We have been talking about several concepts about Life Insurance for several weeks now and I thought it might be a good idea to touch upon some of the most common misconceptions associated with the life insurance. I think it is important to address the topic because life insurance is not something most of us learn in a school but it is one of the cornerstones of financial planning.
For this week, I have hand-picked 7 myths associated with life insurance which I intend to bust! Which one(s) you find familiar?
1. I am young, single and healthy. I don’t need life insurance: On the contrary, the earlier you buy life insurance, the better it is. The premiums are cheap because both the age and health is in your favour. Buying early is a good idea in case you have dependent parents and/or outstanding loan.
2. Insurance is a long-term contract: This is partially true. Insurance contracts are usually long-term and may not suit everyone’s need. However, there has been the advent of on-demand life insurance wherein one can buy the contract for a duration as short as 24 hours. These contracts are focussed on customers who want protection only for the duration they would be engaged in hazardous activities like adventure sports. In case you are more keen, feel free to refer to the article I did on on-demand life insurance.
3. The employer-provided insurance is all I need: It is quite common for employers to provide for the life insurance cover for the employees. However, the cover is generally restricted to 1–2 times the salary, which in most cases wouldn’t be sufficient to meet the expenses of the dependants in case of the unfortunate incident of death. The rule of thumb is to have cover around 8–10 times of the salary. In case you want to get more scientific about the protection gap, here is the link to the calculator developed by Life Insurance Association Singapore.
Additionally, the cover also goes away in case you lose the job and at that time buying life insurance may not be high on priority. The fact that the premiums increase with age makes buying life insurance more difficult!
4. I am not healthy. Nobody would offer me life insurance: This holds good only when you are severely unhealthy. But most life insurance companies would be happy to offer you cover if you are suffering from ailments like diabetes, high cholesterol and arthritis. The premiums would be slightly higher as compared to the standard life though. At times, instead of increasing the premiums, insurers would prefer excluding the conditions for the purpose of the claim. For example, those suffering from heart conditions can be covered for deaths occurring from reasons other than, say heart attack.
5. The only way to get out of life insurance contract is to surrender: The value of insurance contract is best realised when it is held till the maturity. Surrendering, apart from many other things, implies that the insurers would recover their acquisition cost over a shorter period of time resulting in the loss of value for the policyholder. But then surrendering is not the only option. You could always sell it off through fidentiaX Marketplace and get much higher value than the surrender value offered by the insurers. Wondering how do we manage to offer more than the insurers? You guessed it right, there is an article for that as well!
6. All life insurance products are same: Well, if that would have been the case actuaries (including myself) would have been jobless long ago! On a more serious note, life insurance products are designed to take care of various life stage needs. For example, if you want only protection, you could choose between a term insurance and whole life contract depending on the duration for which you need the cover. In case you want to accumulate wealth and take advantage of favourable tax rule for insurance products, you might want to choose from endowment or investment-linked insurance policies.
7. Only bread-winners need life insurance: While it is true that life insurance is essential for bread-winners of the family, the homemakers also need life insurance. If the lady of the house dies, there would be a sudden surge in the household expenses toward cleaning, cooking and taking care of the children and home maintenance. This is an insurable risk and homemakers should also buy life insurance along with the breadwinners of the family!
I sincerely hope that you find the article useful and managed to debunk a few myths. Look forward to your feedback and questions. Please send them to hello@fidentiaX.com. And of course, I would be live on Twitter to answer any life insurance related queries at 8 PM Singapore time on 1-October-2018 i.e. this Monday!
Disclaimer: The article has been written with an aim to broadly explain an otherwise complicated and technical topic for readers with little or no insurance background. Hence, it doesn’t have finer details but is still broadly correct. The readers are recommended to take advise from their respective financial advisers before taking any financial decision.
About the writer: Mr Sumit Ramani is the Chief Actuary of fidentiaX. He is a qualified Life actuary and a computer science engineer with over a decade of experience in (re)insurance business with focus on modelling of life and health products, peer review and business analysis.