Generation X & Y Life Insurance

A LIMRA study finds majority of Gen X and Y consumers believe they need more life insurance.  At the same time, less than 20 percent say they are very likely to buy life insurance.

“The study clearly shows that people recognize the value of life insurance and the risks they face being underinsured,” says Todd Silverhart, a corporate vice president at LIMRA Insurance Research. “Yet other financial priorities and confusion on what they need lead many consumers to postpone buying life insurance.”

Separate LIMRA research has identified nearly 19 million consumers who need life insurance but have become stuck during the shopping process.

Universal Life Insurance

 

A much-discussed insurance product lately is the universal index life policy. This type is best for people who need the reassurance of a guaranteed return, and have no place left to shelter income. But high fees and caps on returns are downsides.

How it works: As with most life insurance policies, your premiums go to the insurance company, which then invests the money in bonds, stocks, funds or other investments. The company hopes to make enough from premiums and investments so that it can afford to pay out benefits when you die.

With a universal index policy, part of your premium is invested in a fund that is connected to a particular index -- the Standard & Poor's 500, in many cases. When that index does well, you earn more interest, which goes into your cash value fund; this is a cache you can tap while you are alive.

Many policies allow for a flexible premium, and you can choose to add more to help you build up your cash fund. If you skimp on premiums, the insurer will take the money out of the cash value. But, should the cash shrink too much, the company may cancel the policy.

Pros. One of the biggest advantages of universal index life is the potential for growth, while you receive protection from volatile markets. Most of these policies guarantee that you earn a certain amount of interest each year. This might be a very low number, such as one percent or two percent (or even a guarantee that it doesn't fall below zero). That means at least you don't lose money even when the index goes down,

Your cash value, depending on the state you live in, might enjoy tax advantages and creditor protection -- meaning, if you declare bankruptcy, the cash stash is off limits from debt repayment. Plus, your cash fund usually isn't subject to the same penalties and restrictions that come when you withdraw early from a tax-advantaged retirement account.

Cons. Most of these policies come with fairly high fees. The commissions are often front-loaded. The costs can eat up your returns, so it can take years before your cash fund sees significant growth. Later in life, your premiums might go up, and leave you without enough in your cash fund to keep the policy in force.

Additionally, most of these policies have caps on returns. Many insurance companies only credit a certain percentage of the increase in the market to you. This means that you don't end up growing your cash value as much when the index does really well. In some cases, you might be better off just investing in an index fund on your own, without doing it through an insurance policy.

Overall, I still can see a place where these types of policies make sense. For me, an index universal life policy is an option to defer some tax if you are not able to participate in a Roth individual retirement account -- if perhaps your income is too high. Like any other financial tool, understand its framework and pitfalls.

Life Insurance Myth

Life insurance is not a simple product. Many elements that must be considered carefully in order to arrive at the proper type and amount of coverage. But the technical aspects of life insurance are far less difficult for most people to deal with than trying to get a handle on how much coverage they need and why. This article will briefly examine the top 10 misconceptions surrounding life insurance and the realities that they distort.

Myth #1: I'm Single and Don't Have Dependents, so I Don't Need Coverage
Even single persons need at least enough life insurance to cover the costs of personal debts, medical and funeral bills. If you are uninsured, you may leave a legacy of unpaid expenses for your family or executor to deal with. Plus, this can be a good way for low-income singles to leave a legacy to a favorite charity or other cause.

Myth #2: My Life Insurance Coverage Needs Only Be Twice My Annual Salary
The amount of life insurance each person needs depends on each person's specific situation. There are many factors to consider. In addition to medical and funeral bills, you may need to pay off debts such as your mortgage and provide for your family for several years. A cash flow analysis is usually necessary in order to determine the true amount of insurance that must be purchased - the days of computing life coverage based only on one's income-earning ability are long gone.

Myth #3: My Term Life Insurance Coverage at Work Is Sufficient
Maybe, maybe not. For a single person of modest means, employer-paid or provided term coverage may actually be enough. But if you have a spouse or other dependents, or know that you will need coverage upon your death to pay estate taxes, then additional coverage may be necessary if the term policy does not meet the needs of the policyholder.

Myth #4: The Cost of My Premiums Will Be Deductible
Afraid not, at least in most cases. The cost of personal life insurance is never deductible unless the policyholder is self-employed and the coverage is used as asset protection for the business owner. Then the premiums are deductible (Maximum RM6,000 per annum)

Myth #5: I Absolutely MUST Have Life Insurance at Any Cost
In many cases, this is probably true. However, people with sizable assets and no debt or dependents may be better off self-insuring. If you have medical and funeral costs covered, then life insurance coverage may be optional.

 

Myth #6: I Should ALWAYS Buy Term and Invest the DifferenceNot necessarily. There are distinct differences between term and permanent life insurance, and the cost of term life coverage can become prohibitively high in later years. Therefore, those who know for certain that they must be covered at death should consider permanent coverage. The total premium outlay for a more expensive permanent policy may be less than the ongoing premiums that could last for years longer with a less expensive term policy.

There is also the risk of non-insurability to consider, which could be disastrous for those who may have estate tax issues and need life insurance to pay them. But this risk can be avoided with permanent coverage, which becomes paid up after a certain amount of premium has been paid and then remains in force until death.

Myth #7: Variable Universal Life Policies Are Always Superior to Straight Universal Life Policies Over the Long Run Many universal policies pay competitive interest rates, and variable universal life (VUL) policies contain several layers of fees relating to both the insurance and securities elements present in the policy. Therefore, if the variable subaccounts within the policy do not perform well, then the variable policyholder may well see a lower cash value than someone with a straight universal life policy.
Poor market performance can even generate substantial cash calls inside variable policies that require additional premiums to be paid in order to keep the policy in force.

Myth #8: Only Breadwinners Need Life Insurance CoverageNonsense. The cost of replacing the services formerly provided by a deceased homemaker can be higher than you think, and insuring against the loss of a homemaker may make more sense than one might think, especially when it comes to cleaning and daycare costs.

Myth #9: I Should Always Purchase the Return-of-Premium (ROP) Rider on Any Term PolicyThere are usually different levels of ROP riders available for policies that offer this feature. Many financial planners will tell you that this rider is not cost-effective and should be avoided. Whether you include this rider will depend on your risk tolerance and other possible investment objectives.
A cash flow analysis will reveal whether you could come out ahead by investing the additional amount of the rider elsewhere versus including it in the policy.

Myth #10: I'm Better off Investing My Money Than Buying Life Insurance of Any KindHogwash. Until you reach the breakeven point of asset accumulation, you need life coverage of some sort (barring the exception discussed in Myth No.5.) Once you amass $1 million of liquid assets, you can consider whether to discontinue (or at least reduce) your million-dollar policy. But you take a big chance when you depend solely on your investments in the early years of your life, especially if you have dependents. If you die without coverage for them, there may be no other means of provision after the depletion of your current assets.

The Bottom LineThese are just some of the more prevalent misunderstandings concerning life insurance that the public faces today. Therefore, there are many life insurance questions you should ask yourself. The key concept to understand is that you shouldn't leave life insurance out of your budget unless you have enough assets to cover expenses after you're gone.

GST On Life Insurance

Staying healthy will cost even more as medical insurance fees, charges and premiums, go up next month. Although life insurance is exempted from the Goods and Services Tax (GST), policyholders must pay at least 6% more for medical and health-related insurance coverage.

The National Association of Malaysian Life Insurance Fieldforce and Advisers has appealed to the Government to exempt “necessity policies” covering hospitalisation and critical illnesses from the GST. Otherwise, many may surrender their policies or lapse in their premium payment.

“GST will be an additional cost for individual policies that are coming up for renewal. If a family of five with a medical policy pay a total of RM7,500 per annum, the additional cost to them would amount to RM450 yearly.”

He said many prospective clients and those planning on topping up their existing policies had adopted a “wait-and-see” attitude. They want to gauge the GST impact on their finances first because the new tax applies not only to insurance but to most of their daily expenses,” Kho said.

He warned that it was crucial for policyholders to understand that GST would impact all traditional and investment-linked policies which had medical, critical illness or personal accident benefits attached. For traditional policies, the GST is imposed on the premium. For investment-linked policies, it is charged on the insurance charges. For investment-linked policies, insurance charges escalated with age because of higher insurance charges.

For example, at age 35, insurance charges for the medical benefit alone is about RM422. At age 65, it rises to almost RM2,500 – exceeding the RM1,176 annual premium paid for the medical coverage alone. Some policyholders above age 60 might pay up to RM5,000 in annual insurance charges.
With a 6% GST imposed on insurance charges, many senior citizens may potentially lose their coverage or need to top up premiums to sustain their coverage.

For investment-linked policies, the annual premium may not increase as the GST and insurance charges are deducted from the policy’s cash value, thus eroding the accumulated cash value meant for retirement, children’s education and sustaining future premiums.

You need to keep tabs on the cash value or you may wake up at age 60 without a retirement fund.
Majority of more than two million life insurance policy holders nationwide had investment-linked and traditional policies with attached medical coverage.

Life Insurance Association of Malaysia (LIAM), in a statement, said fees and charges imposed on investment-linked policies and critical illness, medical and health and personal accident premiums were subject to GST. LIAM advised all policyholders to contact their insurance companies to find out the amount payable from April 1.

General Insurance Association of Malaysia (PIAM) said policyholders were required to pay the additional 6% as all general insurance policies were subject to GST “unless the risks are located outside Malaysia”.

Malaysia Insurance Updates

Malaysia’s life insurance industry recorded a 6.9% growth in insurance protection to RM1.17 trillion for all policies combined in 2014, its industry body said on Friday. The Life Insurance Association of Malaysia (LIAM) said the amount was 6.9% higher than the RM1.09 trillion in 2013.

“The sum assured per capita in 2014 has also recorded an increase to RM38,449 from RM36,387 in 2013,” it said. LIAM president Vincent Kwo said the healthy performance of the life insurance industry reflected the people’s rising awareness on the importance of insurance protection. 

 

Malaysia’s life insurance industry provided insurance protection to 12.4 million lives (counting lives with multiple policies as separate lives) in 2014, an increase of 148,574 when compared with year 2013. Kwo said the increase in the number of lives covered by life insurance and higher sum assured protection reflected a higher level of financial literacy among Malaysians. 

 

However, based on the Protection Gap Study undertaken by University Kebangsaan Malaysia and LIAM in 2013, there is still a huge protection gap for families with life insurance. 

“On average, the gap ranges from RM100,000 to RM150,000. This means that the average sum assured of RM38,449 is still way below the amount needed to support one family member in the event of the death or disability of the breadwinner,” said Kwo. 

 

He added the current penetration rate, as at 54%, was considered low as the government’s plan was that 75% of Malaysians be insured by 2020. “There is a need to develop suitable insurance products to meet the different life stage needs of customers and introduce new delivery channels to reach out to the remainder 50%, of which a high percentage of the population could be concentrated in the rural areas.
 

“Additionally, insurers could also leverage on their existing customer base for upselling or cross-selling initiatives given that even among those who have insurance coverage, in most cases they were not adequate,” he added. 

 

Based on preliminary figures, the life insurance industry in Malaysia grew by 5.5% in 2014, as measured by new business annual premium equivalent (APE).  APE comprises of the 10% single premium and 100% annualised premium. 

New business total APE in 2014 was RM4.71bil as compared with RM4.47bil in 2013. 

As for group insurance business, it recorded a 5.1% growth. In terms of individual business, investment-linked policies continued to outpace traditional policies with the former growing at 11.1% compared with the latter which shrunk by 1.6%. 

On total new premium basis, the industry grew 9.3% in 2014, with total premium volume recording RM8.95bil. The total premium for in-force policies grew moderately at 5.8% in 2014 for individual and group policies combined.

The life insurance industry also registered an increase of 21.3% in claims payouts amounting to over RM8.4 billion as compared with RM6.9 billion in 2013. The high growth in claims payouts was contributed mainly by higher medical claims and bonus payments to policyholders. 

Medical claims increase was contributed mainly by strong growth in medical insurance business in recent years and partly by medical inflation. 

Increase in bonus payments was mainly due to the increased popularity of the cash bonus type of policies in recent years. The increase in death claims meanwhile was moderate at 7.6% in line with the increase in in-force sum assured 

 

Commenting on the outlook for 2015, Kwo said the economy’s strong fundamentals would continue to underpin the life insurance industry with expectations of a robust strong single digit growth.

Sole Proprietorship

A Sole Proprietorship is a simple type of business structure that is owned and operated by the same person. It does not involve many of the complex filing requirements associated with other types of business structures such as corporations. Sole proprietorships allow persons to report business income and expenses on their individual tax returns.

Sole proprietorships are attractive to small investors because they are relatively easy to start up. Also, the owner is entitled to all the profit that the sole proprietorship collets. On the other hand, sole proprietorships can be risky because there is no separation between the owner and the business.
 

In other words, the owner remains personally liable for any losses or debts that the sole proprietorship incurs. They can also be held legally responsible for violations committed by the business or its employees. A sole proprietorship can best be summed up by the phrase, “You are the business”.

What are some of the Advantages of a Sole Proprietorship?

There are many reasons why a person would choose to start their business up using a sole proprietorship structure. Some of the main advantages of sole proprietorships include:

• Ease of formation: Starting a sole proprietorship is much less complicated than starting a formal corporation, and also much cheaper. The proprietorship can be named after the owner, or a fictitious name can be used to enhance the business’ marketing
• Employment: Sole proprietorships can hire employees. This can lead to many of the benefits associated with job creation, such as tax breaks. Also, spouses of the business owner can be employed without having to be formally declared as an employee. Married couples can also start a sole proprietorship, though liability can only assumed by one individual
• Decision making: Control over all business decisions remains in the hands of the owner. The owner can also fully transfer the sole proprietorship at any time as they deem necessary

What are the Disadvantages of Sole Proprietorships?

Forming a sole proprietorship does involve some risks, mainly to the owner of the business, as legally speaking they are not treated separately from the business. Some disadvantages of sole proprietorships are:

• Liability: The business owner will be held directly responsible for any losses, debts, or violations coming from the business. For example if the business must pay any debts, these will be satisfied from the owner’s own personal funds. The owner could be sued for any unlawful acts committed by the employees.
• Lack of “continuity”: The business does not continue if the owner becomes deceased or incapacitated, since they are treated as one and the same. Upon the owner’s death, the business is liquidated and becomes part of the owner’s personal estate, to be distributed to beneficiaries. This can result in heavy tax consequences on beneficiaries due to inheritance taxes and estate taxes
• Difficulty in raising capital: Since the initial funds are usually provided by the owner, it can be difficult to generate capital. Sole proprietorships do not issue stocks or other money-generating investments like corporations do

So, while sole proprietorships do not necessarily create more liabilities, they do expose the business owner to a risk of being sued. Lawsuits can be filed against the business owner for legal violations, as well as to collect any outstanding debts.

A Hero We Will Miss

Throughout his lifetime, Nik Aziz always struck a humble figure. Despite having the most powerful position in a party that boasted about one million members, and retaining the Kelantan menteri besar post for over two decades, the religious teacher was content staying in his old kampong house and driving around in his own car.