Life Insurance FAQ
What is life insurance and how does it work?
Just like how home insurance protects your house and car insurance protects your car, life insurance protects your life.
A life insurance policy is a contract between you and the insurance company where the insurer promises to pay your beneficiaries a lump sum of money if you die while the policy is active. In exchange, you pay the insurance company money (in the form of premiums) on a regular basis to maintain this coverage.
The insurance company takes the premiums you pay and invests it to try to earn a profit before paying out any benefits.
When applying for life insurance, you’re able to choose which beneficiaries to include and what amounts they would get. You can also choose between 2 types of life insurance: Term Life Insurance and Permanent or Whole Life Insurance.
A Term Life Insurance policy does exactly as the name would imply, it is a life insurance policy that is valid for a specific term (usually 10, 15 or even 25 years). If you outlive the policy, the policy lapses and nothing happens (although you may have the option to extend or convert it into a Permanent Life Insurance policy). If you pass away during the policy term, a lump sum benefit is paid out directly to your dependents. This policy is the most flexible and is commonly used to achieve short-term goals.
A Permanent Life Insurance policy is one that is active for as long as you’re paying premiums. The main advantage here over the Term policy is that you do not have to worry about insurability or whether you’re able to get another policy after the term expires.
All things being equal, a term life insurance policy will be much more affordable than a permanent life insurance policy. There is no best policy, it all depends on your budget, needs, and reasons for purchasing life insurance in the first place.
Why should I get life insurance?
As the saying goes, there are only 2 things certain in life: death and taxes.
Whether you like it or not, if you’re the head of the household, you’re a walking ATM for the rest of your family. They depend on you to bring in money every month to pay for expenses and maintain their lifestyle. How would they fare if you were no longer there to bring home a pay cheque every month? Probably not well.
If you don’t have life insurance to help replace your income, your passing could mean serious financial hardship for your surviving family members and dependents. For this reason, many people will purchase enough life insurance to replace their lost income (either fully or partially for a time), pay down the home mortgage, and/or build a college education fund for their children.
If you do decide to purchase life insurance, make sure you let your dependents know so they can contact the insurance company for their lump sum benefit.
When should you get life insurance?
Usually, the decision to purchase life insurance is triggered by an important life event. With our clients, we usually see them look at life insurance when they buy a house, start a family, or have a child.
For example, you might decide to take out a 25 year term life insurance policy when you get a mortgage for your family home. This makes sure that if you were to pass before the mortgage was paid off, your family would have the money necessary to pay off the home and not have to worry about moving.
That said, you should look at purchasing life insurance as early as reasonably possible for 2 reasons: cost and coverage.
One of the most important factors insurance companies look at when setting your premiums is which age bracket you fall into. The older you are, the more you can expect to pay because insurance companies estimate that you’re more likely to pass away as you age.
Your coverage options are also more limited as you age. Once you get above 50 years old, many insurers are reluctant to insure you which limit your choices. As you grow older, you may also develop some chronic conditions that require ongoing treatment. Depending on the condition, it’s possible that the insurer would decline to cover death resulting from that pre-existing condition.
Is life insurance a good idea?
If you have dependents who rely on your income in order to meet their basic and lifestyle needs, carrying some life insurance is a good idea.
Stripping aside all the fancy add-ons and tricks you can do with life insurance, the whole goal is to replace your income if you were to pass away. The idea is that if you die prematurely, your spouse and kids wouldn’t need to take on multiple jobs, sell the house, or endure extra financial hardship because they have the lump sum benefit from your life insurance policy.
What are benefits of life insurance?
Life insurance gives you and your family peace of mind knowing that they would be well taken care of even if you were to pass away.
Most clients choose to purchase enough life insurance to pay for a mortgage, replace their income for a time, fund their children’s education, or give enough financial breathing room for their spouse to re-train and start working again.
A common strategy used by many insureds is called “laddering”. Think about what might trigger you to purchase life insurance – for example, starting a family. You’ve purchased a new house and have a new child on the way. In this situation, where do you have the most risk? Probably somewhere between the first 15-20 years. As your child get older and starts to support themselves, your risk gets lower and lower.
In that case, we might advise that you purchase a 20 year term policy for HK$3,000,000 and a 35 year term policy for HK$1,000,000. By layering life insurance policies in this way, you never pay for more coverage than necessary because your coverage decreases as your risk decreases. If you were to pass away prematurely in the first 20 years, your spouse and child would have HK$4,000,000 in coverage. If you outlive the 20 year term, your first policy lapses and you have HK$1,000,000 in coverage. That isn’t much but it’s OK – you’re likely closer to retirement age so saving money on your life insurance premiums is a good thing and your child would hopefully be self-sufficient by now.
What is not covered by life insurance?
There are a few reasons when life insurance benefits would be denied but here are some common examples:
Many policies will have a discovery period of 2 years. If any information on the application is found to be purposefully inaccurate during this time, your coverage can be denied.
Insurance companies can also deny your claim if premiums aren’t paid in a timely manner.
Generally speaking, insurance companies will not cover death resulting from alcohol or drug abuse, or deaths resulting from a pre-existing condition. In addition, if you deliberately put yourself at risk of injury or death, they usually won’t cover that either.
Life insurance coverage is pretty comprehensive but if there’s something unique about your situation that you’re concerned about getting coverage for, speak with us and we’ll find suitable coverage for you.
Do you pay life insurance forever?
If you purchase a term life insurance policy, then no. You would only need to pay premiums for as long as the policy is active (i.e. for 10 years).
If you’ve purchased a whole life insurance policy then yes, you would need to pay premiums for your whole life for your policy to remain active. That said, many whole life policies will still lapse if you’re lucky enough to hit age 120. But by then, you likely won’t have very many dependents to take care of anyways.
Does life insurance pay for medical bills?
No it does not. Life insurance is a type of insurance policy designed to pay your dependents a lump sum of money upon the death of the policyholder. That means it will only kick in after you pass away.
If you’re looking for coverage for medical bills while you’re still alive, you should consider purchasing health insurance.
What happens to life insurance if you don't die?
If you purchase a term life insurance policy and outlive the term you’ve chosen, the policy lapses and nothing happens. That said, some insurers will give you the option to convert the policy into a permanent life insurance policy (subject to an application and/or medical exam) or renew it for an additional fixed term.
If it’s a permanent life insurance policy and you’re making your scheduled payments then this question doesn’t really apply – unfortunately, everyone dies eventually (at least for now). But if you stop making payments, then naturally, the policy lapses. If you’re lucky enough to live until age 120, your policy would lapse as well.
That said, that doesn’t mean life insurance is only useful if you die. With a permanent life insurance policy, you’re able to borrow money from the accumulated cash value.
Is life insurance a good investment?
Life insurance policies should be used as part of an overall financial and estate planning strategy. Many whole life insurance plans come with a distinct investment component that can generate surprising returns.
With a whole life policy, each time you pay your monthly premiums, a fixed amount will go towards the “cash value” of your policy which is able to accumulate and earn interest.
One major advantage of this cash value from a financial planning perspective is that you don’t have to pay taxes on that cash value until you withdraw the proceeds. It grows on a tax-deferred basis. With many policies, you’re also able to borrow money from the cash value portion.
Some policies may also provide accelerated benefits if you become critically ill. If you develop a serious terminal illness, you may be able to receive 25%-100% of your death benefit before you die to help improve your quality of life in your final days.
Can you get life insurance at any age?
The answer to this question is complicated: yes and no. Most insurance companies will set an age limit on new applicants as a way to control risk. Most insurance companies will set their limit to 60 or 70 years old.
That said, as people live longer and delay different life decisions for longer, senior life insurance is becoming a more popular thing. Although at this age, a Term Life Insurance policy is more than adequate, you can still purchase a Permanent Life Insurance policy if that’s the one you feel the most comfortable with.
Although your options may be more limited at an older age, it is still very possible to purchase life insurance. In fact, we specialize in helping clients find specialist insurance built specifically for their needs. Contact a licensed Trusted Union life insurance broker in Hong Kong to learn more about your options.