Insurance Archives • Allan Calumpang

10 BURNING QUESTIONS ABOUT LIFE INSURANCE

Allan Calumpang — Sat, 01 May 2021 11:43:06 +0000

ANSWERS TO YOUR LIFE INSURANCE QUESTIONS

If you already have a life insurance policy or planning to get one, here are the top 10 questions you probably forgot to ask your insurance agent.

Question 1: Is life insurance intended for savings & retirement?

The main purpose of life insurance is protection. Though permanent life insurance may provide savings component through the investment, cash withdrawal will impact the sustainability of your insurance, most especially those whole of life insurance with a limited number of payment terms. As a recommendation, if you are planning to save up for pension, retirement, education, etc, put in a pure investment and not in your life insurance.

Question 2: Is there a cheaper life insurance?

Yes. Term Insurance is the cheapest type of life insurance because you will only be paying the cost of insurance, and no investment component.

Question 3: Can a person be over-insured? How can you determine that?

Yes. Being over-insured is a “waste” of money because you could have allocated your excess premiums to other saving goals. You can also be under-insured which means that the life cover or critical illness cover is not enough to protect you or your family. Never let an agent just sell the insurance to you. You should know how much protection you need. To calculate your life cover requirement, you can use the DIME method. DIME stands for,

D – Debts
This can be your personal loans and other financial obligations except for the mortgage.

I – Income Replacement
Especially if you are the breadwinner or have dependents, losing you will greatly impact the financial capacity of the remaining family or dependents to sustain their cost of living. The amount can be calculated based on the current income or the minimum cost to sustain the family multiplied by a number of years. Usually, the number of years is based on the longest dependent years of a family member. Say if the family has the youngest child of 1 year old, the child is dependent for 20 years before s/he can survive on his/her own. Hence, income replacement should be equivalent to 20 years of income.

M – Mortgage and/or inheritance taxes
If in case the house that you are living in is under mortgage and does not have mortgage-redemption insurance, then this should be included in the life cover. Inheritance taxes should also be incorporated here.

E – Education Costs for Child(ren)
Though you might have already started saving for your kids’ college fund, you should add it in your life insurance cover as a form of protection if in case you will no longer be able to save up for this if there is
loss of life.

To calculate the Critical Illness Cover, this is equivalent to 2 – 3 years worth of expenses. The main purpose of the Critical Illness cover is to sustain your cost of living while you are recovering from an illness (e.g. stroke, cancer, etc). This is not supposed to be paid to your hospital bills because it is assumed that you have sufficient medical health insurance to cover that. However, for some, this cover is used to pay the hospital bills due to a lack of or insufficient medical health insurance.

Question 4: What is the need for life insurance when a person already has a medical insurance?

The main purpose of medical health insurance is to pay for your hospital bills while the lump sum generated by the critical illness cover of your life insurance is to be used to sustain your cost of living while you are recovering. You have to have both in order to be fully protected. Here is a sample scenario.

A breadwinner of the family had a heart attack and resulted in lower-body paralysis. He was brought to the hospital for treatment. For his hospital bills, his medical insurance covers all the expenses. He then leaves the hospital but still requires physical therapy and rehabilitation session for his paralysis. He is still not able to work hence he is not receiving any salaries anymore. Since he has a critical illness cover by his life insurance, he uses it to sustain his family’s cost of living while he is still recovering.

Question 5: What happens when you withdraw funds from your life insurance?

If you are taking a cash value or permanent life insurance, withdrawing funds from your insurance will impact the following: a) cost of insurance; b) sustainability of insurance.

How does it impact your cost of insurance?

If your life cover is $100,000 and the cash value (investment component) of your permanent life insurance is $30,000, your insurance provider only needs to pay an additional of $70,000 ($100k – $30k) if there is a loss of life. The payout risk from the insurance company side is only $70,000, and with that amount, they calculate the cost of insurance. The smaller the payout risk, the lower the cost of insurance. Hence, if you start withdrawing funds, the insurance provider’s risk will become higher and will consequently increase your cost of insurance.

How does it impact sustainability?

If you stop paying premiums towards your permanent life insurance, the insurance provider will start taking out the cost of insurance from your investment component. If the investment is no longer enough to pay for the cost insurance, your policy will cease to exist without value, and you are no longer insured. The effect is
accelerated if you are withdrawing cash from your insurance since you are consequently depleting the funds
which are supposedly intended to pay for your cost of insurance.

Question 6: What happens when your life insurance investment becomes zero?

The main purpose of the investment component in your life insurance is to pay for the cost of insurance while you are no longer paying.

If during the payment term, your investment component becomes zero, either due to market volatility or withdrawals, and assuming that you are still regularly paying your premiums, you are still insured.

However, if you have stopped paying premiums for your permanent life insurance, the cost of insurance will now be taken out from your investment. Once it depletes or becomes zero, you are no longer insured.

However, prior to depleting, your insurance provider will call you up to arrange options for you to sustain your insurance. (See also Question 5)

Question 7: Are you protected when the insurance provider declares bankruptcy?

The majority of the large international insurance providers in the UAE are authorized by the Isle of Man. The Isle of Man’s Life Assurance (Compensation of Policy Holders) Regulations 1991, ensure that in the event of a life insurance company being unable to meet its liabilities to its policy owners, up to 90% of the liability to the protected policy owners will be met.

Check with your local insurance agent who is their reinsurer.

Question 8: Does a person need life insurance if he/she is single and without dependents?

Technically, No.

If you are single and no one depends on your income, then you don’t need life insurance because you don’t have anyone to leave it behind. Maybe a funeral/memorial plan will just suffice to pay for final costs.

However, the best time to get life insurance is as early as possible (e.g. 18 years old or once you stepped into the workforce) even if you are still single because the cost of insurance is a factor of age and health. The younger we are, the healthier we are, the cheaper the cost of insurance. If you are going to get insurance when you already have kids or dependents, most likely you are already older, hence, the cost is higher. In addition, you might be paying a little extra more or worst, no longer eligible to get insurance because maybe at that point in life, there have been pre-existing conditions already. Remember that insurance is not only purchased with money but also with our health. The healthier we are, the more eligible we are to get insured. Hence, it is best to get life insurance when we are younger, even if we are still single.

Also, note that we are talking about life cover or death benefit, single or not, we need critical illness protection.

Question 9: Is life insurance cheaper in the UAE or in my home country?

Insurance providers consider the mortality rate of a country in calculating the cost of insurance. This can be affected by the crime rate and accessibility to reliable health care. If your home country has a higher occurrence of crime and its health care system is not up to par with UAE, then most likely your cost of insurance in your home country is definitely higher. To give you an idea of how much the difference is, below is an equivalent coverage per dollar for a permanent life insurance quote in UAE versus a quote in one of the Southeast
Asian Countries for the same individual,

UAE Life Insurance Quote
$50 coverage per $1 premium

Southeast Asian Life Insurance Quote
$9 coverage per $1 premium

Will my monthly premium change if I decide to get insurance here in the UAE but will go home for good to my home country eventually?
No. Whatever your premiums and coverage will stay the same even if you move back to your home country.

If you live in the Philippines and would like to get access to higher insurance coverage, you can check with providers in Singapore and Hong Kong. You don’t have to be a resident there to get life insurance but there might be logistical challenges.

Question 10: Can senior citizens and retirees avail of life insurance?

Yes.

However, that is already costly due to old age. Also, there might already be existing health conditions that will increase the cost further or worst, no longer eligible for taking life insurance.

In addition, there is a limit to the maximum age an individual can take life insurance. This depends on the insurance provider. It varies from 64 – 74 years old. Beyond that, the individual is no longer eligible.

I hope the above 10 questions on Life Insurance can provide some clarity. (Also, check out my other blog on Things You Should Know Before Approaching An Insurance Agent)

Sometimes, we forgot to ask these questions because we don’t know what to ask in the first place. It is supposedly the insurance agent’s fiduciary obligation to inform us about the pros and cons of life insurance and lay everything out in front. However, they too have their own biases. There are some who are truly sincere about your well-being but there are also some who are just driven by the sales income. I do hope that you can find someone who you can truly rely on.

The main purpose of Life Insurance is Protection.

Allan Calumpang

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THINGS YOU SHOULD KNOW BEFORE APPROACHING AN INSURANCE AGENT

Allan Calumpang — Tue, 05 Jan 2021 09:47:48 +0000

One of the fascinating things these days about personal finance is that more people are now open to the idea of investments and insurance. Previously in the Philippines, insurance is frowned upon due to fears of provider insolvency. And the thought of “making claims difficult” has also discouraged individuals and families from taking a protection plan. Fortunately, especially the younger generations, people are now keen towards insuring themselves and taking up some investments.

However, we can still hear horror stories like

“I just received a call from the insurance provider that I have to add more money if I still want to be insured. I thought I only have to pay for 10 years!”

“My money never grew. The fund value is way lesser than the amount I put in!”

If only we truly understand how insurance works, we should have never heard about these horror stories. However, most often, we are at the mercy of the insurance agent on how they explain the product to us. This would also depend on their motivation though: are they just aiming for the sale, or genuinely sincere about your welfare?

So, how do you approach an insurance agent? Here are some tips.

Know How Much You Need For Protection

To answer this, you should know what is your purpose for getting insurance. Is it for the family you will leave behind if there is a loss of life, to pay for estate taxes, or as a replacement of income when the insured falls critically ill? You can choose any or all. Your agent should help you calculate this.

I usually recommend using the DIME method for calculation. D for Debts, I for Income Replacement, M for Mortgage (including estate taxes), E for Education cost for kids. Add everything up and most likely you will have your protection requirement.

Of course, you don’t want to leave behind your debts, so it has to be paid off by your insurance. Income replacement is calculated based on how much your family needs to survive on a monthly basis for a specific number of years (e.g. 10 years) if the breadwinner passes away. Mortgages usually have Mortgage Redemption Insurance (MRI), so you might not need to add it up. Just add up the estate taxes and other costs when the property needs to be transferred to the heir. For education, we can obviously save up for that but that is if we are physically able to save up for it. What if the breadwinner is struck by an illness, and can no longer work? How will the family be able to send the kids to college? That is where insurance should come in. College education costs should be included in the protection calculation.

Know Your Options

Generally, there are two categories of life insurance: Term, and Permanent Life Insurance.

With term insurance, you are only insured during a specific term. If something happens within the term, the insured will be compensated. After the term, insurance will terminate and subject to renewal. Whatever you have paid during the term, can’t be recovered since that was the payment for the cost of insurance. This is the cheapest form of life insurance since there is no “investment” component in it so you are not paying extra.

Permanent life insurance on the other hand provides protection all throughout one’s life. With this type, you pay the cost of insurance plus an investment component. This insurance can be paid until death or can be paid for a specific timeframe, say for 15 years. On the 16th year, the insured will no longer be paying however, the cost of insurance will now be taken from the investment component. There is a possibility that your investment becomes zero. If this happens, you may no longer be insured. Ask your agent these questions,

What will happen if the investment becomes zero? And how can you mitigate this risk?
Where will the funds be invested?

Ask your agent the pros and cons between the two types.

Shop Around

Getting at least 3 quotes from various providers is a good practice. They might have the same offering but one important thing you can get out of this is you might be able to learn a few more critical things that the other agent might have “forgotten” to disclose. I have had a lot of experiences when the client says, “they never mentioned those potential risks to me.”

Check Your Agent’s Credentials and Get Feedback From Their Existing Clients.

It is important that your agent is duly authorized or licensed by the country’s insurance regulation. This means that they have passed the basic qualifications and requirements to discuss and provide you the insurance product. Does it mean that if an agent has more credentials, the better? Not necessarily. A license does not automatically mean that they are good and totally understand the product. Just like any other profession, whether an engineer, lawyer, or doctor, there are still those whom you can or can’t rely on. This is where getting feedback from their existing clients will help. Get their opinion especially on how they are taken care after the sale. Things like, how responsive are they with your concerns, questions, etc, and how often do they keep in touch.

If you can get a hold of someone who already made a claim against his/her insurance policy, the better. Ask him/her about the claim process experience. This could be a game-changer.

Check Providers’ Review and Financial Rating

There are a lot of insurance companies out there and most of the time we end up confused as to which provider we should be taking the insurance from. To help you decide, check the reviews of these companies and also get information on their credit ratings (e.g. Moody’s, Standard & Poor’s, Fitch Ratings) if they are very stable. You can usually find them on the insurance company’s website under the “Investors” section.

Ask your agent what happens when the insurance company goes bankrupt. Insurance companies are re-insured. Ask who are their reinsurers and how client’s are protected from bankruptcy.

On a final note,

Never let an agent sell the insurance to you. You should know what you need.

If you signed up for life insurance in just 10 minutes or less, most likely you were just sold to the idea too quickly. It takes time to carefully assess your protection requirement. Do not buy because your agent is your friend. Buy because you know what you need.

Personally, for me, I focus more on how these agents and companies take care of their clients after. These companies and their products are generally the same, but how well their after-care is, for me, one of the biggest deciding factors.

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