Many policyholders assume that paying a fixed premium each month guarantees continuous medical coverage. In reality, most modern medical insurance policies – especially investment-linked policies (“ILPs”) – do not operate this way. The misunderstanding arises from how these policies are structured and funded. This update explains the mechanics in simple terms.
1. The Policy Is Not Just “Insurance”
A medical insurance policy sold as an investment-linked plan actually consists of three separate components:
1. The Investment Account
This is the fund into which part of the premium is placed and invested.
2. The Insurance Charges
These are monthly charges deducted to pay for:
life insurance (if any), and
the medical rider (hospitalisation and surgery).
3. The Medical Benefits
These are the hospital and medical bills payable only if the policy remains in force.
Crucially, the medical benefits are not paid directly by the premium, but are funded by deductions from the investment account.
2. The Water Bucket Analogy (Investment Value)
Think of the investment value as a bucket of water.
Every month, the premium adds some water into the bucket.
Every month, insurance charges remove water from the bucket.
As long as water going in ≥ water coming out, the bucket stays full and the policy continues.
Once water coming out > water going in, the bucket empties. When the bucket is empty:
the policy lapses, and
medical coverage stops, regardless of how long premiums were previously paid.
3. The Engine Analogy (Medical Charges)
Now think of the medical rider as an engine that consumes fuel (money).
• When the insured person is young, the engine is small and fuel consumption is low.
• As age increases, especially after 65, the engine becomes much larger.
• After 70, the engine becomes extremely fuel-hungry.
This increase is exponential, not linear. For example:
• At age 60: the engine may consume RM300 – RM400 per month.
• At age 70+: the engine may consume RM1,200 – RM2,000 per month or more.
If the bucket is not large enough, it will be drained very quickly.
4. Why the Policy “Worked” for Many Years
Most policyholders believe: “I paid for many years, so the policy should last.” This belief is understandable – but incorrect.
The policy worked earlier because:
• charges were relatively low;
• the investment bucket was filling faster than it was draining.
The policy fails later because:
• charges rise exponentially with age;
• investment value is depleted faster than it can be replenished.
This outcome is structural, not accidental.
5. Why the Insurer Can Still Be Profitable
Policyholders often ask: “How can the insurer say my policy is depleted when the company reports profits and pays dividends?”
The answer is that these are separate pools of money:
• Shareholder profits and dividends belong to the insurer.
• Investment value inside the policy belongs to the policyholder.
• The insurer is not permitted to use shareholder profits to subsidise individual policy losses.
Thus, an insurer can be profitable while an individual policy becomes unsustainable.
6. The Critical Disclosure Issue
The legal and practical issue is not whether repricing is allowed, but whether the policyholder was clearly informed at the outset that:
medical charges increase exponentially with age;
late entry (e.g. age 58 and above) significantly increases sustainability risk;
the illustrated premium may never realistically sustain post-70 medical costs;
the policy may lapse even if premiums are continuously paid.
In many cases, these implications are not clearly explained in plain language, even though they might exist in fine print.
7. The Key Takeaway
Medical insurance under an investment-linked structure is not “pay and forget” insurance. It is:
a fund-dependent system,
driven by age-based cost escalation,
highly sensitive in the later years of life.
Once the engine becomes too large for the bucket, no amount of past premium payments can prevent depletion unless additional funds are injected.
Final Note
Understanding this structure is essential for making informed decisions – whether to continue, restructure, or exit a policy. The issue is not consumer ignorance, but product complexity combined with inadequate explanation at the point of sale.
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