THE IMPACT OF LIFE INSURANCE AND EMPLOYEES PROVIDENT FUND ON PERSONAL SAVINGS IN MALAYSIA

The main economic security programs in Malaysia are life insurance and the Employees Provident Fund. Life insurers, apart from providing financial protection against the risks of premature death, illness and disability, and loss of income in old age, have served as important accumulators of personal savings. The Employees Provident Fund is a compulsory savings scheme established for the purpose of providing retirement benefits whose members comprise about 82 percent of the work force. Economists tend to accept the view that life insurance and the Employees Provident Fund have stimulative effects on personal savings, but the depressive effects are generally ignored. The saving habits developed through life insurance may stimulate personal savings among policyowners; while the compulsory savings through the Employees Provident Fund scheme force its members to reduce consumption and hence increase personal savings, and its benefits lengthen the period of retirement over which accumulated assets will spread. On the other hand, the anticipation of windfall death benefits under life insurance may reduce the policyowners\u27 emergency fund resulting in an increase in consumption and reduction in personal savings. The anticipation of benefits arising from the cash value build up under permanent life insurance and retirement benefits under the Employees Provident Fund may have asset substitution effect and thereby cause reduction in personal savings. The purpose of this study is to assess the impact of life insurance and the Employees Provident Fund on personal savings in Malaysia using the extended permanent income model. The time period under study is 1964 through 1984. A varying coefficients model was adopted to eliminate the nonstationary problem. Evidence shows that life insurance stimulates other forms of savings throughout the estimation period while the Employees Provident Fund initially depresses (1967-79) but later stimulates (1981-84) personal savings. Further analysis reveals that the substantial rise of contribution rates of the Employees Provident Fund in 1980 has caused reduction in consumption (and thereby increase in personal savings) and a shift of the insurance market to term insurance plans