Life Common Mistakes

Imagine that you, as your family’s primary breadwinner, are no longer around to provide for your loved ones. It goes without saying that your family’s lives and livelihood would be affected drastically. The situation gets worse if you had left behind housing loan, car loan or credit card balances.


Your dependents may not be able to hold on to the assets you had left behind, and late payment interest charges could accrue to nightmarish amounts.


It is for this reason that many people purchase life insurance policies. However, adequate protection only happens if you had bought the right policies! One can easily end up under-insured or over-insured (still better than uninsured though). More commonly, many people end up paying too much in premiums for the amount of cover they are getting.


For your benefit, we listed down 7 of the most common mistakes people make with life insurance. Once you know this, you can avoid these newbie mistakes and purchase life insurance policies the smart way (and get you in the ‘sufficiently insured’ category).


Not understanding the difference between the 5 basic types of life insurances

There are 5 flavors of life insurance most commonly found today:

1. Whole Life Participating Plan (aka Endowment Plans)
2. Whole Life Non-Participating Plan
3. Term Life Plan
4. Reducing Term Life Plan
5. 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.


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

1. To protect your loved ones against your death
2. To protect yourself against Permanent Disability / Critical Disease
3. Forced savings
4. 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?


Thinking it is expensive, complex OR can only be bought through agents
Only 56% of the Malaysian population have life insurance. The majority of Malaysian buy life insurance from agent. However - other distribution channel includes - insurer directly, insurance broker, online purchase, from bank, from post office, telemarketing and direct mails.




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.


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?


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.


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.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.