Insurance is an essential aspect of financial planning. Think of insurance as a cushion. If tragedies or accidents occur, insurance acts as a financial cushion to protect what matters most to you – be it your loved ones, your assets, or your business.
Before the Covid-19 pandemic, insurance was considered a ‘nice-to-have’ instead of ‘must-have’. However, the pandemic shook up the general perception of insurance as people started to realise the importance of having a financial safety net to shoulder against life’s uncertainties.
Even so, many do not understand what insurance is, how it works and the types of insurance available.
What is insurance and how does it work?
In a nutshell, insurance is a contract (deemed as a policy), whereby policyholders receive financial protection against losses resulting from an unforeseen event.
Policyholders pay a fixed premium on a monthly, quarterly, semi-annually or annual basis to an insurance company which pools risks to hedge against potential losses. Financial planners recommend setting aside 6% of your monthly income for insurance.
How do I know which insurance to purchase?
Before you purchase an insurance policy, it is important to ask yourself:
- Your financial commitments: What is your debt situation? How would you manage your financial risks if you were to lose your job, or for your family manage if you were to pass on?
- Your dependents: If you were to lose your job or pass on, would your dependents be able to manage financially? How much would your dependents need to cover living costs?
- Your medical history: Is there a history of critical illness such as cancer or stroke in your family? Do you smoke?
- The nature of your job: Do you have a high-risk job, a physically demanding job or a job that requires frequent travelling?
- Your assets: Is your property insured against potential theft, fire, flooding, burst pipes or earthquake risks? Are you able to sustain losses or damages to your vehicle in the event of accidents, theft or fire?
Based on your answers above, you would have a clearer idea as to the types of insurance as well as the policy limit (sum insured) that you would require.
What are the types of insurance?
- Life Insurance or Takaful
People often confuse life insurance and health insurance. Life insurance is essential primarily if you have debt or a spouse/dependents relying on your income. Your life insurance company pays a lump sum benefit to your next of kin to serve as a financial relief in the event of your demise or total permanent disability.
Takaful is an Islamic financial product that is regulated through the Islamic Financial Services Act 2013 and is Shariah-compliant. Do note that it is not considered ‘Islamic insurance’, even though that’s what many seem to regard it as such. Unlike conventional life insurance, Takaful participants contribute or donate an amount to a tabarru fund, from which the mutual risk of losses is borne based on the Islamic principles of brotherhood.
- Health or Medical Insurance
If you are diagnosed with an illness, there are both direct and indirect costs involved. On top of direct costs such as your medical expenses, your illness may affect your ability to work, pay off debts or afford living expenses.
According to Aon’s 2023 Global Medical Trend Rates Report, medical inflation in Malaysia stands at 12% and is expected to rise. Medical insurance or commonly known as a medical card is a policy that reimburses your medical expenses in the event of illness, hospitalisation or surgery.
There are many medical cards in the market, with some starting from as low as RM5-10 per month. It is not mandatory but some employers include medical insurance as a fringe benefit which only covers up to a certain limit.
- Critical Illness Insurance
Based on your family and medical history, consider purchasing critical illness insurance on top of a medical card. A critical illness policy offers a lump sum payout as an income replacement if you are diagnosed with cancer, stroke, heart attack and so forth.
- Personal Accident Protection
If you are a frequent traveller or involved in a physically demanding job, personal accident insurance is ideal for you as it covers medical expenses incurred from an accident, travel inconveniences or sickness resulting from travelling.
- Property Insurance
After spending your hard-earned money on your home or property, the last thing you would want is to leave it unprotected from potential risks such as fire, theft, flood and natural disasters. Though property insurance is not compulsory in Malaysia, it is worth purchasing as it is not too costly.
- Motor Insurance
Car or motor insurance is mandated by the Road Transport Department (JPJ) Malaysia, as you will not be able to apply for road tax without having a policy. In case of an accident, fire or vehicle theft, a comprehensive motor insurance covers damages and losses associated with the third-party injury as well as you or your authorised drivers who are driving the vehicle.
Getting started with insurance may be an overwhelming process. Rest assured, it is not necessary to purchase all types of policies, only the ones you truly need.
A great way to start is with the essentials such as medical and life policies. Afterwards, you can schedule a regular policy review to assess your evolving protection needs.
By Mabel Yan
