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Example Problem Adding Takaful
Nidal’s Family takaful has a sum assured of RM 200,000 and his participant’s account has currently accumulated RM 50,000 based on his contribution over several years and the dividend received on these investments. He plans to continue this takaful participation until his assumed mortality. His work provides some coverage for death and disability as a benefit, with a value of RM 70,000. It is not a takaful investment. Similarly, Rasha has RM 100,000 of a permanent conventional insurance policy that pays out on death or complete disability. An additional short-term family takaful investment has a sum assured of RM 60,000, which will pay out on her death or complete disability. Her participant’s account currently holds only RM 10,000. In 16 years when the takaful expires the participant’s account should be valued at RM 50,000 based on the contribution schedule.
Solution Using Summary Insurance Coverage:
Go directly to the Insurance screen:
- Under Client’s Permanent Insurance enter $250,000 for Nidal’s permanent takaful life coverage since the combined amounts of RM 200,000 and RM 50,000 would be paid out on death.
- For Client’s Term/Group Insurance, enter the $70,000 of coverage through work.
- In the Spouse’s Permanent Insurance field, enter the $100,000 that would be available on Rasha’s death.
- Set the Spouse’s Term/Group Insurance to $70,000: the total amount that would be available from the sum assured (RM 60,000) plus the participant account (RM 10,000).
- In the disability section, set the Client’s Lump Sum on Disability to $320,000, since both his takaful investments and work coverage payout their total amount if he were to become disabled and unable to work.
- Under Client’s Lump Sum on Disability, enter the total $170,000 available from her permanent insurance and short-term takaful.
- The Will benefits be subject to income tax drop-down menu should be set to No, based on the taxability of insurance benefits.
- Click Save at the bottom of the screen
- Use the drop-down menu to continue to the Pensions and Other Revenues screen.
Hint: The only real difference between entering conventional insurance and Islamic takaful coverage, is just that you will enter the combined value of the participant’s account and sum assured for the coverage amount. Otherwise, the only other thing to keep in mind is the eventual payout of the participant’s account for any personal family takaful where your client’s participation ends before assumed mortality.
Term Takaful Payout
In the event that Rasha does not die or become disabled in the next four years, her short-term family takaful policy will pay out her participant’s account.
- Click on the Add button above the current revenue entries
- Enter an appropriate description in the Description field.
- In the drop-down menu beside Owner change the setting to Spouse
- The $50,000 value of the participant’s account (future value) can be entered in the Amount per Year field
- Both the From Year and To Year fields should be set to 16 years from now when the policy will expire.
- The Index Rate to be 0%, since this RM 50,000 is the future value.
- Set the Percent Taxable to 2.5% since it is most likely the revenue will be invested in other financial assets and thus liable to Zakat.
Note: This 2.5% of the lump sum revenue will not be paid immediately, since the client might object, but is just used to show that not all of this revenue will be available for investment or lifestyle after the end of the year.
- The Amount on Death can be set to 0%, the takaful will then payout through the insurance screen.
- The Amount on Disability would be 0%, for the same reason.
- The drop-down menu beside Model As should be set to Fixed Period since the takaful will pay out regardless of when she retires.
- Click Save to return back to the summary Pensions screen
One of the most important goals to keep in mind for your clients is the life insurance reduction on disability. The way the Web Advisor treats the life insurance and disability insurance for long-term calculations means that any permanent life insurance that pays once on disability OR death, is actually calculated as paying out twice: once when the person becomes disabled, and another time on death at the assumed age of mortality. To correct this, you must add an event specific goal for the amount of the permanent insurance. So to finish your analysis of the life insurance coverage, we recommend you visit the page Planit:Life and Disability Insurance in One Policy to add this objective for Nidal Dhakir and Rasha Nadhir.
Example Problem Life and Disability Insurance in One Policy
Alvin Cheng has an insurance policy worth $150,000 that covers his whole life or would pay out a $100,000 lump sum benefit if he were to become disabled. If Alvin were to become disabled, he would not receive his whole life benefit. His insurance policy through work is a two times salary plan, so would pay $440,000 in the event of his death. It also covers $4,000 in a monthly benefit in the event of disability, not indexed to inflation. Grace Cheng has $80,000 of whole life insurance, which pays out a separate disability benefit of $30,000 lump sum.
Solution using Summary Insurance Coverage
From the Insurance Screen:
- Under Client’s Permanent Insurance enter $150,000 for Alvin’s permanent life coverage
- For Client’s Term/Group Insurance, enter the $440,000 Alvin would receive through work.
- In the Spouse’s Permanent Insurance field, enter Grace’s $80,000 coverage.
- Set the Spouse’s Term/Group Insurance to $0.
- In the disability section, set the Client’s Annual Income Benefit to $48,000 (12 months x $4,000 monthly benefit)
- The Index Rate on Benefits can remain at 0%, since they are not indexed.
- Under Client’s Lump Sum on Disability to $100,000, since his personally owned policy pays out this benefit if he were to become disabled and unable to work.
- Under Spouse’s Lump Sum on Disability, enter the $30,000 available.
- The Will benefits be subject to income tax drop-down menu should be set to No for both client and spouse, based on the taxability of insurance benefits.
- Click Save at the bottom of the screen
The way the Web Advisor treats the life insurance and disability insurance for long-term calculations means that any permanent life insurance that pays once on disability OR death, is actually calculated as paying out twice: once when the person becomes disabled, and another time on death at the assumed age of mortality. To correct this, you must add an event-specific goal for the amount of the permanent insurance.
Use the Next arrows or the drop-down menu to continue to the Objectives screen. Some objectives may have already populated the screen, such as a child's education and retirement lifestyle.
- To add a new objective, click on the Add button above the existing entries.
- In the Description field, enter an appropriate name, such as Life Insurance Reduction on Disability
- In the drop-down menu beside Need For, choose Client, since we are counter-acting for Alvin’s doubled life insurance.
- In the Retirement Amount Per Year enter $0, since this is an event-specific goal.
- The From Year and To Year will both be the year of Alvin’s assumed mortality since that is when the life insurance would be included incorrectly.
- The Index Rate should be set to 0%, since the amount will not index when paid out.
- The event-based needs Radio button should be set to Amount
- The Need on Death field can be changed to $0, since the life insurance will pay out once, appropriately on Alvin’s death.
- The Need on Disability field can be changed to $150,000 – the amount of Alvin’s permanent life insurance policy.
Note: You do not need to include the value of the term or work insurance, since it will not be assumed to still be active at Alvin’s assumed mortality of age 80.
- Select the Fixed Period option under the drop-down list beside Model As, since this stream is not affected by retirement.
- Click Save to return to the summary Objectives screen.