Income protection of the primary breadwinner of the family is a matter of importance.
Is your family prepared should the worst-case scenario happen and they are bereft of your earnings? According to the Financial Stability and Payment Systems Report 2014 (FS2014) published by Bank Negara Malaysia (BNM), at least half of all Malaysians would have to answer ‘no’.
In reference to the life insurance market, for instance, the report says “The insurance penetration rate, as measured by the number of policies per population, has increased significantly over the past decade to 55.5%” – but as many people hold multiple policies, the true number is likely to be somewhat less.
BNM was more explicit in its FS2013, saying that “Recent studies by the Bank in partnership with a number of local universities revealed that two-thirds of Malaysian households are poorly prepared to deal with income shocks with savings of less than three months.”
Income protection of the primary breadwinner of the family, therefore, would seem to be a matter of some importance that should be resolved, and according to Iskandar Ezzahuddin, General Manager of U for Life Sdn. Bhd. (pic), Malaysia’s first online insurer, Malaysians in general agree… at least in theory. “You ask anyone whether life insurance is important, they’ll say ‘yeah, life insurance is very important’. And then when you ask them whether they’ve bought it, well, that’s a different story.”
Both the FS2014 from BNM, and the 2012 Underinsurance Study In Malaysia, which was jointly conducted by the Life Insurance Association of Malaysia (LIAM) and University Kebangsaan Malaysia, agree with Iskandar that when it comes to life insurance, Malaysians are substantially underinsured. And Iskandar reckons he knows why. “The reasons why people don’t really buy life insurance – although they know that it’s important – really comes down to 3 main things; the price, the buying process, and a lack of product understanding,” he clarifies.
With regards to pricing, Iskandar says that most people think that they cannot afford the premiums. “No matter what you do with your products, if they’re not affordable, you fail at the first impression.” This accords very well with LIAM’s own statement on the issue, and is undoubtedly the sentiment behind news reports like this.
Iskandar’s take on the buying process is that it can be a bit inconvenient. “You need to set an appointment with an agent, set a time, sit down, spend about an hour going through the whole product – and that’s just for one product. So imagine if you want to know about another product; you have to go through the whole process again. And as a result of that, some people say ‘I will make an appointment with a second agent’, and then that never happens,” he highlights.
“You can’t go directly to an insurance company and buy the product that you want. With any other product in the world, you can actually go through that whole browsing process where you start looking at all the different brands out there before you decide to make that final purchase. Insurance is the only category out there that doesn’t allow you – or makes it very hard for you – to go through that browsing process.”
As for the lack of product understanding, Iskandar believes that people don’t really understand the product despite spending the requisite time with the insurance agent or other channel representative. “They come out of the meeting, but they still don’t know what the product really is. In fact, there are people who have bought life insurance and if you asked them again 2-3 years down the line what the product they bought was, they don’t actually know. They can’t really tell you. In fact, they don’t even remember the death benefits and key features,” he said.
But Iskandar also believes there may be a 4th reason as well, which is the lack of flexibility in the usual life insurance policies. According to him, there are those who don’t like the fact that they’re locked into their policy for the next 20-30 years.
Even those Malaysians who have life insurance coverage may still be underinsured, Iskandar cautions. “In the life insurance business, we usually recommend a coverage of at least 10x your annual income. I personally would actually suggest having 20x your annual income; that way, your family can put it in an investment vehicle with 5% p.a. returns, which would in effect give them a perpetual income. But when you talk about 20x your annual income, a whole lot of people out there are severely underinsured, especially if they look at the premiums they’d have to pay with their current product.”
The Malaysian government recognises the challenge, and has earmarked one of the Economic Transformation Programme’s Entry Point Projects (EPP) to address the ‘protection gap’. EPP 5 under the Financial Services NKEA aims to have 75% of the population insured by 2020.
Malaysia has already taken the first step towards this goal by addressing the factors that Iskandar has pointed out. In 2013, BNM issued the Life Insurance and Family Takaful Framework concept paper, which is being implemented in stages starting from this year. One of the key components of this framework, as FS2014 puts it, is “The implementation of direct channels and product aggregators to enable consumers to compare products across different providers and purchase life insurance or family takaful products through direct channels such as the Internet.”
As a beneficiary of this framework, Iskandar believes that U for Life is well-placed to help the Malaysian government achieve its 75% insurance penetration goal through its flagship life insurance product, which is only available online.
Tomorrow: Buying insurance online: Is it really that easy?