Personal Financial Planning (FIN533) - Risk Management & Life Insurance (Chapter 5) PDF

PERSONAL FINANCIAL PLANNING (FIN533) CHAPTER 5 RISK MANAGEMENT AND LIFE INSURANCE Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Insurance Planning  Chapter 5 Learning Objecti...

PERSONAL FINANCIAL PLANNING (FIN533) CHAPTER 5 RISK MANAGEMENT AND LIFE INSURANCE Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Insurance Planning  Chapter 5 Learning Objectives 2  Introduction, Concept and Principle  Family Maintenance Fund  Multiple Salary  Needs Approach  Types of Insurance Cover  Life Insurance  General Insurance  Takaful  Takaful Vs. Conventional insurance  Useful Information When Buying An Insurance Policy  INSURANCE PLANNING: 3 AN INTRODUCTION WHAT IS INSURANCE?  Insurance is protection against possible financial loss; it gives you peace of mind  An insurance company, or insurer, is a risk- sharing firm that assumes financial responsibility for losses from an insured risk  People purchase a policy and the firm assumes a risk for a fee called the premium, which the insured policyholder pays periodically CONCEPT OF INSURANCE PRINCIPLES OF INSURANCE Insurable interest The person who purchases the insurance has an 'insurable interest' in the subject matter of the insurance if the loss or damage of it would result in a financial loss to the person.  Utmost good faith The insured is to disclose to the insurer all material facts regarding the subject matter of the insurance and the circumstances pertaining to it which would influence the judgement of a prudent insurer.  Contract of indemnity A contract to make good or restore, as best as possible, the insured to the same position immediately before the loss or damage by way of payment, repair or replacement. PRINCIPLES OF INSURANCE  Contribution The insurer is liable only for the insurer’s rateable proportion of the loss or damage in the event other insurers are also liable for the loss or damage.  Subrogation The right of an insurer to be in the place of the insured having paid the loss to seek recovery of the loss from a third party.  Proximate Cause The 'immediate or effective cause' that leads to an event.  FAMILY MAINTENANCE 7 FUND  The most important function is insurance as protection for our families.  The size of fund will reflect the level of living we would like to see maintained or an amount at least enough to eliminate the need for major financial adjustment.  Multiple Salary Approach  The Needs Approach  Multiple Salary Approach 8  With the multiple salary approach, the goal of having life insurance is earnings replacement.  This approach has the goal of replacing the annual salary stream of a bread winner for a certain number of years, or until the children are raised and the spouse is financially stable and retired.  Normally, an amount of five to fifteen times your gross salary is recommended. (Traditionally, a person earning RM60,000 per year might calculate that he/she needs coverage equal to ten times his/her salary, or RM600,000).  Generally, most insurance companies will not insure an individual for more than twenty times his or her annual income.  Needs Salary Approach 9  The needs approach to life insurance planning is used to estimate the amount of insurance coverage an individual needs.  The needs approach considers the amount of money needed to cover burial expenses as well as debts and obligations such as mortgages or college expenses.  The needs approach is a function of two variables:  The amount that will be needed at death to meet immediate obligations.  The future income that will be needed to sustain the household.  Needs Salary Approach 10  The needs approach takes into account a variety of expenses, including:  Funeral costs  Legal fees  Estate taxes  Business buyout costs  Probate fees  Medical deductibles  Emergency funds  Mortgage expenses or rent  Debt and loan repayment  College fees and tuition  Childcare and school fees  Maintenance costs  https://prudirect.prudential.com.my/prudirect/general/calcul ator.do  TYPES OF INSURANCE 11 COVER https://piam.org.my/ LIFE INSURANCE  Life insurance is a contract between you and an insurance company.  Essentially, in exchange for your premium payments, the insurance company will pay a lump sum known as a death benefit to your beneficiaries after your death.  Your beneficiaries can use the money for whatever purpose they choose.  TYPES OF INSURANCE 12 COVER  GENERAL INSURANCE  General insurance is an insurance product that does not cover the life of an insured or is commonly known as a non-life insurance product.  There are two categories of general insurance products, one which falls under the Commercial Lines offered to businesses/corporations and the second one is offered under Personal Lines, designed specifically for the public.  The coverage period for most general insurance policies and plans is usually one year, whereby premiums are normally paid on a one-time basis.  REASONS FOR HAVING LIFE INSURANCE 13  LIFE INSURANCE 15  Term Insurance 16  Term life insurance only covers you for a set timeframe – this could vary from a 5, 10, 20, or even 30-year period depending on the term that you choose.  If you die or suffer from total and permanent disability (TPD) during this period, your loved ones will receive the benefit, but if you do not, you and your beneficiaries will not receive anything.  You can choose to discontinue the plan after your policy term is up or renew it up until a certain age.  Term Insurance 17  Whole Life Insurance 18  Whole life insurance covers you for the rest of your life.  Once the policy is in effect, and as long as you pay the required premiums, you do not have to worry about your coverage ending.  Your beneficiary will always receive the benefit pay-out, no matter what age you pass away.  Whole Life Insurance 19  Term Vs. Whole Life 20 Insurance  The advantage of term life insurance policies is that it is affordable. The premium of a term life policy is significantly lower compared to a whole life policy with the same sum of coverage.  Whole life insurance has a higher premium because it covers you for a lifetime and also comes with cash value. However, even though the premium for whole life insurance is higher, it usually stays the same throughout the policy, whereas the premium for a term life policy usually increases when you renew it.  Endowment Plan Insurance 21  Endowment plan is a life insurance policy which provides you with a combination of both i.e.: an insurance cover, as well as a savings plan.  It helps you in saving regularly over a specific period of time, so that you are able to get a lump sum amount on policy maturity, if the policyholder survives the policy term.  Endowment Plan Insurance 22  ‘cont…  In the Malaysian context, the most common endowment seen is an insurance investment plan or often known in layman terms as a savings plan.  The function works similarly whereby you invest a fixed amount of funds over a period of years and will receive returns on schedule up to the maturity date whereby you receive a lump sum typically higher than your original capital.  Endowment Plan Insurance 23  Types of Endowment Plan 24 Insurance  Traditional with profit: Returns are based on bonus profits from the basic sum assured and a maturity/terminal bonus.  Traditional non-profit: A lump sum payment payable only upon death, total permanent disability.  Unit-linked: Endowment premiums are invested in a unit trust and returns are based on the UT performance.  https://ringgitplus.com/en/blog/sponsored/how-much-do- you-know-about-investment-linked-insurance.html  Annuity or Pension Plan 25 Insurance  An annuity is a contract between you and an insurance company.  It is designed to protect and grow your money, and then provide a stream of income during your retirement.  How do annuities work?  You purchase an annuity by making a payment to an insurance company.  Your annuity can grow over time.  When you're ready to start receiving retirement income, your annuity is turned into a steady stream of income payments.  https://www.nst.com.my/news/nation/2021/09/730131/kri- proposes-life-annuity-under-social-insurance-pension  Annuity/Pension Plans 26  GENERAL INSURANCE 27  Medical And Health 28 Insurance Designed to cover :  The cost of private medical treatment  Ensures that we would not have to worry about the cost of seeking treatment during emergencies.  Provides us with an income stream while undergo treatment. Main Type of Policies  Hospitalization and surgical insurance  Dread disease, or critical illness insurance  Disability income insurance  hospital income insurance  Medical And Health 29 Insurance EXCLUSIONS An MHI policy also contains certain exclusions, just like other insurance policies.  You must be aware what these are and if you don’t understand them, ask your agent or insurance company. Some common exclusions are the following: Pre-existing conditions Conditions and illnesses experienced by you prior to applying for the policy. These conditions and illnesses would be excluded from coverage by your insurance company. You should check with your insurance company regarding the details of pre-existing conditions for the policy that you intend to buy. Qualifying/waiting period You will not be eligible for any claim arising from any medical or physical conditions within the first 30 days of the cover, except for accidental injuries.  Medical Card 30  Medical cards and medical insurances are necessary because all services cannot be offered by a government hospital.  Possession of a medical card will be able to give us more choices.  https://piam.org.my/medical-and- health-insurance/  Example of Medical Insurance by Prudential 31  Cont..Example of Medical Insurance by Prudential 32 Personal Accident Insurance  Personal Accident insurance or PA insurance is an annual policy which provides compensation in the event of injuries, disability or death caused solely by violent, accidental, external and visible events.  It is different from life insurance and medical & health insurance. Personal Accident Insurance COVERAGE The type of coverage that is normally provided under PA policy include:  accidental death  permanent disablement  medical expenses  hospitalization benefits  funeral expenses  weekly indemnity  (Indemnity is a comprehensive form of insurance compensation for damages or loss).  repatriation benefits  (This means that if you pass away due to an accident that happens outside of the city you live in, your mortal remains will be transported back to where you lived (at the cost of the insurer). Personal Accident Insurance EXCLUSION The major exclusions under this policy include the following (list is not exhaustive and may vary between insurers):-  War, terrorism, radiation or contamination by radioactivity  Suicide or self-inflicted injury, pre-existing physical defect or infirmity, AIDS, pregnancy  Professional or hazardous sports, aerial activities, underwater activities requiring breathing apparatus  Motorcycling, member of armed forces, rescue services, police forces, aircraft crew  Fire/House Owner/ 36 Householder Insurance  This insurance protects your building and/or contents.  There are three main types of policies which you can buy to protect your home :-  BASIC FIRE POLICY  HOUSEOWNER POLICY  HOUSEHOLDER POLICY https://piam.org.my/fire-house-owner-house-holder- insurance/  Basic Fire Policy 37  This policy covers your building and/or contents from loss or damage caused by fire and lightning.  The coverage could also be extended to include special perils e.g. storm and tempest, flood, earthquake etc.  The premium rates, wordings, coverage, terms and conditions including clauses and endorsements of a standard fire tariff policy are subject to the Revised Fire Tariff issued by PIAM.  However under Bank Negara Malaysia’s tariff liberalization framework, insurers are also allowed to introduce non tariff fire insurance products with variations in coverage, terms and conditions.  Policyholders are advised to refer related enquiries to their agents or insurers.  House Owner Policy 38  This policy provides additional coverage compared to the basic fire policy for residential properties i.e. private dwellings, condominiums, apartments or flats.  Insured Value  You must make sure that your property is adequately insured at all times, taking into account the renovations and enhancements made to your property.  The sum insured should cover the cost of rebuilding your property in the event of loss/damage.  If your property is under financing, you should make sure that your financier has taken adequate coverage.  Usually, the coverage arranged by the financier will be for the amount of loan taken.  You may, therefore, want to take up a separate insurance cover to extend the coverage taken by your financier.  Householder Policy 39  This is a policy to cover your household contents and includes coverage for fatal injury to you as the insured.  Basis of compensation  You should decide on the basis of compensation of your householder policy, whether it is on reinstatement or replacement value.  You will be compensated with the value of a brand new item under reinstatement basis but on the depreciated value of item lost under replacement basis.  House Owner and Householder 40 Policy POLICY COVERAGE The House owner and Householder policy provide cover for loss or damage to your building and/or contents caused by any of the following:-  Fire, lightning, thunderbolt, subterranean fire  Explosion  Aircraft and other aerial devices and/or articles dropped therefrom  Impact by any road vehicles or any animals not belonging to or under the control of the insured or any of his family  Bursting or overflowing of water tanks apparatus or pipes  Theft but only if accompanied by actual forcible and violent breaking into or out of a building or any attempt threat  Hurricane, cyclone, typhoon, windstorm  Earthquake, volcanic eruption  Flood but excluding loss or damage caused by subsidence and landslip EXCLUSIONS House owner policy does not cover loss or damage due to subsidence, landslip, riot, strike and malicious damage. However, you can cover these exclusions with payment of additional premiums. Extensions are also available to cover loss of rent and liability to third parties for accidents in your house. Householder policy does not cover theft claim if there is no evidence of forced and violent entry or exit. Motor Insurance  One of the largest insurance sector and coverage is Motor Insurance. This is due to the fact that Motor Insurance is mandatory for all vehicles using Malaysian public roads under the Road Transport Act 1987.  TYPES OF MOTOR INSURANCE COVER  When you buy a motor vehicle, you need to buy a motor insurance policy for use of the vehicle on the road. There are, however, many types of motor insurance policies available. The common types are:-  Act cover  Third Party cover  Third Party, Fire and Theft cover  Comprehensive cover  https://piam.org.my/motor-insurance/ Motor Insurance  Act cover  This is the minimum cover corresponding to the requirements of the Road Transport Act 1987. The cover required is in respect of legal liability for death or bodily injury to third party (excluding passengers). This Policy is hardly ever written by Insurers.  Third Party cover  This policy insures you against claims for bodily injuries or deaths caused to other persons (known as the third party), as well as loss or damage to third party property caused by your vehicle.  Third Party, Fire and Theft cover  This policy provides insurance against claims for third party bodily injury and death, third party property loss or damage, and loss or damage to your own vehicle due to accidental fire or theft.  Comprehensive cover  This policy provides the widest coverage, i.e. third party bodily injury and death, third party property loss or damage and loss or damage to your own vehicle due to accidental fire, theft or an accident.  Travel Insurance  The travel insurance policy covers accidents to the Insured and losses arising from a journey whether by air, sea or land. COVERAGE  Death and permanent disablement  You are normally covered for death and total permanent disablement for a period within 365 days after the occurrence of the accident. The compensation will be paid according to a scale of benefits and may differ from one insurance company to another.  Loss of luggage  This covers accidental loss or damage to your baggage, clothing, personal effects, and even money, caused by the carrier.  Loss of passport and money  You will be reimbursed for additional hotel charges, travel and other expenses incurred in the country you visited, while obtaining the replacement of a lost passport. Such loss must be reported to the police within 24 hours.  Travel Insurance  Hospitalization and medical expenses  Coverage for hospitalization, hospital or surgical expenses, outpatient medical expenses, as well as daily allowances up to a maximum number of days, should you be hospitalized for more than 24 hours.  Repatriation  In the event of accidental death of the insured, the insurer will reimburse the insured’s legal representative for the cost of returning the remains home.  Curtailment  You will be reimbursed for expenses incurred due to loss of travel or accommodation expenses paid due to cancellation or curtailment of the journey.  Hijacking  The insurer may make daily payments up to a specified maximum number of days, if your journey is interrupted for more than 12 hours due to an act of hijack.  Travel Insurance EXCLUSIONS Losses caused by certain events are excluded from the cover. Some common exclusions include:  War risks  Suicide and insanity  AIDS  Provoke murder or assault  Childbirth or miscarriage  Hazardous sports  Baggage delay and loss of baggage and personal effects due to seizure or destruction under quarantine or custom regulation.  https://piam.org.my/travel-insurance/  TAKAFUL  Takaful is an Islamic insurance concept which is based on Islamic banking transactions (muammalat) by observing the rules and regulations of Islamic law.  Takaful is perceived as cooperative or mutual insurance, where members contribute (tabarru’) a certain sum of money to a common pool. Principles of Takaful  Policyholders cooperate among themselves for their common good.  Every policyholder pays his subscription to help those that need assistance.  Losses are divided and liabilities spread according to the community pooling system.  Uncertainty is eliminated in respect of subscription and compensation. Concept of Takaful  Takaful Act 1984, Section 2 defines takaful as: ‘A scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aids and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose’  Basic aim is to provide mutual financial aid to participants Benefits of Takaful  Provide peace of mind to individuals as compensation and/or outstanding liabilities will be covered upon untimely death or total disability  Security of inheriting properties by the dependents or heirs  Free of liability by the guarantor on any outstanding credit facility or financing/loan  Entitlement to share profit or surplus of operations based on profit sharing principle of al-mudharabah  TAKAFUL Vs. CONVENTIONAL INSURANCE 50  Resolution of Scholars “ Muzakarah Jawatankuasa Fatwa Majlis Kebangsaan Bagi Hal Ehwal Ugama Islam Malaysia (MJFK) telah pun memutuskan hukum berkaitan dengannya dalam beberapa siri persidangan yang membahaskan status insurans konvensional. Secara umumnya semua jenis insurans konvensional sama ada insurans nyawa, insurans am serta memperomosikannya juga adalah haram” “Life insurance transacted by present-day life insurance companies is a transaction containing the elements of al- Gharar, al-Maisir and al-Riba and as a consequence its contract is void; therefore HARAM” http://e-muamalat.islam.gov.my/en/bahan-ilmiah/artikel/148- menyertai-polisi-insurans-konvensional-halal-atau-haram Resolution of Scholars Conventional insurance is strictly not allowed for Muslims as agreed upon by most contemporary scholars because it contains the following elements:  Al-Gharar (Uncertainty)  Al-Maisir (Gambling)  Riba (Interest) Takaful Products  Family Products  General Products  https://www.takaful-malaysia.com.my/products/ family/Pages/myCICover.aspx  https://www.malaysiantakaful.com.my/  https://www.prubsn.com.my/en/  USEFUL INFORMATION WHEN BUYING AN 54 INSURANCE POLICY  Be sure to buy from a company through an authorised agent  Shop around for rates  Understand the scope of cover, terms and conditions of the policy  Avoid unwanted additional coverage  Make sure the life policy recommended is right for us