When people hear the term “insurance policy”, a few things come to mind; silver-tongued insurance agents and “if you die” scenarios just to name a few. And yes, while these are some facts of life about these financial instruments, it’s hardly the only things you should know about them. This time around, we will explore the types of life insurance policies and how you may benefit from them in your portfolio.
What is an insurance policy?
Most of us have some kind experience with insurance at some point in life; the most common being the legally required car insurance, which for the majority, is only there to get our road tax approved and paid.
Basically, an insurance policy is a contract between you and the insurance company. This contract will spell out everything the company agrees to “cover” for. A coverage is the terms and conditions within the contract of the risks which the company is willing to pay for. An example condition is if you die, the company pays out x amount of money.
In order for the company to agree to cover you, your end of the bargain is to pay what’s called Premium. A premium in this context simply means the money you pay to the company in order for them to hold up their end of the bargain i.e. provide you the benefits of your policy.
Life Insurance companies in Brunei
Some companies who provide life insurance in Brunei are more well known than others. Regardless, they provide a similar service to one another with some differences in the terms, products and marketing. The companies that I know of in Brunei are:
- AIA
- Great Eastern
- TAIB Family Takaful
- Takaful Brunei Keluarga
- Tokio Marine
OK, OK, what kinds of policies are there and what do they do?
Fine, fine. In a nutshell, there are 5 key types of life insurance policies:
- Term insurance
- Whole-life (Traditional) insurance
- Endowment plan
- Investment-Linked Policy
- Annuity plan
Each one of them have key benefits and drawbacks so let’s have a look.
1. Term insurance
i. What is it?
A term insurance provides very high coverage over a certain period of time (e.g. 10 or 20 years) for an affordable amount of money. In fact, it’s the highest for any given budget! Meaning compared to the other types of policies, term will give you more coverage for your buck.
The drawback? Well, term policies have no cash value at all. So when the coverage period ends, you don’t get any money back. Additionally, if you want to renew the plan when the period ends, you’ll have to pay higher premiums, like significantly higher.
ii. Who is it good for?
“No cash back you say? Why should I even consider this then!?” Well, if you have a limited budget and/or your family cannot afford to lose you as a breadwinner, a term plan will be a good fit into your portfolio. Usually this plan is perfect for maintaining a certain standard of living in case the worst happens.
2. Whole-life (Traditional) insurance
i. What is it?
As the name suggests, this plan covers you for your whole life; sometimes literally until you move on to the rainbow bridge or some until something like 100 years of age.
Traditionally, people have been required to keep paying until they cash out or kick the bucket but there are products nowadays that offer the same coverage for a short payment term. Meaning you could pay for x years and still be covered until Ragnarök!
Additionally, these policies usually will accumulate some cash value over time so it doubles as a super long-term savings plan.
ii. Who is it good for?
This plan is good for people who want long term coverage and some savings. Whilst the coverage won’t be as high as a term plan (there’s no contest when it comes to coverage there), it’s usually pretty good considering the period of coverage. On top of that, you have the choice of terminating the policy and taking the accumulated cash.
3. Endowment plan
i. What is it?
Usually this is marketed as a “savings plan” and for good reason. The main point of this policy is to save at a rate that supposedly better than the banks. For this plan, coverage takes the back seat so unless you’re saving a butt tonne into it, your coverage won’t be huge.
The savings portion of this plan works a little bit like fixed deposits. I mean this in the sense that, if you withdraw early, you’ll get penalties which usually means you get less money. The penalty here is no joke so usually it’s best if you forget about it and get a nice little lump sum down the road.
ii. Who is it good for?
Endowment plans are good for people who find it harder to save or those who want to up their savings game. The latter refers to the fact that usually returns are projected at around 3% compared to bank rates of 0.15% to 1%.
That’s why these plans are usually marketed towards saving for your kid’s education or retirement (to a certain extent).
4. Investment-linked policy
i. What is it?
An investment-linked policy (ILP) is a plan which combines insurance with investment aspects of a unit trust. How it works is your payments are converted into points or units. These points are then used to pay for fees and charges and the rest would be invested by the company’s fund managers.
What do they invest in? That would depend on individual companies so do ask for the investment breakdown if you’re looking into this.
ii. Who is it good for?
I’ve heard many complaints about fees and charges of ILPs. Which is fair because why would you go for this when you can get better returns on the market yourself? Which begs the question: Are you? If yes, then this plan is likely not something for you.
ILPs are good for a number of things:
- You want to invest but can’t be bothered to do the research. I believe ILPs and Unit trusts came from people wanting easy solutions. And nothing is easier than giving money to someone else to invest for you! The drawback here is you do not have any control in what is invested so you do need to check once in a while.
- It helps you dollar cost average. Meaning some times the prices may be higher or lower but you put in a fixed amount of money anyway so that on average, your investment portfolio evens out in price.
- You automate the habit. Investing takes time and patience so while throwing your money in blindly is just as bad, having a good plan in place takes away the risk of forgetting to invest some months so that your nest egg grows more consistently.
5. Annuity Plan
i. What is it?
An annuity plan is basically a self-created pensions plan. The premium you pay to the company is invested and at your retirement age, the company pays out on a monthly basis to replace your employment income. There may be bonuses involved but that will differ between companies and policies.
ii. Who is it good for?
Basically anyone who wants to save for retirement! Not only do you automate this saving process, the monthly income is usually guaranteed by the contract.
A little reminder for policies
The insurance policy you can get today has been tweaked and modified to suit modern needs and situations. Don’t be surprised if you find out the one you bought 20 years ago feel a little obsolete.
That likely will be the case 20 years later for the current products on the market. But as of now, the ones we have are the best we can get. You can think of it similar to any other product on the market; they will need to get better sooner or later or the company would become irrelevant in our fast changing world.
Conclusion
Traditionally, an insurance policy is simply a means to manage the risk of someone kicking the bucket prematurely. Since then, it has evolved towards giving more benefits especially things as specialised as annuities.
Owning a policy or not, like investing, it’s best to review from time to time to see if it suits your needs and goals. That way you can make an informed decision to add on, modify or reduce.
