There is a fine line between hedging your risk or gambling with the hedging instruments. Insurance is for us to hedge against our financial loss upon the occurrence of an event. It is not meant to be used so that we are financially better after the event and the subsequent insurance claim.

When an event strikes, if our financial loss is covered by insurance, this is called proper hedging of risk. However, if not only our loss is covered but we are financially better off from our insurance claims after the occurrence of an event, we are gambling.

If we buy insurance more than what we need, the premium that we pay for just cover our loss is for the purpose of hedging, the extra premium we pay in order to have extra insurance claims is for gambling.

If we buy an insurance plan when we will be financially better off after the strike of an event, the extra premium we pay is just like the money that gamblers pay to 4D, TOTO, Big Sweep, etc. There is no different.

In lottery, you pay the bookie your bet. When the event strikes (you strike lottery) you are financially better. In buying insurance, you pay extra premium (more than actually required to just cover loss) to the insurance company. When the event strikes (though unfavorable), you cover your financial loss (hedging) and have extra money (gambling).

We were usually told (by agents), "Isn't it better if you have extra money after these things happened". Yeah, sure. It is also how gamblers convince themselves, "Isn't it better if I have extra RM3 million if my Big Sweep ticket strike."

This is particularly true in the education fund insurance that you pay for your children future education. Education fund insurance covers child's life. STOP! Why cover child life? Your child has not earned income yet! What financial loss that you are hedging against in the event of your child's death? (Touch wood.) Funeral expenses? It can be minimised, therefore it is not really an issue. So, a family becomes financially better (from the child's life insurance claim) after the death of their child.

This is a unpleasant example, but it illustrates well on the gambling part of insurance. When we pay what we don't need, when we were convinced by insurance agents buying more than covering our actual FINANCIAL loss (not emotional loss, etc.), we are gambling with insurance. No wonder we always feel insurance is expensive.

Critical illness cover is one the most important elements of personal insurance. Sometime, it is even more important than the death coverage. For instance, even if you don't have dependent, it is still important to have coverage on permanent disablement and critical illness. Of course, it would be good to have a small amount of death coverage that can cover your funeral expenses.

Life insurance companies understand this, therefore life insurance is designed in a way that we CANNOT buy critical illness separately from death and permanent disablement coverage. We are FORCE to buy death coverage, even if we want to buy critical illness coverage only.

In Malaysia, there is one insurance company offers critical illness cover without attaching it to life insurance: American Home Assurance. It is a general insurance company.

I made a quick check with the company.
Coverage: RM50,000 critical illness for male non smoker
Annual premium: RM84 (Age: 18-35), RM177 (Age: 36-45), RM514 (Age: 46-55), RM1,136 (Age: 56-60), RM1,783 (Age: 61-65)

The plan is worthwhile if you are below 46 years old. For instance, the annual premium for a 25-year-old is RM84 only. By splitting out the critical illness coverage from your life insurance, you can get a term life insurance with reducing coverage. It can cut your entire insurance premium further by half.

You can find American Home Assurance Co.'s telephone number at General Insurance Association of Malaysia's web site (List of Members page, left column third row), which is 2058 5000.

At this point you probably realised that it is your personal lifestyle profile that determine whether you can go for such "cheaper" insurance by not buying unnecessary benefits.

This means if you are the type that is careless with money, have difficulties to save money, don't really care about investing, etc. Such benefits become important to you and it is probably for your own good that you should have at least one or two such investment-linked products inside your beg.

But if you are careful with money, have a good saving and investing plan, etc. You can afford not to pay for such benefits. Keep the change to improve your coverage or increase your investment...

Therefore, am I against insurance products like investment-linked? Not really. It is useful for certain people.


Part 1: Reduce your life insurance premium
Part 2: Reduce your life insurance premium (2)
Part 3: Reduce your life insurance premium (3)

Other web resources

Read what the expert says about life insurance, Term or Whole Life?

You probably would quickly point out that I did not actually cut down the life insurance price. I did not get a real cheap deal or something value for money. I merely gave up those life insurance benefits, those real good benefits, in order to get a lower price. I was merely NOT buying some elements of the life insurance.

You spot on.

I did not buy those elements that are good, that I WANT. I only buy what I NEED.

They are many benefits that I want from an life insurance product. I want my family to have a wind fall from my life insurance like hitting a lottery upon my death and not just an amount they could get by sufficiently without me. Should I have some critical illness at the age of 65, I want to claim RM500,000 from my life insurance coverage (not my cash value or investment in the life insurance). This is despite the fact that I would have earned less from my labour work if I am healthy. My financial position is actually better off upon this unfavorable event. You see, these are insurance WANTS. You pay a small sum and hope for windfall upon unfavorable events. You are not just covering possible actual loss of income but hoping for more money which you would not have earned if you are healthy. You are not just covering your risks, you are betting for odds.

To have level coverage through out the term of the life insurance, knowing that I will cumulate financial assets, is a WANT.

To put in more money in investment-linked that gives me unit trust return, no point. I am investing properly outside an life insurance product. To me, investment-linked insurance is a WANT.

But crisis coverage for critical illness is a NEED to me. I am forced to take the terms laid by insurance company. I am forced to paid a higher premium for level coverage, instead of reducing coverage, in order for me to buy critical illness.

The key idea is that, just don'’t buy what you don'’t need and you will make the hefty savings.

Pause and think. Taking out investment element and level coverage, insurance premium now seems extremely cheap. Why RM50,000 coverage only? It is hardly enough as a protection if you have dependents. By cutting down the unnecessary element in a life insurance product, you are now afford to ensure sufficient coverage.

Part 1: Reduce your life insurance premium
Part 2: Reduce your life insurance premium (2)
Part 3: Reduce your life insurance premium (3)


Other web resources

Read what the expert says about life insurance, Term or Whole Life?

When we buy investment linked insurance products we are not buying insurance alone. We are buying insurance and unit trust. We are not just paying the premium for the insurance protection of loss of income; we are paying for unit trust investment too. In fact, if you look at the section of Investment Linked prices in newspaper that is usually below unit trust prices, you can actually call such products an Insurance Linked Unit Trust. :-)

In investment linked products, life insurance and unit trust are bundled into one financial package. You may argue that unit trust investment is, too, a form of insurance to protect against loss of income. This is mere twist of words. The fact is that insurance gives you protection that you have not earned, i.e. you pay RM400 now and you will get to claim RM50,000 upon incident. For unit trust investment you get what you have paid for and the return it gives, i.e. you pay RM400 now and you will get RM400 plus investment's return back.

This is the 2nd key concept you must know in managing risks through insurance. Insurance protection covers what you have not earned. Investment pay you what you have earned.

Functionally, therefore, insurance and investment are different. You don’t call investment as insurance. The word investment itself spells clearly that it will give you future income. It is not “a form of insurance” that gives you future income.

To distinctively differentiating the mechanism between the two is critical in managing risks. Insurance addresses your current needs for financial protection. It is about NOW, the imminent and pressing requirements to be protected financially NOW. While investment can only provides for your FUTURE financial needs when the investment grows big enough.