3 Important Points I Wish I Knew Before I Bought Life Insurance


Quick Summary:

  1. Definition of Life Insurance

  2. How to customise the cost of life insurance?

  3. How to bargain interest rates on loans with life insurance?

  4. Which type of life insurance is better?

So what is life insurance?

  1. Life insurance is a rightful policy that a person can hold to hedge against unexpected death.

What if you had only one day left to live, what is the logical way to lighten the financial burden to your family? It is to be insured and alleviate the cost of your funeral and ensure they live on the same quality of life with your absence. Unfortunately, for those who are less fortunate and do not have the opportunity to invest in insurance, GoFundMe is the last resort. When a family depends on one person for income, life insurance’s existence is a must.

Disclaimer: I am not sponsored by any insurance company and this knowledge is shared from my past experience working in AIA Insurance Group . I believe this information should be available to anyone who is concerned with the risk of unexpected death.

By paying a small amount of fee to the insurance company every year, you reduce the consequence of unexpected death. Insurance is like a jackpot that you do not want to win. But “if” you do win the jackpot, you are rewarded with money. Even though the chances of you winning the jackpot are slim, you should still participate. The most common excuse of not investing in insurance is that “I cannot afford insurance“. This brings me to the first point:

1. Every insurance policy can be customised to your needs

  1. No matter where you are, insurance should be affordable to everyone because it is not a luxury, but rather a necessity.

Keep in mind: Insurance policy can be suited to your income level.

  1. For Example, George’s income = 100,000 HKD per year, David’s = 10,000,000 HKD per year

  2. George and David purchase the same life insurance contract

  3. George pays 10,000 HKD every year for a contract value of 100,000 HKD

  4. David pays 100,000 HKD every year for a contract value of 1,000,000 HKD

George and David receive the same quality of service and insurance benefit, given both person’s annual cost is drastically different. The cost of insurance depends on the contract value and the person’s age.

How to calculate the annual cost of the contract?

The basic benchmark is 10x of a person’s annual income. (Ex. If George earns 10 HKD per year, George will consult his agent for a contract value of 100 HKD). This does not mean George pays 100HKD every year, 100 HKD is how much that is paid out if George dies.

Why 10x (Folds)?

The idea is that your family should be able to live in the same quality of life for the next 10 years if you pass away. During that time, they should have plenty of time to settle your funeral and regain financial steadiness.

2. Having life insurance grants you better loan rates

By having a life insurance policy, banks are less worried about the chances of your default when you die, the payout of the insurance policy can cover the loan. The greater your insurance contract value, the better the rate you can bargain with the bank. (Note: This depends on the reason for borrowing and your credit rating but, a person with a clean record should entitle to this advantage).

Always exploit this advantage!

This can reduce a large amount of interest expense. If you extrapolate this saved interest expense, you can use that money and invest it elsewhere. You can then use the savings for a weekend getaway.

3. Term Life versus Whole Life Insurance: The 2 Common Types of Life Insurance.

Term Life Insurance

Term life insurance covers a specific time period (ex. 30 years old to 50 years old) at a fixed cost.

Pros

  1. Cheaper

  2. Easy to understand

  3. Flexible (Cancel anytime)

Cons

  1. Not guaranteed for payout because if you pass away after (ex. 51 years old) you cannot make a claim

  2. Doesn’t cover your entire life

Whole Life Insurance

  1. Covers your entire life and compensation are 100% guaranteed.

Pros

  1. Insured entire life

  2. Less stress

  3. Guaranteed payout

Cons

  1. Higher overall cost (due to the longer term of payment)

Which one did I pick and why?

  1. Considering that I am just entering the workforce, I chose term life insurance. However, my limited cash is not the main reason.

  2. The idea of buying whole life insurance is allowing the insurance company to invest a portion of your money in a stable asset, which you receive the funds after your death.

  3. The main reason that I chose term life insurance and you should too, is because you should use the savings from not investing in whole life and invest it elsewhere. That way, you save some handling fees and you get to decide when you want to use the money. (For example, you use the savings and decide to invest in 1 share of Tesla and plan to sell it 5 years later for a trip to Japan). By investing in term life insurance, it gives you liquidity and choice of investment. Liquidity is extremely important when it comes to cash management. (Liquidity costs a lot of money, look at the impact of Covid-19). Nobody expected Covid-19 to be so contagious.

If you find this helpful, please share your thoughts in the comment and question section. Writing these articles motivates me to become better every day and share more about personal finance while learning along the way.

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