Life insurance is a contract between the insured and an insurance company. When the insured person passes away, the insurance company compensates a sum of money to the policy beneficiary, enabling them to receive financial support directly and immediately.
Life insurance helps avoid financial impact due to the death of the insured, such as discontinuing property payments or affecting children’s education plans. Life insurance is a highly effective risk management tool that transfers the financial risk of the insured’s death to the insurance company and is an essential part of financial planning.
Life insurance can be broadly divided into (1) Whole Life Insurance and (2) Term Life Insurance:
Whole life insurance is one common type of savings insurance, which can provide both life protection and savings return at the same time.
The operation of savings insurance involves the investment department of the insurance company. Through long-term and stable investment, the insurance company can earn stable income. These incomes can provide “guaranteed returns” and “non-guaranteed returns” for the policy.
Insurance companies often invest in high-rated bonds (such as government bonds) because bond returns are fixed, predictable, and higher than bank deposit rates. However, if there is a low-interest-rate environment, some insurance companies may also make other investments (such as distributing high-yielding blue-chip stocks or collecting rent from the property market) to increase the potential return on the policy.
As a savings insurance, whole life insurance can be a valuable asset, so it can also be used as collateral to apply for loans from insurance companies or banks when needed, but the policyholder also needs to pay corresponding interest.
However, generally, whole life insurance requires a longer period for the policy to accumulate satisfactory returns. If it is terminated too early, it may result in the final withdrawal amount being lower than the total premium paid.
Moreover, life insurance with savings components will compress all premiums for the entire protection period into a limited payment period. Plus, some premiums will be used for investment and other expenses, such as administrative fees and sales commissions, so premiums will be more expensive than regular life insurance.
Also known as “pure life insurance” or “life insurance without savings component”, the policyholder’s premium is mainly used to pay for life protection.
The greatest benefit of term life insurance is that premiums are cheaper because the policy does not contain any savings, bonuses, or investment components. Moreover, the protection period is limited and generally does not cover too old an age or lifetime.
The payment term of term life insurance is also relatively flexible, usually 1 year, 5 years, 10 years, or 20 years. It belongs to a consumption-type insurance, and the policy has no cash value at all. Even if the decision is made not to renew the policy at maturity, there is no need to consider whether the policy value exceeds the total premium paid.
More importantly, term life insurance has a simple product structure, so the protection and details of various insurance products offered by major insurance companies on the market are similar, making it easier for policyholders to compare and find the best value-for-money life insurance product.
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Term life insurance provides coverage for a specified period of time, typically renewable every 1/5/10/20 years until age 85. Most term life policies do not have a savings component and premiums are much lower than those for whole life insurance, which calculates premiums for the insured’s entire life. Policyholders have a contractual obligation to pay premiums on a monthly, quarterly, semi-annual, or annual basis.
If premium payments are missed for a designated period (such as 2 months), the life insurance company has the right to terminate the policy unilaterally.
Although term life policyholders can apply to reinstate a lapsed policy within a grace period, the grace period is usually short (such as 60 days). The premiums for many term insurance products increase with the age of the insured.
In addition, some companies offer fixed premium structures that maintain fixed premiums during a specified period (such as the first 10 years of the policy). However, after the initial fixed premium period, premiums may be several times higher than before and will continue to rise with the age of the insured.
Term life insurance can provide affordable life insurance coverage for loved ones and is suitable for young people and couples. Most term policies do not have cash surrender values and are non-participating (i.e., do not pay dividends).
Whole life insurance is a product that combines insurance protection and investment opportunities. Like term insurance, policyholders have a contractual obligation to pay regular premiums to the insurance company to avoid contract termination. The insurance company also allows policyholders to revive lapsed whole life insurance policies within the grace period.
Part of the whole life insurance premiums paid for whole life insurance products is converted into cash surrender value, which means that premiums are generally higher than those for term insurance products. One difference between whole life insurance and term insurance is that the premiums for the former remain fixed throughout the contract period and do not increase with the age of the insured.
As a result, most whole life insurance policyholders hold their policies for as long as 20 or 30 years and use the accumulated cash surrender value to supplement their retirement income. For dividend-paying whole life insurance policies, the life insurance company may distribute non-guaranteed dividends to policyholders.
Whole life insurance policyholders can withdraw dividends in cash, use them to purchase additional life insurance coverage, or deposit them with the life insurance company as savings. Of course, premium payments for dividend-paying whole life insurance policies are higher than those for non-dividend-paying policies. Like term insurance, whole life insurance is also popular among traditionally conservative customers.
When deciding whether term life or whole life insurance is the best for you, you may want to ask yourself the following three questions:
1. Do you need short-term or long-term insurance coverage?
If you need lifelong coverage for asset transfer planning, you may want to choose whole life insurance, because at the age of 80 or older, the premium for term life insurance may be very expensive.
2. Do you want to transfer investment risk to the insurance company or assume it yourself? What is your risk tolerance and capacity?
If you are not a risk-averse investor, we recommend that you purchase term life insurance and use the saved premiums for investments, which may yield greater returns. Conversely, you can consider purchasing whole life insurance, as you can at least receive “guaranteed return.”
3. Do you want the policy to be solely a life insurance protection tool, or both an insurance protection and investment tool?
If you view life insurance as a “protection tool,” we recommend that you purchase term life insurance because you can obtain greater protection with less premiums. Conversely, you can consider purchasing whole life insurance.
Honestly answering these questions will help you find the right type of life insurance for yourself.
Remember that life insurance is a product that needs to be tailored to your needs. The product purchased by your neighbor/friend, or recommended by an insurance agent/broker, may not necessarily be suitable for your personal situation.
Therefore, you have a responsibility to make the final decision based on your own needs and circumstances.
There are many different kinds of life insurance in the market, which might be confusing for a layman to consider which life insurance plan is the best.
When it comes to the best life insurance, there is never a definite answer given that every person has his/ her own needs and wants. Still, here are 5 tips to help you choose the best life insurance for yourself:
Assess your contribution to the family’s finances, who depends on you financially, and how your family will cope with daily expenses and debt repayment if you pass away. You must answer these questions clearly before purchasing life insurance to determine the appropriate coverage amount and payment method.
Life insurance can be divided into savings insurance and pure protection insurance. Choose the appropriate type of insurance based on your personal situation.
Before buying life insurance, make sure you have enough payment ability. Incorrectly estimating your payment ability may result in policy termination, which is a waste of money and loss of protection for your family.
There are various types of life insurance products on the market with different levels of coverage. Study the policy carefully before getting insured to understand the extent of coverage and exclusions to avoid budget overruns in case of accidents.
To ensure that the insurance company pays compensation as promised, research the claim ratio of the insurance company. If some claims have been rejected unreasonably, it may affect your final purchase decision.
Beneficiary is the person who can apply for compensation after the insured person meets the claims conditions. For example, in life insurance, if the insured person passes away, the beneficiary can receive insurance compensation.
There are different channels to purchase life insurance in Hong Kong, including:
• Directly from insurance companies online
• Through brokers/agents
• Through banks
• Through online comparison platforms
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