[SPONSORED] Investment-Linked Products, As Explained By the CEO of Life Insurance Association of Malaysia
As part of an outreach campaign, members of the financial media – including personal finance bloggers like yours truly – were invited to the office of Life Insurance Association Malaysia and treated to a first-hand presentation of the latest update within the investment-linked products industry.
Even the CEO of Life Insurance Association of Malaysia (or LIAM for short), Mark O’Dell attended the meeting. He’s like the top boss in the insurance industry. His background is very, very impressive. Happy to report he was approachable in person.
Let me share with you how LIAM explains investment-linked products. It’s quite clever.
Investment-Linked Products, explained using Nasi Lemak
This section explains investment-linked products, or ILPs for short, using the nasi lemak analogy. Yes, that nasi lemak.
Imagine the most basic ILP like a basic pack of nasi lemak. You get coconut rice + sambal. Protection (life insurance) + investment. Basic.
Now imagine the comprehensive ILP like the nasi lemak with lots of extras. You get coconut rice + sambal + the fried chicken, the rendang, the sunny-side up eggs, the sambal tempe, the sambal sotong, whatever. They cost more, but they make your nasi lemak way better.
Applying the same concept here, add-ons to your ILPs – called riders – gives you better protection for an additional cost. Depending on the provider, riders can be any of the following:
- Medical card
- Critical illness
- Personal accident
- Hospitalisation benefit
- Waiver benefit
- Income protection
There are two types of ILPs: conventional and takaful. You can pick either one. Both conventional and takaful ILPs serve the same purposes and objectives – protection + investment plan.
The only difference is Takaful ILPs are Syariah compliant, thus eliminating the elements of Maisir (gambling), Riba’ (interest) and Gharar (uncertainty).
ILP – the investment part
The protection part of ILP is easy to understand. In the most basic ‘nasi lemak’-type of plan, you get life insurance. This type of insurance is particularly important for main breadwinners who have dependents who rely financially on them.
Let’s talk about the investment part of ILPs. How it works is the monthly premium/contribution goes towards an investment fund. The idea is you’ll get your investment money back at the end of the term, while being protected for the whole duration. It’s common for the term to be a few decades long.
About those investment funds. Every Insurance provider/Takaful operator offers different funds. Takaful ILPs will offer Syariah-compliant investment funds. It’s important to know that the funds’ values go up and down like other investments.
The majority of policyholders get their ILPs from an insurance / Takaful agent. Their role, aside from helping you select which Insurance/Takaful is most suitable, is to advise you during the investment fund selection process.
Mark O’Dell mentioned how sometimes people get surprised that the investment fund they selected for their ILP didn’t perform as well as they hoped. That’s because they may be unaware that their fund’s performance can go up or down over the years.
Policyholders should be aware of this fact as the poor performance of your investment fund could affect your fund value in your policy. Other factors that reduce your fund value are:
- not paying premiums/contributions on time,
- making partial withdrawals from the fund, and
- choosing not to increase premiums/contributions when your protection cover has been increased.
The reduction of your fund could lead to your policy/certificate being unsustainable. To maintain your policy’s sustainability, you can either reduce your protection cover or increase your premiums/contributions.
I was told that insurance premiums and Takaful contributions don’t usually drastically increase in price. If it does, the most common reason is due to policyholder/ certificate holder also taking a medical rider with their ILP, therefore the cost of medical rider premiums/contributions increases due to
- medical inflation, and
- increase in medical claims.
New Development for Investment-Linked Products in 2019: Sustainability report
BNM came up with a new rule that came into effect on 1 July 2019. Basically, insurers are now mandated to give sustainability reports to policyholders/certificate holder.
They need to tell you, at least once a year and through their marketing channels, in plain English (not legalese), how your investments in ILPs are doing, if they are still on track, and what you can do if they’re not.
If you are an ILP policyholder/certificate holder, look out for the information from your Insurance/Takaful providers. It’ll be very useful, something to regularly monitor.
Speaking of monitoring, I asked a burning question of mine –
Why do insurance/Takaful products expire? Are newer products better?
I own an insurance/ Takaful product that is no longer offered by the insurance provider/Takaful operator, so I’ve been very curious about the reason why.
According to Mark O’Dell, new products enter the market because the insurance/Takaful landscape evolves based on consumer demand.
For example, consumers have shown a preference for shorter-term payment period and a higher sum assured policies/certificates, so those are introduced in the market.
This naturally brought a follow-up question: are newer insurance policies/Takaful certificates better, then?
Not necessarily, said Mark. If you’re thinking of terminating your ILP to a newer product, you need to consider:
- The premium/The Contribution – Your protection begins immediately upon paying your premium, but your investment won’t have time to grow if you terminate it early. Also remember that you may have ‘aged up’ and likely have to pay a higher monthly premium/contribution if you enrol in a new plan.
- Its contestability period – If you start a new policy/certificate, the contestability period starts all over again. Just so you know, the life insurance company/Takaful operator cannot dispute the validity of a life policy/Takaful certificate after it has been in force for 2 years. If the insurance company/Takaful operator refuses to pay, it must prove that the policy/ certificate was obtained through fraud.
- The coverage – What you want in the newer products may be covered under your existing policy/ certificate anyway. If not, you can actually contact your insurance company/Takaful operator and request them to make the changes you want, at a lower cost (I didn’t know this was possible, cool to know)
Last words
Thank you LIAM (Life Insurance Association of Malaysia) and MTA (Malaysia Takaful Association) for engaging with Ringgit Oh Ringgit for ILP education.
Just so you know, this article is a purely educational piece – LIAM and MTA don’t sell investment-linked products themselves. The bodies are set up to achieve the following mission and vision:
For more information, please visit the following websites:
LIAM : https://www.liam.org.my
MTA : http://www.malaysiantakaful.com.my/
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Hey Suraya! I am Zach, very nervously and excited at the same time to send my greetings to you.
I started following your posts since a random search on braces costs led me to your site. Haha.
Anyway, i know you wouldn’t want to entertain any product selling in here, so no worries. I won’t do that! Hahaha.
In regards to your insurance post though, i really want to share some ilmu in light to the critical illness rider in any medical policy. No obligations or selling. Just genuine sharing! (Takut kena marah hahahahaha that’s why keep assuring)
When you are looking at the rider, do know that when you subscribe to the plan, it is very important to know that you are to be covered from early stage to advanced stage.
Most of the time, clients that i’ve met are not aware of this coverage range, but it is their financial rights to know. Across all the brands in Malaysia, the base number of critical illness is 36, means there’s 36 critical illness recognized. And when there are brands that promote more numbers; i.e 43 CI, 72 CI, 110 CI and etc, these numbers are based of the 36 CI, and the additional numbers are the number of events that are covered. The events are what we know as the stages of the condition. For example, a cancer can be classed into early, intermediate and advanced stage, and each stage has a condition which are normally recognized as part of the main illness. Early stage cancer is a carcinoma in situ for example. So each condition adds to the numbers given by the brand. Dalam kata lain, cabang2 from the main illness.
So their agents would usually tell them, yes you are covered for the critical illness, but some agents would not tell you what stages are you covered for unless you actually ask about it, which most malaysians does not because they don’t know! Even I didn’t know previously 😅
And most of the policies i’ve reviewed, their coverage is only for advanced stage CI. Now, if Mr. A is diagnosed by a CI, and it happened to be an early stage CI, he could not claim his sum insured for CI. So dah bayar tiap bulan to actually use this benefit, but sebab conditions of the contract and dia x check the policy.
Its important to find out the sum insured, and with the ever inflating medical costs, please consider to get at least rm100k and above. Its a one time payment so if its low, then it might be exhausted early then to repurchase the rider will depend on the health condition at that time of repurchasing. And as it has been used, then the CI earlier would not be covered. Its also important to find out, will you be covered from early stage to advanced stage. If you are covered from early stage, then of course the number of the CI based of the 36 akan jadi banyak. The more the better la jugak kan.
Sharing for your comparison, Axa Affin has a critical illness rider called 110 CI Assure. This covers from early stage to advanced stage of the CI. The payout differs on every stage. For example a RM100k sum insured, early stage payout 30% of the sum insured upon diagnosis (Rm30k), 60% for intermediate stage (rm60k) and 100% for advanced stage (rm100k).
Do know that CI rider is an income protection in a sense. Why do i say so? For example an employed person diagnosed with cancer, the doctor would recommend that the person to rest to enhance recovery rate at home and usually the doctor would recommend taking 6-9 months off work to focus. As stress and recovery doesn’t go together. The company may be able to give a 3 months medical leave, but what happens on the 4th month onwards? The company could offer unpaid leaves, but that only means the person dah xda income for daily necessities. This is where the CI payout can be used, to replace the income for the next 3-6 months. And usually we would advise if there are still balance left after going back to work, to invest the money because at the end of the day its his money.
Sama macam kita beli any gadgets we want or need, kita akan check the specs dulu. The same diligence should be applied to when buying a medical policy jugak.
Before this, i thought just paying cheap premiums and leave it aside is enough. But after entering this industry for the past 3 months, i see how low I prioritize my medical costs planning both for myself and my family and with the knowledge i have now, its very worrying. Now that i know, as with other things in life, i want the best for my wife and daughter and this include medical plans. Xkan la i nak keluar duit lebih dari poket sendiri every time masuk hospital padahal bayar setiap bulan.
Thank you so much for the insightful comment, Zachary! Super appreciate your helpful insight into Critical Illness insurance/rider.