Insurance Planning (Risk Management Planning)

By Kenney Khew
CFP CERT TM
Kenney is the chairman of FPAM JOHOR CHAPTER, a non-profit NGO and also licensed financial planner of Phillip Wealth Planners Sdn Bhd. He can be contacted at kenneykhew@icloud.com

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Insurance Planning is only one part of a financial planning. The definition is the process of determining your coverage or sum insured against the risks and mitigating those risks. Therefore, insurance is the concept of transferring your risk to insurance company.

According to Sir Winston Churchill’s quote, “ If I had my way, I  would write the word insure over every door of every cottage and upon the blotting pad of every public man, because I am convinced that, for sacrifice that are conceivably small, families can be secured against catastrophes which otherwise would smash them forever.”

There are no other products in the world than can replace insurance products that provide the function of taking your mortality risk (upon your demise, total disability, diagnosis of terminal illness and etc) by just paying certain insurance premium!

Insurance policy is actually the contract between the insured (the client) and insurance company (insurer). The insured is as the offering party and the insurer is the accepting party. However, it is always important to look carefully at the insurance proposal form that you need to sign before purchasing their insurance plans.

Please take note of the following insurance principles that we need to be aware of:-

  1. Minimisation of Loss
  2. Acting utmost in good in faith (most important)
  3. Insurable interest
  4. Indemnity
  5. Subrogation
  6. Proximate cause
  7. Contribution

If the insured goes against the principal that may be facing insurance contract void later on especially point no two. Please take note that we not only need to fully disclose our knowledge of our health condition or upon diagnosis certain illness by clinic doctor and etc to insurance company.  Do not be surprised that most of the time insurance companies will not accept those risks. This is stipulated clearly in the policy contract and also in the application form under exclusion clause and the insurer will be issuing letter of offer for the client to sign before they issue any insurance policy to you.

However, the insurance company will be covering for the healthy part with certain loading as well. So, in order to avoid all such a situation, please buy your insurance plan as early as possible when you are HEALTHTY for the sake of getting a full coverage.

There are total three methods to calculate the sum insured for the insured. According to CFP modules the three methods are the Rule of Thumb, Income Replacement Method and Financial Needs Analysis Method. All the methods have their own ways to calculate your insured sum. The Rules of Thumb is the easiest method among the three.

Many people have neglected insurance planning and also emergency fund preparation and start straight away to do investment in equity counters, unit funds, future derivatives and etc. However, sometimes unfortunate events occur like accident, total disablement, diagnosis of illness and etc that needs us to come out with a lump sum for the medical cost for the treatment. Then, the next course action of these people is to liquidate their investment even in a loss situation due to they need the cash urgently. I personally do not think this is a wise planning from the beginning. They certainly do not understand the importance of firstly setting up an emergency fund and secondly, insurance planning as part of their financial planning.

The importance of insurance is as per the following:-

  1. Protection for you and your family from a financial disaster against unforeseen events (illness, accident, and etc) from happening and insurance compensation as the financial support to preserve your family’s standard of living.
  2. Reduce stress during difficult times and focus on recovery if hospitalised.
  3. To provide financial security to your family as we know that the insurance compensation will help in the future for either the children’s education fund, spouse retirement and so on.

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