Dr.

Norliza Che Yahya

Office: PFI 04 -032 Office (Tel): 03-3258 7077
Email: norliza9911@uitm.edu.my

CHAPTER
5 FIVE
.

Risk Management and Life Insurance

1
Semester March 2021
 Content of Syllabus

CODE CHAPTER WEEK

Ppt 1 Introduction 1-2
Ppt 2 Personal Financial Statement 2-5
Test 1
Ppt 3 Tax Planning 6-7
Ppt 4 Consumer Credit 8
Ppt 5 Risk Management and Life Insurance 9
Ppt 6 Investment Planning 10-11
Ppt 7 Retirement Planning 12 Test 2
Ppt 8 Estate Planning 13

2
 Chapter Outline

CONTENTS

1 To understand concept of risk management

To learn on life insurance planning

2

To understand principle of Islamic insurance

3 and Takaful

To understand other types of insurance

4 - Health and General Insurance

3
 Introduction
Understanding Concept of Risk
Management

4
 Introduction
What is Risk Management?

01 03
• An organized strategy and • Through the purchase of
process for protecting assets insurance policy
and people

02
04
• A long-range process that
• If an individual understand type
helps reduce financial
and level of risk that he/she is
looses caused by
suffering as well as how to
destructive events
manage the risk, he/she could
improve economic, social and
emotional well-being
05
• Since an individual is not able to
cover all risks, he/she need to
understand how to obtain the best
protection that he/she can afford
5
 Process of Managing Risk
Step 1 Step 2
Execute risk Develop risk
management plan management plan

Step 3 Step 4
Scrutinize
Collect information
information

Step 5 Step 6
Set up risk
management
objectives
6
 Risk Management Techniques
Risk Reduction Risk Assumption
• Set up policies, procedures, early prevention • Assume risk because some risks cannot be
to reduce the risks being exposed eliminated. It maybe practical when insurance
• Example: You can reduce risk of being coverage is expensive and when there is no way
severely injured in an accident by wearing of obtaining other protections
seatbelts • The assumption of risk leads an individual to be
more aware on any consequences of an accident

Risk Avoidance Risk Shifting

• Remove risk through eliminating the • Transfer risk through insurance. Most
situation or activity that presents risk. common method of dealing with risk
• Although risk avoidance seems give a high • Simply means to transfer the risk to an
opportunity cost but it is practical at times insurance company or some other
organizations

7
 Life Insurance Planning
What is it?

8
 Introduction
What is Insurance?

01 03
• A transfer of risk by an • An insurance company, or
individual or an organization insurer, is a risk-sharing firm
known as a policy owner that assumes financial
responsibility for losses from
an insured risk

02
04
• Provides a protection
• The insurance company will
against possible financial
receive periodic payments by
loss
the policy buyer in the form of
premiums and will compensate
the policy owner in the event of
losses or damages

9
 Insurance Concept
Target Market
A group of people who are insured and
01 secured against a particular loss. They pays
premiums or insurance funds

Needed Parties
A party in insurance group who suffers a
02 hardship

Insurance Process
A certain amount of money from insurance
03 funds are channeled to the needed parties
to ease hardship

10
 Insurance Principle
Insurable Interest
The person who purchases the insurance has an
1 'insurable interest' in the subject matter of the
insurance if the loss or damage of it would result in a
financial loss to the person
Contract of Indemnity
A contract to make good or restore, as best as
2 possible, the insured to the same position immediately
before the loss or damage by way of payment, repair
or replacement
Contribution
The insurer is liable only for the insurer’s rate-able
3 proportion of the loss or damage in the event other
insurers are also liable for the loss or damage
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Utmost good faith
The insured has to disclose to the insurer all material facts
4 regarding the subject matter of the insurance and the
circumstances pertaining to it, which would influence the
judgement of a prudent insurer
Subrogation
The right of an insurer to be in the place of the insured having
5 paid the loss to seek recovery of the loss from a third party
Proximate Cause
The 'immediate or effective cause that leads to an event
6
 Insurance Companies in Malaysia

12
 Types of Insurance Coverage

Life Insurance Home Insurance Motor Insurance

+
Medical & Health Investment-linked Personal Accident
Insurance Insurance Insurance

13 Education Insurance Travel Insurance

 Life Insurance
Why Life Insurance is Important?

To have savings plan for To ensure family members To finance children’s

the future have financial support after education
the insured demise

To ensure family members To entitle for relief when To ensure that an

are able to maintain their computing income for extra income is
living standard upon their taxation purpose available
demise
14
 Basic Types of Life Insurance Policy
Term Insurance
• This offers insurance
protection for a limited period
only
• The money will be paid only if
we pass away or if suffer total
and permanent disability during
the term of the policy
15
Whole-Life Insurance
• This offer life-long protection
and premiums are paid
throughout our life.
• The money, including any
bonuses, will be paid when we
pass away or suffer total and
permanent disability.
Endowment Insurance
• This combines protection with a
savings plan. It has a fixed
maturity which are 15, 20, 30
up to 65 years.
• It covers us against death,
Total Permanent Disability and
critical illness
 Medical & Health Insurance
Medical card - A possession on medical treatment. Medical cards and insurances are necessary because all
services cannot be offered by a government hospital

01 02 03 04

Hospitalization and Dread disease, or Disability income Hospital income

POLICIES surgical insurance critical illness insurance insurance
insurance

To ease burden of To ensure that we would not have To provide us with an

OBJECTIVES cost for private to worry about the cost of seeking income stream while
medical treatment treatment during emergencies undergo treatment

01 02 03

16
 Investment-linked Insurance
• An investment-linked plan • The insurance coverage
is a life insurance plan that provided would include
combines investment and death benefit, disability
protection and critical illness

• A portion of premium
payment is used to
purchase units in the Benefits of Investment-linked
investment linked funds Insurance Policy
managed by the
insurance company
• To assist in creation of
wealth as per the goals
determined by insured
What is Investment-linked Policy?
• Benefit from
diversification through
the spread of investment

• Enjoy the benefit of • Have the flexibility in

insurance protection investment through top
up and switching
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 Education Insurance
Provide the funds needed by child to pursue further education and assures that whatever happens in the future,
they will still have the means and chance to pursue some of his/her goals in life

To provide better and

dreamed education to our
child in the right time

To secure our child’s

Education insurance is tax
exempted under Section
80C and Section 10 (10D) of
the Income Tax Act
03 future even in case of
any uncertainties
04 Examples - death,
02 disability, loss of job

The child receives the sum

To secure our child’s
assured plus bonus, if any,
or value of the investments 01 05 future even in case of any
uncertainties
accrued up to that point in
Examples - death,
the policy, at a pre-
disability, loss of job
determined age
18
 Types of Home Insurance

House Owner Policy

Basic Fire Policy • Provides additional coverage

compared to the basic fire
policy. It includes loss or
damage due to flood, burst
• Provides coverage for the
pipes
building only and covers loss
or damage by fire, lightning or
explosion

Household Policy

• Cover our household contents

and includes coverage for fatal
injury to us as the insured

19
 Life Insurance
Why Life Insurance is Important?

To have savings plan for To ensure family members To finance children’s

the future have financial support after education
the insured demise

To ensure family members To entitle for relief when To ensure that an

are able to maintain their computing income for extra income is
living standard upon their taxation purpose available
demise
20
 Motor Insurance
An insurance policy that covers the risk of injuries to the body that may be a result of an accident caused by an
external forces and results in disablement or death

01 03 05

Temporary total 02 04
Accidental Hospitalization
or partial
death benefits
disablement

Permanent
disablement Funeral
expenses

21
 Travel Insurance
• An insurance policy that covers medical expenses, financial and other losses incurred
while traveling, either within one's own country, or internationally
• The cost of travel insurance depends on a number of factors such as our age, the
duration of our trip, the country we plan to visit and other benefits included in the plan

01 02 03
Medical Personal Emergency
expenses accident medical
evacuation or
transportation
Coverage of travel
insurance
04 05 06 07
Repatriation Trip delay, Loss of luggage Travel
cancellation or and personal documents
interruption effects

22
 Approaches to Determine
Insurance Funds
The Needs Approach
• An analysis to determine variety of financial needs
• Example - life insurance. It has a different objective
than multiple salary approach
• Objective determination of buying insurance
• Example - to pay for children's’ education. Thus, the
goal is to meet the total needs of the household after
the death of a breadwinner, both at the time of the
death and in the future
23
Multiple Salary Approach:
• Known as earning multiple approaches where the
goals of having a life insurance is earning
replacement
• Has the goal of replacing the annual salary stream
of a bread winner for a certain number of years or
until the children are raised and the spouse is
financially stable and retired
• Normally, an amount of 5 to 15 times your gross
salary is recommended
• Most insurance companies will not insure an
individual for more than 20 times his/her annual
income
 Calculating Needs Approach
Step 1 Step 2

Add up all financing needs Calculate family maintenance

(short & long term) expenses

Step 3 Step 4
Subtract amount of insurance
Calculate income by adding all
needed from the difference
available saving and
between all financial needs
investment assets
and income

24
 Principle of Islamic
Insurance and Takaful

25
 Introduction
What is Takaful?

01
• An Islamic insurance concept
which is based on Islamic
03
banking transactions
(muammalat) by observing the • Conventional insurance is
rules and regulations of Islamic strictly not allowed for
law Muslims as agreed upon by
most contemporary scholars
02 because it contains the
• Perceived as cooperative following elements:
or mutual insurance,
where members i. Al-Gharar (Uncertainty)
contribute (tabarru’) a ii. Al-Maisir (Gambling)
certain sum of money to a iii. Riba’ (Interest)
common pool

26
 Resolution of Scholars

National Fatwa Resolution of Fiqh

Committee of Academy (Majmak
Malaysia, 1972 Fiqh) OIC, 1985

Extract of the Minutes of The National

Fatwa Committee For Islamic Affairs
Malaysia -15 June 1972
“Life insurance transacted by present-day life insurance
companies is a transaction containing the elements of al-
Gharar, al-Maisir and al-Riba and as a consequence its
contract is void; therefore HARAM”

27
 Concept of Takaful
According to Takaful Act 1984, Section 2
Takaful is ‘A scheme based on brotherhood, solidarity and
1 mutual assistance which provides for mutual financial aids 4 Participants mutually guaranteeing each other
and assistance to the participants in case of need whereby
the participants mutually agree to contribute for that
purpose’

Basic aim is to provide mutual financial aid to

2 participants 5 Those suffer losses can claim financial aid from Takaful Fund

Participant contributed funds to a common pool called

3 ‘Takaful Fund’ 6 Conceptually, participants are insurer and insured parties

28
 Principles of Takaful

Every policyholder pays his subscription to Losses are divided and liabilities spread
help those that need assistance according to the community pooling system

Policyholders cooperate among Uncertainty is eliminated in respect of

themselves for their common subscription and compensation
good

18
 Benefits of Takaful

Security of inheriting properties by the

dependents or heirs Entitlement to share profit or surplus of operations
based on profit sharing principle of Al-Mudharabah

Provide peace of mind to individuals as

compensation and/or outstanding liabilities will
be covered upon untimely death or total
disability
Free of liability by the guarantor on any
outstanding credit facility or financing/loan +

30
 Other Types of Insurance
“Health and General
Insurance”

31
 Takaful vs Conventional Insurance

vs Takaful
• Risks are shared among
participants under a mutual
guarantee scheme or Takaful
scheme works

Conventional insurance
• Risk transfer mechanism by
which an organization can
exchange its uncertainty for
certainty

32
 Takaful Insurance vs Conventional Insurance

Joint indemnity or guaranteeing

Based on? Gharar, Maisir and Riba
each other
Members of Takaful are both the Insurer and Insurer – Insurance companies
insurer and the insured Insured Insured - Customer

Not purchased but participated and

Purchased? By customers
become members

“Takaful Fund” to pay compensation Equivalent Special No

Fund

Tabarru’ – Members contribute or Contribution Concept No

donate
Received through Mudharabah Profits No
concept

Yes Rewards in Hereafter No

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 General Takaful Products
Takaful for School Students Scheme Fire Takaful Scheme
Group Takaful for Pilgrims Motor Takaful Scheme

Foreign Workers Compensation Accident Takaful Scheme

Scheme

Marine Takaful Scheme Liability Takaful Scheme

Engineering Takaful Scheme Burglary or Theft Takaful Scheme

House owner Takaful Scheme Householder Takaful Scheme

34
 Family Takaful Products
Group Family Takaful Plan for
Hospital and Surgical Benefits

Family Takaful Plan Takaful Rawat

Family Takaful Plan or Education SiswaTakaful Plan

Mortgage Takaful Plan Group Family Takaful Plan

35
 THANK YOU !


Dr. Norliza Che Yahya, FIN 533

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