Insurance 101 – Understanding Malaysian Insurance
The mere mention of the word insurance is enough to clear a room full of crowd. Try it if you don’t believe me. Start talking about insurance at the next party you are invited to. You may not exactly make everyone leave though, but I bet you can make yourself the least popular person there.
Many among us who do own a policy or two, view insurance as the necessary evil in our lives. We bought these policies knowing that they are a necessity without fully understanding why.
In our last article, we touched on a few reasons why we hate insurance so much and what we could do to overcome them. Now we will begin our journey in educating ourselves about insurance, its importance, and why we should consider having them. We will start with the basics of insurance.
Insurance is a practice or arrangement by which a company or government agency provides a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a premium.
In Malaysia, insurers offer another option which is Takaful. Takaful is an insurance concept based on the Shariah laws whereby a group of participants mutually agree among themselves to guarantee each other against a defined loss or damage that may inflict upon any of them by contributing as tabarru’ or donation in the takaful funds. It emphasizes unity and co-operation among participants.
What insurance means in layman’s terms
What insurance basically means is that, you as the policy owner pays the insurance company money (called the premium). Usually by monthly, quarterly, half-yearly or annually, for a specified period of time. In return, the insurance company, undertakes to protect you, by compensating you for: damage or loss of what you have insured. This can be your house, car or yourself for illnesses or death. Insurance helps you manage your risk. That is why it is also called a risk management system, where the risk is transferred to another party. There are many types of insurance plans being offered, in this article, we will be looking at the three most common and relevant to all of us.
The 3 most common types of Malaysian insurance are:
- Medical and Health
1. Medical and Health Insurance
This is the most basic insurance that covers you in case of illness or injury due to an accident or illness. It covers all medical expenses and if necessary, hospitalisation cost which can be quite overwhelming if you do not have the fund readily available. This is the most critical insurance that everyone needs. If you still live with your parents and under their care, they may have a policy which covers you. However if you are an independent adult, you may want to make sure that you have medical and health insurance. There are numerous types of medical and health insurance covers offered in Malaysia, here are a few:
Medical Card or Hospitalisation and Surgery Cover
This insurance provides medical coverage for any expenses incurred during hospitalisation due to illness, accident and injury. The medical bill is sent directly to the insurance company saving you the hassle pay first and claim back from the insurance company.
Critical Illness plan
One cash amount (also called lump sum) is paid to you (the insured) upon diagnosis of any critical illness (also known as dread diseases). Some of the illnesses are: Heart attack, cancer, stroke, paralysis, blindness, Alzheimer, Parkinson’s etc.
Hospital Income Insurance
This insurance pays out an agreed amount of money to you when you are hospitalized. This is especially important for people, who need cash everyday to support their family.
2. General Insurance
General insurance protects the things that are valuable to us, such as our homes, our cars and other possessions. Most of us get general insurance with the purchase of our first car or motorcycle. It is mandatory in Malaysia to buy insurance for the vehicle that you own. Also, if you have bought a house with a loan from the bank, the bank will require you to purchase a house owner or fire insurance. The most popular types of general insurance are:
Third Party Liability Motor Insurance or short TPL is mandatory in Malaysia. This is good, because if you drive your car or motorcycle and injure someone by accident, the insurance company will pay for you. You do not need to worry and the other party does not need to worry that you cannot pay, because the insurance company will take care of it. Third Party Liability insurance takes care of that. In addition, you can buy Theft, Fire or own damage protection that will protect the value of your car, in case any of the event happens. Most of the time, we buy comprehensive insurance for this, because even if the accident is our own fault, the insurance company will step in and pay for the repair cost. If you want to learn how to save on your motor insurance read our article 3 ways to save on motor insurance.
This insurance will protect you for risks such as travel cancellation, delays, medical emergencies, lost and delay of baggage, lost passport and many other travel related risks. Those events can happen and if you travel frequently you want to consider buying a travel insurance, because it is more likely that it will happen to you.
This insurance pays a fixed amount of money if you suffer temporary, partial or permanent injury, disability or death due to an accident. Personal Accident insurance is similar to a life insurance policy, but the insured sum (pay out amount) is usually much lower.
3. Life Insurance
Life insurance is a policy that pays out a sum of money (sum insured) to the beneficiaries upon the death (or other circumstances such as critical illness or permanent disability) of the person insured. Usually, when you have covered the basics like health and motor insurance, you will want to consider purchasing life insurance. You should strongly consider life insurance when you start earning more than you spend and you have responsibilities such as spouse or kids. Check out our Quick Life Insurance Quiz to find out if life insurance is right for you. Here are some of the most common types of Life insurance plans.
Whole Life Insurance
This plan provides lifetime coverage of “Life Risks” for you. You make periodic cash payments, monthly or yearly, until a specific maturity date. Most of the time the maturity date will be the retirement age 55-65 or after a fixed time period of 10, 15, 20 years. What are the benefits? When the insured dies, the beneficiaries will receive a fixed amount of money as pay-out. This is helpful in case you have family to support or debt like a house loan to settle. This is the protection for “Life Risks”.
A Whole Life Insurance will also give you savings benefits. Which means that if you live until the maturity date, you will enjoy a pay out from the savings benefit. This amount can be quite large and is also the main reason, why a lot of people use it for retirement planning.
Term Life Insurance
Term Life Insurance also provide coverage for “Life Risks”. The insurance period can be similar to the Whole Life Insurance, but are usually shorter. The key difference is that there is no savings benefit in this type of policy. You only pay premium for the death part, which will pay out a big lump sump to the beneficiaries in your policy. If no death occurs. then there will be no pay out. Because of that, this insurance is much cheaper that Whole Life Insurance.
To fully comprehend the various types of insurance available is indeed a daunting endeavor. However, you do not need to know all of them by heart. Especially since terms and coverage vary according to policies and insurance companies that offer them.
Knowing the basics of insurance can help you better understand your needs. This will then help you in your search for the right policy. If you need more help in buying insurance, contact an insurance agent. You can find a list of insurance agents in our Insurance Directory. To help you find the right insurance agents for you, check out our article Choosing a good insurance agent.