Thursday, October 16, 2008


I mentioned insurance is not in my pyramid but acting as a support pilars to the pyramid I build.  ( read old post for more info )

I categorize insurance into the following ;
1. Term Insurance
2. Whole Life Insurance
3. Endowment Insurance
4. Hybrid
Term Insurance is the most basic type of insurance.  You pay a certain amount of money to the insurance company and in return should something unexpected happen, insurance company will pay you a lump sum of money.

This works base on probability and statistic.  Says the insurance company has a statistic showing that only 0.1% of people age 25 will pass away.  So when a 25 year old guy buy a RM 100,000 insurance for his life, the cost would be RM 100.  Because when 1,000 people buy the same insurance, the company would have collected RM 100,000.  And out of these 1,000 people, 1 people will pass away, so the RM 100,000 is paid out to this unfortunate person.

Whole Life Insurance is a term insurance that has a contractual period up to a very old age, ie. 100.  This age is also determined by the statistic.  ie. if 'most' of the citizen in your country live up to age 82, then insurance will pick an age that is much larger than that age and then call it 'whole life'

Endowment insurance marks the slight deviation from the original meaning of insurance.  Endowment insurance contract period is within the time that you can enjoy the benefit itself.  The main purpose of endowment is provide a safe saving with good return, and along the way, provide free insurance.

endowment in insurance is like FD in bank.  Bank actually earns much more than FD but only promise you a lower return so that they can play safe and earn more.  Likewise, insurnace company earns quite a lot and in turn can 'guarantee' you some form of lower interest return.

The last one is Hybrid.  Which is a new category I added into my Personal Finance not more than 5 years ago.  Basically it can be part Term, part Endowment and part Whole Life.  Most of the time, this also refer to "Link" insurance.  Which is a combination between mutual fund and insurance.

However, I predict that in near future, insurance will also combine with other form of investment vehicle.  So intead of calling it mutual fund insurance, I called it Hybrid.

Dealing with the complicated, confusing and constant changing types of insuranc is rather simple.  

If you are the type of person who love to learn and able to tell the difference of finance tools in this market, then you probably will ignore all kind of hybrid and only buy term or whole life insurance.  

If you are the type of persons who never get a clue about what in the world am I talking about here, then most probably you should just pick one of the hybrid products or endownment.