Life insurance is designed to protect your family and others who are dependent on you for financial support by providing them with a lump sum cash benefit.
If someone were to ask you what you thought the most important thing in your life was, how would you answer? Would you say the most important thing in your life would be your assets like your home, car, or investments? Maybe it’s your prized art collection? Maybe it’s the business you spent your best years building. Would it be your own life? Or maybe it’s your family?
Regardless of what your answer is, we all know how important it is to protect your home and personal possessions with home insurance, your car with car insurance, and so on. Protecting these things is almost instinctual for us. But how do you protect the other important things like your life or your family? Life insurance protects the things that are truly important in life: your family.
If you’re the head of your household, your spouse, children, and the rest of your family likely depend on you to maintain their lifestyle. If you were to die or become disabled and unable to work, how would your family fare without your income? Likely not well.
Without your income to support them, they may have to downsize or sell the family home, cut expenses, etc. Life insurance is designed to protect your family and others who are dependent on you for financial support.
If you have adequate life insurance, the insurer will pay a lump sum of cash to your listed dependants with no strings attached. There are no restrictions on how your dependants use this money but many will use it to pay down the mortgage, set up an education fund for the children, and/or to replace your lost income until the surviving spouse can be retrained and take over as the primary income earner.
Now that we’ve covered the basics, let's get into some more details. There are 2 types of life insurance policies each with their own use cases and unique advantages and disadvantages:
● Term Life Insurance
● Whole Life Insurance
Term Life Insurance
Term life insurance is a type of life insurance policy that is only valid for a fixed length of time - a “term”. This is the simplest type of life insurance policy as it provides nothing except the lump sum death benefit. The upside of this type of life insurance is the low cost and flexibility.
This type of policy is good for short term goals or if insurance protection is only needed for a fixed period of time such as if you’re getting a mortgage for the first time or want protection for your growing children. In most cases, the mortgage will be paid off and children would be fully independent in 25 years. In that situation, a term life insurance policy offers flexible coverage just when you need it.
Another popular strategy is laddering - the act of layering multiple insurance policies on top of one another with varying expiry dates to ensure you have just enough coverage at the right time. Let’s use the above mortgage example to explain this. With a 25 year mortgage, you will owe significantly less in year 20 than you would in year 5. If that’s the case, then getting 1 25 year long policy isn’t the best idea.
Instead, you should consider getting 3 policies, one 10 year long, another 20 years long, and a final one that is 25 years long. If your mortgage is for HK$3,000,000, then your 10 year policy could be HK$1,500,000, your 20 year policy could be HK$1,000,000 and your final 25 year long policy could be HK$500,000.
With this laddering technique, you would be HK$3,000,000 in coverage for your first 10 years after which that policy lapses and you’re left with HK$1,500,000 in coverage. By the 20 year mark, that policy expires and you’re left with 1 final HK$500,000 policy. Although significantly less than the HK$3,000,000 you originally borrowed, it should be enough considering how much of the mortgage has been paid down by this point.
Whole Life Insurance
Sometimes called permanent life insurance, whole life insurance is a form of life insurance policy that lasts your whole life provided you continue to pay the premiums. On top of the lump sum death benefit, this type of insurance also allows you to accumulate a cash value. A portion of your monthly premiums are set aside and invested. This accumulated cash value can be withdrawn at any time and used for whatever you want.
Whole life insurance is great for people who are looking to use life insurance transfer wealth in a tax-efficient way, as an investment vehicle, or as part of a larger financial plan.
If you’re interested in learning more about life insurance and the different “tricks of the trade”, don’t hesitate to get in touch with a licensed Trusted Union life insurance advisor for an obligation-free consultation.