Life Insurance: Your Life, Your Choice
A Sense for Money
Last week we looked at the basic principles behind life insurance: What it is, the circumstances when you can and cannot buy life insurance, who benefits from being insured, and the people who don’t really need it.
This week, we are going to look at the basic types of life insurance, explain the differences and give you some useful tips which may well save you money when you are face to face with anyone selling insurance.
The first question to ask yourself is how much life insurance protection you need. Lots of insurance companies produce sales aids on how much you should buy, but how much you need is something for you to decide. It’s not complicated.
If you are buying life insurance for a specific purpose, you can usually put a financial value on that purpose. For example, if you have just borrowed Rp 300 million to buy a home, then the life insurance you need is the amount of the money borrowed. If you are buying the insurance to replace an income that would be lost if the insured should pass away for any reason, you know the income and you know the length of time you need this income for, and so multiply one by the other and that’s the amount of insurance protection that you need.
You could be very precise and factor inflation and potential changes in circumstances into your calculations, but it’s not really necessary as you can generally buy more insurance at a later date as and when things change. Just add up all your life insurance needs then round up the number to a figure you think is right, as life insurance is quite inexpensive for the protection that it provides. Talk this over with your sales advisor too. The advisor is likely to suggest you buy more – don’t they always! Listen to the reasons for this, but always remember that the final decision is yours.
Now that you know how much insurance you are going to buy, you have to decide on the type of policy. Essentially, policies are either life insurance with no investment component or life insurance combined with some form of investment. The following shows some examples:
Life Insurance With No Investment:
- Mortgage Protection
- Term Assurance
- Family Income Benefits
- Personal Accident Plans
Life Insurance With Investment:
- Whole Life
- Universal Life
- Endowment Policies
- Unit Linked Policies
A life insurance policy with no investment is just that. Premiums are paid to the insurance company to cover the risk of the insured dying before the end of the selected term. That’s it. If there hasn’t been a claim by the end of the term, the policy just ends and no premiums are returned and so this leads some customers to think that they have paid for nothing (which is not true as there was a risk that has been covered during the term of the insurance policy).
So, to give customers more choice, insurance companies developed policies that would pay out cash when the policy ended, at least paying back the premiums and often considerably more. There are some merits to this approach although there is also a downside. Broadly speaking, to enable the companies to provide cash returns, the premiums for the insurance have to be higher. This is because some of the premium pays for the insurance risk and the remainder is invested to produce the cash return.
The message is that when you are buying life insurance, you do have choices. Having established the amount of life insurance protection that you need (as described earlier), ask the advisor/salesperson for two different types of illustrations. One illustration should be a product with no investment content, and the other from the life insurance with investment content.
Both policies will provide the protection that you need although one policy will be a lot cheaper with no cash return at the end of the policy and the other more expensive with a cash return. You can now decide if firstly, you can afford to pay the additional cost and secondly, if the cash return is worth the additional cost. You might also ask the salesperson why they are recommending a particular company or product, and how the prices, services and products of that company stack up against other providers. Now, you are in position to make an informed choice.
Listen to what your salesman/advisor has to say, but always remember it’s your decision that’s final. After all, it is your life.
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