CHAPTER 5

LIFE INSURANCE

Mahdzan & Boey 2015

Learning Outcomes
Explain the basics of life insurance.
Distinguish the different types of life insurance.
Calculate the amount of life insurance to own.
List the general exclusions under life insurance
policies.

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1.0 Basics of life insurance
1.1 Definition
Upon the death or any other contingency dependent on
human life, company will pay a lump sum amount (the face
amount of the policy) which is guaranteed at inception of
the contract to the insured’s beneficiary(ies).

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 1.0 Basics of life insurance
1.2 Perils covered under Life Insurance
Types: death, disability and critical illnesses.
A basic life insurance policy only covers death of the Insured.
Disability and critical illness benefits are usually purchased as
riders.
A rider - supplementary benefits that are attached together
to a basic policy.
The cost of insurance (COI) or premiums- depend upon the
features of the rider that is offered by the insurance company
and the sum assured that is purchased for that rider by the
Insured.

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 1.0 Basics of life insurance
1) Death
 Basically covers premature death.
 Premature death: dying too soon
with outstanding liabilities and
financial commitments.
 Primary breadwinner: spouse who
has most of the earning capability
to support the household of
growing children and elderly
parents.

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 1.0 Basics of life insurance
2) Total and Permanent Disability (TPD)
 One is unable to perform the daily living activities and
never be expected to ever work again.
 A totally and permanently disabled person has to fulfill
the following conditions:
1. Total and irrecoverable loss of sight of BOTH eyes.
2. Severance of TWO (2) limbs at or above wrist or
ankle
3. Total and irrecoverable of loss of sight of ONE (1)
eye and loss by severance of ONE (1) limb at or
above the wrist or ankle.

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Visualisation of losses under TPD

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 1.0 Basics of life insurance
3) Critical illness
To cover an insured from loss of income upon the diagnosis one of the
36 debilitating critical illness.

AIA Malaysia was the first to cover 39 critical illnesses in July 2018.
Prudential Malaysia started to offer 43 critical illness cover in Jan 2019.

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 The basic 36 critical illnesses
 Alzheimer’s Disease /
Irreversible Organic
Degenerative Brain Disorders
 Angioplasty and Other Invasive
Treatments for Major Coronary
Artery Disease
 Bacterial Meningitis
 Benign Brain Tumor
 Blindness / Total Loss of Sight
 Brain Surgery
 Cancer
 Chronic Aplastic Anemia
 Coma
 Coronary Artery By-pass
Surgery
 Deafness / Total Loss of
Hearing
Table 1: Listing of 36 Critical Illness commonly covered in Malaysia
 Encephalitis
 End Stage Kidney
Failure
 End Stage Liver Failure
 End Stage Lung Disease
 Fulminant Viral Hepatitis
 Heart Attack
 Heart Valve Surgery
 HIV due to Blood
Transfusion
 Loss of Independent
Existence
 Loss of Speech
 Major Burns
 Major Head Trauma
 Major Organ / Bone
Marrow Transplant
 Medullary Cystic Disease
 Motor Neuron Disease
 Multiple Sclerosis
 Muscular Dystrophy
 Other Serious Coronary
Artery Disease
 Paralysis / Paraplegia
 Parkinson’s Disease
 Primary Pulmonary
Arterial Hypertension
 Severe Cardiomyopathy
 Stroke
 Surgery to Aorta
 Terminal Illness
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Additional critical illness cover
Occupationally Systemic Lupus
Acquired Human Erythematosus with
Full Blown AIDS
Immunodeficiency Severe Kidney
Virus (HIV) Infection Complications

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 1.0 Basics of life insurance
1.2 Identifying the Primary Breadwinner
 Single Adults
Many adults are single either by choice or
through circumstance.
As long as they have provided for all their
outstanding liabilities and medical needs,
this group does not need a huge amount
of life insurance as they do not have any
dependents.

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1.0 Basics of life insurance
 Single Breadwinner/Traditional Families
A traditional family - only one breadwinner in the family.
Conventional wisdom recommends that the income-
generating breadwinner purchase an adequate amount of
life insurance.

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 1.0 Basics of life insurance
 Double-income Families
In modern times double income
families are normal where both
spouses are working to jointly pay the
bills and raise the children.
Each spouse will need to buy an
equivalent amount of life insurance for
their financial contribution towards
the family.

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 1.0 Basics of life insurance
 Single-Parent Families
Single-parent families may be the result when
one of the spouses passes away or through a
divorce.
Divorce - the parent who is the primary care-
giver will be financially dependent on the
estranged spouse’s monthly financial
contribution upon a separation or a divorce.
Some single mothers are not so lucky to receive
such financial support as their ex-spouses have
gone astray and are no longer bother to provide
any financial or emotional support.

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 1.0 Basics of life insurance
 Sandwich Families
The working generation is
sandwiched in between the older
retired generation and the
younger still school-going
generation.
A substantial amount of life
insurance is needed to cover the
working generation who have to
provide for the needs of two
generations with differing needs.
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 1.0 Basics of life insurance
 Blended Families
The parents have children from
previous relationships but all the
members come together as one
unit.
The breadwinners from both
families need to buy sufficient
amount of life insurance to ensure
that the needs of the children
from two different families are
well taken care of.

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Basic definitions in a life insurance contract:
Premiums:
The regular amount of premiums payable to the life
insurance company which is based on the Insured’s
attained/future age, smoker or non-smoker status and
health condition at the time of policy application.

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Basic definitions in a life insurance contract:

Insured Person:
The Named Person whose life is covered in the
insurance policy contract.

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Basic definitions in a life insurance contract:

Death Benefit:
The amount of insurance money that the
beneficiary(ies) receive from the insurance company
upon the death of the Insured.

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Basic definitions in a life insurance contract:

Face Amount:
The Sum Assured which is the amount of insurance cover
that the Insurer will pay the Insured beneficiary(ies) at the
point of insured’s death.

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Basic definitions in a life insurance contract:

Beneficiary(ies):
The person(s) who will receive Death Benefit proceeds
from the insurance company upon the death of the
Insured.

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Basic definitions in a life insurance contract:
Lapsed policy:
A life insurance policy may lapse upon non-payment of
premiums.
The unpaid premiums will be initially deducted from any
available Account Value. Over a prolonged period of non-
payment (>1year) of premiums, the policy will be
converted to an Extended Term Insurance (ETI) where the
Insured will only be covered for Death/TPD.
The Sum Assured and all the accrued benefits on a policy
will be terminated by the insurer due to prolonged non-
payment of premiums by the Payor.

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Basic definitions in a life insurance contract:

Extended Term Insurance (ETI):

Insured is only covered for Death/TPD like a basic Term
policy. This is non-forfeiture option to extend the life of
the policy when the policyholder is unable to pay
premiums on time.

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Basic definitions in a life insurance contract:
Account Value:
Actual accumulated
cash value (either from
dividends or capital
appreciation of the
units for ILP) in the
policy at time of death
of the Insured, upon
surrender of policy or
at any given time.

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 Basic definitions in a life insurance contract:

Surrender policy:
Early termination policy
contract before Maturity by
the policyholder.

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2.0 Types of life insurance
Term
insurance

Investment- Whole life

linked plans Insurance
Types of
life
insurance

Endownment
Annuities
insurance

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 2.0 Types of life insurance
2.1 Term Insurance
Temporary insurance or a fixed term insurance- the Insured is
covered for a fixed level amount of Face Amount for a specified
period.
Term insurance
Death Benefit = Face Amount

Usually includes a guaranteed convertible - the insured can

convert this policy to a permanent plan without any further
evidence of insurability at the time of conversion.

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2.0 Types of life insurance
2.2 Whole life Insurance

A plan that provides protection for the entire lifetime of the

insured, usually until he/she is 100 years.
No clear separation between the protection and savings
element as it is bundled together in the cost of insurance
(the premiums).

Whole Life Insurance

Death Benefit = Face Amount + Account Value

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2.0 Types of life insurance
2.2 Whole life Insurance

Participating (Par) policy: dividends are accrued to this

policy from the life fund of the insurance company.
Non-Participating (Non-Par) policy: it does not participate
in the dividends accrued in the life fund of the insurance
company.
Limited Payment Whole Life policy: premiums are payable
for a limited number of years (a much shorter period
compared to paying premiums for the Insured’s lifetime)
after which the policy becomes fully paid-up.

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Mahdzan & Boey 2015
2.0 Types of life insurance
2.3 Endowment Insurance
Term insurance of a relatively long period (e.g. 10, 15 or 20
years) that incorporates a savings element together with
insurance.
E.g.: child’s education savings plan or a personal savings plan.
Endowment Insurance
Death Benefit = Face Amount
(payable to the beneficiaries if the insured dies before maturity of the
policy)

Death Benefit = Face Amount + Account Value

(payable to the insured if the insured survives till the maturity of the policy)

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2.0 Types of life insurance
2.4 Annuities
The payer deposits regular premiums for a specific period and will later
receive guaranteed regular coupon payments from the insurance
company upon maturity of the policy.

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 2.0 Types of life insurance
2.5 Investment linked plan

A relatively new type of insurance that combines

insurance (protection) with investments (savings).
The flexibility benefits of investment linked plan:
 The insured may choose the level of protection
and investment desired
 The amount of premiums can be varied from
time to time
 The type of funds chosen should be according to
the risk profile of the insured
Investment Linked Plan
Death Benefit = Face Amount + Actual
Accumulated Cash Value
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2.5 Investment linked plan

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2.5 Investment linked plan
Computation of Cash Value under Single Pricing
Premiums = RM3,600, Initial Sales Charge = 5%, Unit Price of fund = RM0.50

Initial Sales Charge 5% = RM3,600 x 5%= RM180

Balance premium to be invested = RM3,600 – RM180 = RM3,420
Number of units purchased = RM3,420 / RM0.50 = 6,840units
Assume Mortality charge to be 1% and Policy fee = RM50

Cash Value under Single Pricing

= (Number of units x Unit Price) – (Mortality charge + Policy fee)
= (6,840units x RM0.50) – [(6,840units x RM0.50 x 1%) + RM50]
= RM3,335.80

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3.0 The amount of life insurance
to own
3.1 Human Life Value Method
A simple method to quantify the amount of insurance
needed on a person’s life.
Three steps:
1. Estimate the breadwinner’s average annual income
till he/she retires.
2. Determine the remaining number of years till
retirement.
3. Assume a reasonable discount rate (Fixed Deposit
rates can be used)

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3.1 Human Life Value Method
Example:
Assume that Aishah, age 35, takes home a salary of RM60,000 per
annum (after deducting EPF and income taxes). She plans to retire at 60
years old. Assuming a discount rate of 4% per annum and that income is
received at the end of the period, compute Aishah’s human life value
today.

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3.1 Human Life Value Method
Using a financial calculator:
Mode: END; PMT=60,000; n=25; i=4%; compute PV.
PV = 937,325
Using a Present Value of Annuities (PVA) Table:
Human Life Value = RM60,000 x 15.62208
= RM937,324.80
Hence, Aishah’s human live value today is RM937,325 and should be
protected by insurance by this amount.

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 3.1 Human Life Value Method
Disadvantages of the Human Life Value method :
 It assumes the breadwinner’s earnings are constant throughout
his entire career.
 It doesn’t provide for variations in income or expenses
throughout life, or consider for life’s major events (e.g. the birth
of a child, home upgrading home, divorce, etc).
 Variations in the assumed discount rate will lead to different
results. Lastly, inflation on future earnings and expenses are not
taken into account.

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3.0 The amount of life insurance
to own
3.2 Needs Based Approach
Allows for a more comprehensive method of determining
an individual’s life insurance needs based on his or her
unique needs and priorities.
Important family needs could be: regular income needs and
lump sum capital needs
Method:
 Capital Liquidation Method
 Capital Preservation Method

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a) Capital Liquidation Method
Creates a capital sum of money for the breadwinner’s dependents to meet
a particular family need for a specific time period (n).
Five steps:
1. Net Worth - Total Assets minus Total Liabilities
2. Capital to generate regular income needs - Present value of
regular income required (PMT) at a specific Interest rate (i) * for a
specific number of years (n)
3. Lump sum capital needs – total sum of liabilities and other needs
to be settled upon the breadwinner’s death
4. Income Producing Assets – sum of liquid assets which can be
invested to produce income.
5. Capital Shortfall required - additional insurance that is required
for the family’s needs: Total Capital Needed from 2) plus Total
Liabilities that need to be settled upon breadwinner’s death from
3) minus Available Income from Net Income-Producing Assets from
4)

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b) Capital Preservation Method
Creates an amount of capital required to provide for the breadwinner’s
family or beneficiaries for an infinite time period.
Five steps:
1. Net Worth - Total Assets minus Total Liabilities
2. Capital to cater for regular income needs - an indefinite time
period: Total Income requirement (PMT) divide by a specific
Interest rate*
3. Lump sum capital needs – total sum of liabilities and other needs
to be settled upon the breadwinner’s death
4. Income Producing Assets – sum of liquid assets which can be
invested to produce income.
5. Capital Shortfall required - additional insurance that is required
for the family’s needs: Total Capital Needed from 2) plus Total
Liabilities that need to be settled upon breadwinner’s death from
3) minus Available Income from Net Income-Producing Assets from
4)

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4.0 Basic Exclusions in a life
insurance policy
Exclusion clauses : to limit their liability and to discourage
anti-selection
Do not cover the listed perils and not payable
Types:
 Exclusion on Death Benefit
 Exclusions on Disability Benefit
 Exclusions on Critical Illness Benefit

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4.0 Basic Exclusions in a life
insurance policy
Exclusion on Death Benefit
Death caused by suicide within the first year from the issue date or
commencement date, whichever is later.

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 4.0 Basic Exclusions in a life
insurance policy
Exclusions on Disability Benefit
Any disability resulting from attempted self destruction or self-inflicted
injuries while sane or insane:
Services in any armed forces or public order restoration
Activities connected to any aerial device or conveyance except as fare-
paying passenger or crew member on a commercial airline on an
established passenger route
Any congenital defect which has manifested or was diagnosed before the
insured attains 17 years of age
Pre-existing disability resulting from a physical or mental condition

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Exclusions on Critical Illness Benefit
The signs and symptoms of the critical illness are manifested prior to or within 60 days
of the date of the rider begins or last reinstatement date for Cancer, Heart Attack,
Coronary Artery By-Pass Surgery, Other Serious Coronary Artery Disease and
Angioplasty and Other Invasive Treatments for Major Coronary Artery Disease
The critical illness arises from a pre-existing condition which existed prior to the date
of purchase of the rider
Cancer from the following conditions:
All cancers which are histologically classified as pre-malignant, non-invasive,
carcinoma-in-situ, having either borderline malignancy, or having low malignant
potential
All tumours of the prostate, thyroid and urinary bladder histologically classified as
T1N0M0 (TNM classification)
All cancers in the presence of HIV
Any skin cancer other than malignant melanoma
The critical illness or surgery is caused a self-inflicted injury
The critical illness is caused directly or indirectly by AIDS or HIV infection except for HIV
due to blood transfusion
This list is non-exhaustive. Kindly refer to the policy contract for full list of exclusions
under the policy.
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