RM 1,000,000

Why do I need a one million dollars insurance cover? This is often the question posed to me every time they ask me to recommend them with the appropriate amount of protection.

My immediate respond ... why not? Would you be interested in a property worth a million ringgit instead? Of course is usually the answer.

Well, lets do a simple comparison. The scenario is a based on a 40 year old CEO whom I met recently.

Say you bought a property worth RM1.0 million and you got an excellent deal from the bank giving you a 100% loan at 3.5% interest with a tenure of 25 years. (question is can you get these kind of rate?)

The monthly installments would be RM5,006.24. Now the total repayment amount that you would have paid to the bank after 25 years would be RM1,501,872. Take this amount and minus the RM1.0 million that you borrowed, thats the amount of profit you would have passed on to the bank! Of course, one would hope that the property value would have sky rocketed in that time ... but to how much? That would be a different discussion, for now we just do a simple comparison.

Lets just get this out in the open. Insurance or Takaful is just a financial tool with the objective of transferring the risk that we would otherwise have to handle ourself. However, with the right kind of product, you can maximize your dollar value tax efficiently.

For example, a RM1.0 million insurance or takaful policy would be around RM9,000 to RM30,000 per year, depending whether its a pure term, composite term or a term with mudharabah (profit sharing). Here, we're not discussing how much return we get, but consider this for a moment.

1. The contract is under your name. You have FULL ownership of the RM1.0 million, whereas the property is under the banks ownership until the loan is fully settled.

2. What would happen if you were suddenly incapacitated and not able to payoff the loan? Well, someone will have to pay for it or the bank will assume its position. So then he said, I can buy MRTA. Well, isn't that insurance? Of course the calculation above did not take into account MRTA, because then the figures would increase. But why do you want the MRTA? Yes, the policy would payout RM1.0 million to your family, whereas the property will need to go through the process of estate administration, assets realization and distribution. How long will this take?

3. Lets compare the expected profit you can make at the end of it.

The Takaful program.
Annual premium RM32,000
Total amount deposited RM800,000
Immediate cover RM1.0 million
Maturity value RM1.2 million
Expected profit RM400,000

The Home loan program
Annual repayment RM60,000
Total amount paid RM1.5 million
Contingency cover RM1.0 million (value of the property)
Expected value RM2.0 million
Expected profit RM500,000

Now, having done all this comparison, we can still argue. So I say, it not about one side having to win and the other lose, its not about who's right and who's wrong. At the end of the day, all this need to tie back to your objectives and your opportunities.

As a conclusion, we need time to build wealth, we need time to build the business, we need time time to sort out all the things we handle, but if an unexpected event take a turn in, our family will not have the time. So do take action on what you can ... now!