Investment linked insurance – 2nd post

Posted on May 6, 2008. Filed under: Investment Linked Insurance |

Continue from what I have written on Investment linked insurance products

Minutes ago, I was just chating with a close friend of mine whom is very senior in the insurance industry. He was just sharing with me that discussions are on-going with Bank Negara that may allow all insurance companies in Malaysia to cease offering traditional insurance policies and only provide investment linked insurance products

Well, from business point of view, it make good sense to the insurers. Investment linked policy is passing 100% of the risk to the policy holders, whereby for tranditional insurance policy, due to the guaranteed portion of returns or cash-back (ie dividend declared each year by the insurer), the risk is shared between the policy holder and the insurer.

For investment linked policy, the whole cash value depends on the performance of the funds. There is virtually no risk on the insurers. If the funds do not perform, they will just ask you to top up. If you failed to, they will just let the policy lapse and refund you the balance cash value.

For traditional policy on the other hand, once the dividend is declared, it stays with you regardless the market condition. So, if the insurer is hit by the market downturn after declaring the dividend, they can’t ask back from the policy holders from what they have declared. So, the risk is shared in that sense

I sincerely hope that we as a policy holders are given a choice to choose from and not to just be presented with one choice, ie. investment linked insurance products.

p/s: just an additional note to share from what I have missed out from my last post on this subject. I did mention that the yearly insurance charges are paid via selling the fund units. From what I understand from some insurance agents I spoke to, when you pay your premium, the premium will first be used to purchase the units based on prevailing market rates. A relevant portion of the units will then again be sold to pay for the insurance charges. As you might be aware, you need to pay a transaction fee, usually 5% or so as service charges when you buy or sell the fund units. So if the units needed to pay the insurance fees are sold immediately, you are in other words, paying an additional 5% above the cost of the insurance fee. This 5% hence, effectively reduces the portion that would have been invested for you. This 5% is an indirect income to the insurer but is your instance a loss. Paying 5% for investment purpose, yes! Paying 5% for insurance charges?? Mmm……

p/s 2: Just a disclaimer, here   I am merely share with you my personal point of view based on my knowledge of the topic. I am not a qualified insurance agent. Hence, do consult the professional for any of your decision made.

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2 Responses to “Investment linked insurance – 2nd post”

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A simple explanation to a laymans queries on investments and insurance. Most ppl invest without much of an understanding of the product and it workings. Your site makes it much simpler! Way to Go!!

Shanthi,

Thanks! 🙂


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