Ask Melanie

Ask Melanie: Life insurance

Melanie Nutbeam, a certified financial planner based in Hong Kong, addresses common personal finance queries. Send your questions to

PUBLISHED : Monday, 10 September, 2012, 12:00am
UPDATED : Monday, 17 September, 2012, 3:27pm

I want to ensure my family is looked after if I die. Should my life insurance policy include a savings plan or should I keep this separate?        

Insurance policies that combine death benefits with a savings plan are common in Hong Kong and it's not hard to see why.

A policy that provides cover for a set term, usually to age 60 or 65, is typically the least expensive way to arrange a lump-sum death benefit for your family.

But you have to die for the policy to pay out. That's hardly attractive.

Not only that, your premium statement reminds you of payment for something you haven't used. Instead of seeing the payment as representative of a crucial value - to leave your family safe and secure - you may feel short-changed.

This feeling could be perversely compounded when, reaching age 60 or 65, you find your payment term, and your cover, expires. All those years of paying premiums and nothing to show for it.

Term life insurance makes perfect sense if you are building up your other assets and cutting debt. It provides inexpensive cover against premature death and assumes you can manage your own savings to meet family needs should you live to an old age.

Recognising, among other things, that term life insurance has some emotional downsides, insurance companies offer whole of life and universal life policies that have both insurance and savings components.

Such policies switch your focus from death to savings - perhaps for your children's education. While a part of the premium is allocated to paying for your insurance cover, the balance, or savings component, is invested by the insurance company to create the "cash value" of your policy. The cash component earns interest, and can be drawn down or borrowed against.

Universal life policies let you switch premium payments between the insurance and cash value components, and to reduce or skip premiums if the cash value is sufficient; though be careful to ensure death benefit expectations can still be met.

On death, guaranteed amounts for whole of life policies, or residual cash values for universal life policies allow for a payment to beneficiaries even if you die in very old age. You might find this aspect comforting.

Of less comfort is the fact that agents are paid a lot of money to sell these plans. Typically, the full amount of premiums paid in year one goes straight to the agent in the form of a commission. Agents may have a fee incentive to recommend the plan over less expensive term life insurance.

Also note that plans are often sold as investment products. If you want to invest, there are more efficient ways to do this. So first and foremost look at these plans as insurance and ask yourself if that is what you want.

These savings-based policies have their place. People are living longer. The ability to apply for whole and universal life policies late in life means the policies can play a part in estate planning, tax management, charitable giving and so on.

They're even promoted for cryonics, that's freezing of your body immediately after death until medical developments can thaw you back into the land of the living. How you fund your lifestyle from then onwards is anyone's guess.

Whatever your expectations about longevity, when looking at life insurance this is the bottom line: ask plenty of questions and understand what you are signing up for.

The views presented here are general in nature. For personal finance strategies tailored to your needs you should talk to a professional planner