Insurance Information

General Knowledge on Life Insurance

In buying a life insurance policy, what must be taken into consideration and how does it related to  managing your investments, let me give you a brief explanation on this.

First of all, before making a decision to buy an insurance policy, you must consider how much money you will have left each month after your expenses.  Simply put, it’s the extras that you can put into savings each month.

Next will be to manage this extra money you can save to give you the maximum benefit.  Many of you will manage this in a ways so that you can get a maximum return on your investments, or, try and maintain your wealth in the most efficient way possible.

But how one manages his/her investments is up to the different levels of risks that one can take.  For instance, those that can take on higher risks may invest in high-risk assets for high gains (although this is not always certain);  medium-risk assets for medium returns (quite possible);  low-risk assets for surer returns (this has more certainty).  Low-risk assets with surer returns (which I won’t go into detail as most followers of banking and financial books and magazines will already know very well), such as 50%: 30%: 20%, or for those who can take less risk may opt for the formula 20%: 30%: 50%.   Again, one’s  state of health must be taken into consideration , i.e.  those who are not very healthy may need to go for low-risk assets but with high liquidity.  The reason for this is if they need funds for medical attention then they can do so within a short time.

But many of us may overlook that we do get ill now and then.  This will of course affect our savings and in many cases, may wipe out the entire savings altogether.  There is yet another financial product that pays a medical compensation without affecting our investment plans, or having the least affect on our investments.  Some  say  this is a clever way of maintaining and managing wealth.  We call this product “Health Insurance” which is a part of life insurance and also gives coverage for physical disabilities.  Of course, no one expects to become a disabled person, but how can we be sure of this.  So being well prepared for uncertainties  is a cautious step for every good investor.

What is Life Insurance?

Life insurance is a financial tool to help reduce the financial burden should the unexpected happen, such as getting a medical compensation for being hospitalized from accidents.  Treatments for accidents can be very costly and this could affect the family’s financial situation, in some cases, to the point of being critical.  Apart from high medical costs, the injured person could be the family’s bread winner  and the accident could cause him/her to become  incapacitated or unable to continue working in the regular occupation.  Therefore, having a financial tool as a safety net will be a cautious step to take.

Life insurance is made up of  2 major coverage

  1. The main or the basic coverage, and
  2. Additional coverage (also called a ‘supplementary coverage’, or  ‘rider’) such as  coverage for medical treatments; total permanent disability (or becoming an invalid); daily compensation; critical illness coverage, etc.  You may apply for any of these additional coverage after you have bought the basic insurance plan.

There are  2 types of main (or basic) coverage

  1. Life Coverage only, and
  2. Life Coverage with a Savings element

Life Coverage’ can again be broken into 2 types

  1. Accidental Death coverage,  which  runs for one year.  Some insurance companies may also add a medical treatment component to it (but as it is part of the accidental coverage, the medical treatment must be for accidents only).   Some insurers may also offer accidental coverage package for the whole family, like Prudential’s “PRU Family PA”, which gives coverage to both parents at a discount and extends a  free protection to the children.
  2. Death from all causes, which is gives a coverage of more than 1 year.   This can be further broken into 2 types
    • Term:    which covers loss of life for a specific period and at the end of the period, the coverage ceases (just like auto insurance, the coverage terminates at a specified time with no cash-back).  However, if death occurs, the insurer will pay out a large sum, usually it is many times the premiums paid.  Customers may also choose the period of coverage, i.e. 10, 15 or 20 years.
    • Whole Life:  which works the same way as the Term coverage but for a longer period.   For example, some companies may provide a coverage  till the insured is aged 90 (like, “PRU Whole Life”), or up to age 99 which is like giving coverage throughout a lifetime. Many of you may wonder how long the premium payments will be.  This is up to each company, some may have a shorter payment period, like 5 years, or may give a choice of payment for 10 or 15 years.

This type of product is suitable for those who want to reduce the financial strains for their loved ones should they die.

Life Coverage and Savings:  again, this can be further broken into 2 types

  1. A plan that answers specifically to the Insured, of which there are  2 tyes
    • An insurance plan focusing on savings and returns on investment.  If you consider the portions of investment as stated earlier, you will see that this type of product sits in the medium-return segment but it come with low-risk, e.g. “PRUextra cash” which gives a return of 3.09% - 3.76% p.a. while the bank’s 12-month fixed deposit (as on January 17, 2007) is around 4.0%.  The product also gives a life coverage, while some give a longer term savings plan, such as a 20-year savings plan (like, “PRUendowment").
    • An insurance plan for retirement (“PRUretirement”) which is another savings plan for the future so that you will not become a burden to your children as you grow old or when you retire.Apart from having some savings for your retirement, you will also have a life coverage throughout the term of the insurance policy, or period of coverage.
  2. Savings for your children or the ‘education plan’:  this type of product aims at saving for your child’s future education, i.e. savings toward a Bachelor’s Degree (“PRUscholar”) which pays a premium until your child reaches age 18 (equivalent to High School Certificate), after which the policy pays a sum each year from age 18 – 21 years (equivalent to year 1 – year 4 in college) with a final reward pay-out at graduation, or it could be considered a fund for furthering education towards a Master’s Degree, or a fund to start up after completing a Bachelor’s Degree.    The product comes with a life coverage as well as an option for the payor of premiums to buy an additional coverage to safeguard against unpredictable circumstances.  This will give some assurance that the savings plan will still be in place even if the unfortunate should happen to the payor.Prudential has other ‘education’ plans, such as “Sai Sam Phan 4 (PRUchild 4)”, “Sai Sam Phan 5 (PRUchild 5)” which you may look up for details in the attached table.

Many of you may have experienced the effects of the changing economic environment, e.g. the ups and downs of the interest rates;  increase in gasoline price; bird flu epidemic; exports problems;  inflation, etc.,  all of which may have affected your investment strategies at one time or the other and to which you had  to make  adjustments in your investment strategies to keep up with the situation of those moments which were not an easy thing to do, especially to those who may not be able to adjust their investment plans as fast as the changing environment – as it  could cause losses or the inablilty to liquidate the funds as needed in time.  However,  your insurance protection plan will give you the coverage as indicated, in whatever economic situations.

Some insurance plans may incorporate several types of coverage together, such as “PRUcash 3” which has a life coverage and a savings element in the plan. The customer may also choose to have additional coverage for Total Permanent Disability and Critical Illness so that he/she can be fully covered.

An important point in choosing a plan is being clear on your savings objectives. The sales agent will ask your requirements – and all good agents will take the time to listen and understand what the customer wants – and translate these into the right products that suit their needs as well as help manage the amount of premiums the customers can afford. What you must always remember is, each time you make a payment through the agent, you must ask for the temporary receipt as a confirmation of your coverage. The insurance company will send you a written notice to inform whether your application has been approved or not. If approved, the company will send you the life insurance policy along with a receipt via your agent.

Another trick you should know is that, after getting your life insurance policy from your agent, please check that everything is in order and that you are getting the coverage that you bought (i.e., the coverage that you had explained you wanted to your agent), the correct amounts, etc. If you find any discrepancies, please inform the company to have these corrected within 15 days.

Another important benefit that the insured will get, for holders of 10-year-up life insurance policy, is the tax privilege, of which the insured may get up to 100,000 Baht in income tax deduction (for Personal Income Tax 90 and Personal Income Tax 91). Many of you may wonder how this works. Let me give you an example: A customer buys “PRUextra cash 5” for which he pays 50,000 Baht premium a year. Now, his personal income tax base is 20%. If he uses the insurance premium receipt to apply for a tax deduction, he will get a 20% deduction – or 10,000 Baht – off his annual personal income tax (or 20% of the premiums paid). You can see that this customer is getting a 20% benefit from the 50,000 Baht which he paid. In the present situation, it is quite difficult to be getting a 20% return on your investment plus a coverage. In addition, the life insurance policy also gives more than a 3% return.

So by doing a study of life insurance products you will find that it opens another option for your investment and is a tool to reduce the financial burden and problems that may arise due to unexpected circumstances – and all of this, simply by paying a small amount of premiums.

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