds.
Total Cash Value = Net Asset Value (of your Funds)
ILPs can provide certain benefits that traditional life policies may not:
If there is sufficient value, ILP is very flexible in allowing you to utilize the cash value for either withdrawals, purchasing more insurance coverage, or using it to pay for your premiums.
2. Control of your Investments
You have control over which funds to invest in and can switch them up whenever you want
3. Potential Profits
Since an ILP cash value is entirely tied to the performance of your funds, you could possibly earn handsome returns if your funds do well. But beware! The reverse is also true. It could be worth millions today and worth nothing tomorrow.
Though they are sometimes sold as cheaper alternatives to WLP and WLNP policies, there is an important catch. Unlike Whole Life policies, the Cash Value for ILP is NOT guaranteed. Essentially, the risk is passed right back to the policy holder. If the fund performs poorly and the Cash Value becomes insufficient to cover for the growing Cost of Insurance, you would have to pay more in premiums to make up the difference.
Another sticking point that isn’t commonly mentioned is that like all unit trust products, a fund management fee of 1-1.5% of NAV will be charged annually regardless of fund performance.
Due to the similarity to Regular Term Life insurance, no graph will be provided for ILP.
Congratulations! You now have a firm grasp of the 5 most common types of life insurance policies in Malaysia. Most policies in Malaysia are variants or extensions from these 5 basic forms, each coming with their own bundled product features and riders. As such, no matter how elaborate or complicated some policies might seem, you will still be able to tell them apart like an insurance pro!
Finally, if at any time you feel unsure, you can always refer back to this guide so no one ever pulls a fast one on you.
Good luck hunting!