Your life in the balance

Ensuring the right level of life insurance is the foundation to all sensible - and pre-emptive - financial planning, writes Nicky Burridge

PUBLISHED : Monday, 17 September, 2012, 12:00am
UPDATED : Tuesday, 18 September, 2012, 4:32pm

The thought of not being around to provide for your family is something most people would rather not think about.

And for those who do want to make provisions in case the worst happens, working out how much life insurance is necessary and what form it should take can seem bewildering.

Ensuring you have the right level of cover in place is the cornerstone of good financial planning.

For the lay person's benefit, we ask who needs life insurance and what to consider when buying a policy.


Who needs life insurance?
Sheila Dickinson, senior wealth manager at independent financial advisor the Fry Group, recommends that anyone with "liabilities or responsibilities" should consider taking out a life insurance policy.

Dan Smith, director of international insurance at broker Alliance Group identifies three key groups of consumers: people with a partner who relies on their income, parents with children under 18 and people with debts.

Life insurance becomes increasingly important the more money you earn, as your financial liabilities - mortgage or rental contract - tend to increase in line with your salary.

But not everybody needs life insurance. Some people have sufficient assets to provide for their families if they were no longer around, effectively enabling them to self-insure. Others may simply have no dependents or debts.

Smith says: "Life insurance is about leaving money to people who need it once you've departed the world. If there is nobody who needs it, you don't need life insurance."


When is the best time to buy it?
Life insurance, like health insurance, is best taken out young, before you have developed medical conditions that could increase the cost of the cover or even make you uninsurable.

For some types of life insurance, like term insurance, the premium can be fixed when you take out the cover. Generally speaking, the younger you are, the lower the cost.

As a result, Dickinson advises: "If someone is in a situation where they don't have a need for life insurance now, but they will in the future, they may consider buying it now."

How much does one need?
The level of life insurance you need varies according to the reason for taking out the cover.

If the purpose is to repay a debt, it may be appropriate for the policy's value and term to match that of the debt.

Smith suggests people should consider a policy that will pay out the equivalent of five to 10 years' of the policyholder's annual salary.

In some cases, where young children are involved, people may want to consider extending to 15 years.

Smith says: "The principle behind this calculation is that if you have five years' worth of salary, the family is looked after financially for five years. That gives them time to grieve and readjust their finances and lifestyle."

Dickinson takes a different approach, looking at the capital sum needed to be invested to provide a replacement income for a spouse or family, and the period over which this income would be needed.

She adds that for expatriates, it is particularly important to consider the cost of returning home, and whether they would need to buy a property there, as well as factoring in the cost of rent or school fees if the family decided to remain in Hong Kong.

Smith also cautions that life insurance should be affordable.

"If you need to adjust your spending habits to pay for your life insurance, you are buying too much."

He warns that if you have a month where you cannot afford the premium, the policy may lapse.


How much does it cost?
Life insurance policies are underwritten on an individual basis, so policy cost varies in each case.

For example, a 37-year-old man, non-smoker, with no pre-existing medical condition, would pay HK$465 a month for a policy with HK$3.88m worth of cover over a 15-year term.

Health aside, three other factors govern cost. The value of benefits the policy will pay out if the holder dies, known as the sum assured; the term over which the policy is taken out, and the age of the person taking out the cover.

As a general rule, the longer the policy's term, the higher monthly premiums will be. The higher cost reflects the fact that, statistically, someone is more likely to die over a 25-year period than they are over a five-year one.

The age of the policyholder has a similar impact; a 50-year-old who takes out a 15-year policy is statistically more likely to die during the term, than a 20-year-old with the same policy.


How many types of policy are there?
There are two main types of life insurance policies: protection policies, which only pay out if the holder dies, and policies which combine life insurance with an investment policy. Bonnie Lui, chief life product officer at Axa, says: "People in Hong Kong like to combine protection products with savings or investments.

"That way, if nothing happens to them, they still get a payout, but in the unfortunate event of death, their family is protected."

But there are signs that sales of conventional life insurance are rising.

David Knights, general manager, Hong Kong of Friends Provident says although his firm offers both types of life insurance policy, demand for its pure protection life insurance product is currently strongest, increasing by around 40 per cent in the past 12 months. "Separating savings from protection gives flexibility should the client find themselves in financial difficulty," he says.

Smith puts it more directly: "If you want life insurance buy life insurance. If you want to invest money then buy an investment policy."

He adds that life insurance policies with an investment element, such as whole-of-life policies, generally have lower rates of return.