- How is premium calculated?
- What is policy size adjustment?
- What is preferred risk adjustment?
- What is a non-smoker adjustment?
- What are female rates?
- What are modal premium adjustments?
- What is stamp duty?
- What is underwriting?
- What is loading or extra premium?
- How can loading or extra premium be avoided?
- What are the essential documents that the life insurer needs to approve my application for a policy?
- What are my premium paying options?
- What is face amount?
1. How is premium calculated?
The premium is calculated based on three major factors:
- The rate of mortality
Mortality tables are used when determining the rate of mortality. These tables are constructed by making observations of past experience, and projecting the trends observed into the future by forecasting the expected number of deaths. This is based on the assumption that the rate of deaths among a group of people of the same age in the future will be similar to that of a known group in the past. Higher mortality means higher premiums will be charged, and vice versa except for riders or plans that continue to pay only when the insured is alive. Examples of the latter are cash dividend and reversionary bonus riders.
- The rate of interest
This is the interest rate the insurer expects to earn on its funds and/or investments. It directly affects the level of premium that will be charged. For example, if the insurer expects to earn high interest on its investment, it will charge a lower premium, and vice versa.
- The expense factor
These are the expenses that the insurer incur as a result of issuing the policy. The determination of the expenses that will be incurred is based on the assumption that operating costs will follow some patterns based on past experience, adjusted for inflation. It is obvious that the higher the expenses, the higher the premiums will be, and vice versa.
Therefore, all three factors above will be taken into account in calculating the premium.
Usually the premium rate derived is presented in a table or tables and expressed as premium per thousand RM of face amount. Depending on the age of insured and where relevant, the length of period of coverage, a premium rate is extracted from such tables. Sometimes there are separate tables for male and female insureds. If not, the premium rate table provided is assumed to be for males and when reading for female rates, a certain number of years are subtracted or added to actual age before being read from the table. Sometimes, there are separate tables for each face amount band. If not, a fixed amount may be added or subtracted from the table rate depending on whether the face amount is below the lower threshold or greater than the higher threshold, respectively. Furthermore, if the insured is considered to be a medically preferred risk, the premium rate is reduced or increased by a certain amount. Often there is a further reduction for non-smoking insureds. Finally, if chosen frequency of payment is not annual, a modal premium adjustment is applied. 2. What is policy size adjustment?
Policy size adjustment is basically a premium reduction (sometimes it can be an addition to the premium if the policy has a small sum assured) in respect of large insurances. This is because to an insurer the cost of issuing a policy with a large sum insured is virtually the same as that of issuing a policy with a smaller sum insured. Book-keeping, policy preparation, postal, and clerical costs are the same in both cases. Therefore, the insurer gives an incentive to the policyowner who purchases a policy with a large sum insured by reducing his premiums.
3. What is preferred risk adjustment?
Preferred risk adjustment is a reduction in premiums accorded to policyholders who are considered to be good risks. These people are usually engaged in non-hazardous occupations and are of good health. Sometimes, there are other conditions to be met (e.g. certain products must be purchased and/or the sum assured must exceed a certain amount) in order for this preferred risk adjustment to be applicable.
4. What is a non-smoker adjustment?
A non-smoker adjustment is a discount or reduction in the premiums payable by non-smokers. It is generally accepted that non-smokers, on average, live longer than smokers. Therefore, non-smokers (who present less risk exposure) are entitled to lower premiums.
Most of the time, the reduction allowed depends upon the age of the insured and also the product purchased. The proposer will generally be asked to declare (in the proposal form) that he/she does not smoke and has not smoked for the last 12 months.
5. What are female rates?
As the name suggests, female rates are premium rates applicable to females. It has been statistically proven that females generally live longer (ie. have lower mortality) than males of the same age group. To truly reflect the difference in risks presented to the insurer by the two groups of sexes, the premium rates for females are lower than those for males of the same ages.
However, for medilife insurance (also known as living assurance or dread disease riders), female rates are higher because their morbidity (sickness) rate is higher than males.
Please note that separate females rates may not exist for certain products and/or ages.
6. What are modal premium adjustments?
Modal premium adjustments are adjustments that are made to the annual premium in order to determine the appropriate amount to be paid at each premium due date for the mode of payment chosen. For example, if a policyholder decides to pay premiums on a half-yearly basis, the modal premium would be slightly more than half of the annual premium.
Similarly, the policyholder can choose to pay his/her premiums on a quarterly or monthly basis. The annual premium will be adjusted accordingly to yield the modal premium.
Please note that the mode of payment selected will sometimes affect the length of the grace period. You will need to check your policy provisions carefully to determine if any restrictions apply.
7. What is stamp duty?
Stamp duty is the tax that is levied on the policy document. It can be fulfilled in two ways:
- Purchasing and putting on the document, an adhesive stamp of the value required, and cancelling. In this case, cancelling refers to the endorsement of the stamp duty and is represented by a chop or print on the stamp itself.
- Paying money of the value required, to the stamp duty office which then impresses a stamp to that value on the document.
8. What is underwriting?
Underwriting is the term used to describe the process of accessing risks (the proposed insureds) and classifying these risks into various groups in respect of the premiums to be charged. Based on the degree of risk that a proposed insured presents, the insurer decides whether to accept or decline an application for insurance. The level of premium rates has to be monitored constantly for a life insurance company to remain competitive.
A typical classification of risks in respect of premiums to be charged would be:
- To accept the risk on standard rates
- To accept the risk, but with a loading (i.e. extra premium) or lien (i.e. with a reduced sum insured that is gradually increased to a maximum within a certain period providing that the health of the insured improves)
- To defer the risk until such time it becomes acceptable
- To reject the risk
9. What is loading or extra premium?
Loading or extra premium is the amount that is added to the standard premium in respect of the larger than standard risk presented by the proposer or life assured. This could be the case if the proposer, for example, has suffered or is suffering from an injury and/or illness considered serious enough to warrant a premium loading. Or the proposer could be engaged in a hazardous occupation; or the proposer could have dangerous hobbies or pastimes; etc.
When a loading is required on the proposed insured, a letter will be issued to the proposer as a counter-offer, indicating the loading required. If the proposer agrees to the terms and conditions imposed on his/her application, he/she will need to sign a letter of consent or acceptance and send it back to the insurer.
10. How can loading or extra premium be avoided?
Heavy smokers can avoid loading or extra premium by giving up smoking. Smokers generally pay up to 50% more for life insurance than healthy non-smokers.
The proposed insured should never resort to suppressing information such as poor health condition in your application to avoid the extra premium. This practice is likely to lead to a repudiated claim in the event of the insured's death.
11. What are the essential documents that the life insurer needs to approve my application for a policy?
The essential documents that the life insurer needs to approve your application for a policy are:
- An application for life insurance form. This is also the same as the proposal form and will be made a part of the policy contract
- A medical examination report (MER) is required if the sum assured applied for is greater than the non-medical limit of the insurer
- An attending physician statement (APS) is required if you have suffered or are suffering from an injury and/or illness which the underwriter thinks may have a material impact on the risk presented
- An agent's confidential report is required if if there are information and circumstances which are apparent and not revealed in the application and are material to underwriting
- Effective 1 July 2004, all applications for life insurance polices must be submitted together with the Customer Information Form (CIF) and Confirmation of Advice Form (CAF). The Bank Negara Malaysia Guidelines on Proper Advice Practices for Life Insurance Business sets the minimum standard for proper advice as well as a structured process for advising and selling life insurance products by insurance intermediaries. The primary purpose of the guidelines is to ensure that an intermediary obtains sufficient information about a prospective policyowner before giving advice on the suitability of a particular life insurance product to the prospective customer
For Manulife Insurance Berhad, the intermediary is our agent. 12. What are my premium paying options?
You have a number of premium paying options regarding frequencies and methods of payment. For the frequency of payment, premiums for an Ordinary Life insurance policy may be paid on the following basis:
- Monthly (If this mode of payment is chosen, many life insurers require payment of premiums to be made through Banker's Order, AutoDebit or payroll deduction schemes)
Home Service policies provide frequency of payment of even shorter durations such as weekly. However, in Malaysia, some of the Home Service life insurers will no longer sell new Home Service business with weekly payment frequency
For the method of payment, premiums can be paid through any of the following ways:
- You can pay the premium due (in cash or cheque) direct to the insurer's offices
- Alternatively, an agent who is authorised by the insurer may collect the premium due on the insurer's behalf
- Payment by post using cheque, postal, money order or bankdraft. If your cheque is dishonoured, the receipt issued by the insurer will be deemed invalid
- Banker's order
You will need to instruct your banker to remit the required premium from your account to the insurer every month. This method of payment can also be used if the mode of payment is on a quarterly, half-yearly or yearly basis
Many banks like MayBank operate a scheme whereby an accountholder can authorise the bank to accept instruction from a specified party to transfer an amount up to the maximum specified by the accountholder. This method is cheaper than banker's order and is more flexible as the insurer can vary the amount within the limit set by the bank accountholder.
- Automatic Teller Machine (ATM)
Many banks like MayBank, Public Bank, etc. allow ATM cardholders to pay to specified parties through their ATMs. Policyowners who enjoy such facilities can use it to pay their premium when due, provided that they have applied for such facilities with their bank.
- Credit Card
Most life insurers now allow its customers to pay premiums using Credit Card auto-debt services, free-of-charge. This method is becoming more popular as it provides a hassle-free premium payment service.
- Online Payment
You can also pay your insurance premium using internet via your bank's internet facility. (www.maybank2u.com.my, www.pbebank.com.my, etc…)
- Salary deduction or payroll scheme
Under this method of payment, your employer will need to agree to deduct the monthly installment of premiums from your salary. Your employer will need your consent in the form of a written instruction. Furthermore, your employer will need to obtain prior approval from the Labour Department for such deductions.
13. What is a face amount?
Each basic plan and most riders have a face amount which is stated in RM and used to compute the annual premium. After computing the premium rate, the annual premium is computed by multiplying the face amount with the premium rate and dividing by 1000. This is because the premium rate is by custom always stated as a rate per 1000 of sum insured.
For term plans and riders, the face amount is the sum insured which is what the beneficiary will get if the insured dies. For other riders like compound reversionary bonus and cash dividend riders there is usually a rule of thumb formula provided by the actuary that will allow the agent to compute the face amount that will result in a desired benefit amount. For such riders, this face amount is only a notional amount and is not the amount payable on death and/or maturity.