Life Insurance

A Comprehensive Guide to Life Insurance 2021

Life Insurance is one of the most ubiquitous types of insurance products available in Hong Kong. You can bet that many of those around you have bought life insurance before. In fact, Hong Kong is one of the most developed insurance markets in the world, with a high life insurance density (measured by premiums per capita) at HK$ 478,175. What exactly is life insurance? What types of life insurance are there? Which factors should you consider before purchasing life insurance? Let Bowtie walk you through a step-by-step guide to understand life insurance!
Author Bowtie Team
Date 2021-11-03
Updated on 2021-11-03
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What is life insurance?What are the types of life insurance?Who needs life insurance?How to calculate your premium?How much life insurance do I need?Which factors to consider when buying life insurance?How to buy life insurance in Hong Kong?What are the advantages of Bowtie Life Insurance?Life insurance that keeps up with the times. Abrupt situations are also possibly covered?

What is life insurance?

Life insurance is a risk management tool that ensures the financial protection of your dependents if you unexpectedly die. Life insurance coverage provides a financial safety net. It guarantees that the insurer pays a sum of money, exempt from the estate tax, to named beneficiaries when the insured dies. It is an essential part of a sound financial plan.  

You may determine your desired amount and form of life insurance based on your situation and needs. And how much you’ll pay for life insurance is based on your age, gender, health, habits and more.

What are the types of life insurance?

There are two primary types of life insurance: pure and cash value life:

  1. Cash-value life insurance

Cash-value life insurance provides coverage for the life of the insured and contains a cash value component. Whole life insurance is a common type of cash value life insurance in Hong Kong.

Managing the cash values of life insurance involves the investment department of an insurance company. Insurance companies earn by prudently investing the premiums they receive from customers in long-term, high-quality assets. The yield then goes to providing the insurer guaranteed and non-guaranteed benefits. A relatively big part of insurance company investment portfolios comprises investment-grade bonds (e.g. government bonds) that tend to be less risky than those designated as high-yield, usually deliver a more stable and defined return, and pay higher rates than traditional savings accounts. However, to cope with a low-interest-rate environment, insurance companies may increase their exposures to alternative investments (e.g. blue-chip stocks or real estate) to ensure their ability to pay policyholder claims.

Life insurance policy loans are available on cash value life insurance policies where there is sufficient cash value to borrow against. The insured must pay interest on the policy loan. However, since cash value life insurance policies provide lifelong coverage, should the insured choose to surrender the policy, the insured may receive a much lower amount than the premiums they have already paid.

With cash value life insurance, which is more expensive than pure life, your premium payments go to three places: 

  • Toward the cost of actually insuring you.
  • Into the cash value. 
  • Toward policy fees, such as administrative costs and sales commissions.
  1. Pure life insurance (without a cash value component)

For pure or term life insurance, the premium payments contribute largely to the cost of insuring the policyholder. 

Since there is no savings, dividend, or investment component in a term life insurance product, it is cheaper than cash value life insurance. The premium payment period is also relatively flexible, with common terms available in 1, 5, 10, and 20 year(s). Since term life insurance policies do not have an investment portion, you suffer no economic loss when you surrender your term life policy. 

More importantly, the premium structure for pure life insurance is generally straightforward. The provisions and details of most term life insurance policies are similar, making it easy to shop around and compare rates.

Cash Value Life Pure Life
Character Long-term investment product Pure protection/ term protection product
What does the policy include? Life protection & savings Life protection
Benefit Period 10 years to a lifetime 1, 5, 10, 20 year(s)
Premium More costly More affordable
Clientele
  • Less financial burden
  • Seeks steady returns and protection
  • Greater financial burden
  • Seeks higher sum insured

Who needs life insurance?

Most people understand the primary benefits of having life insurance, but before making a decision to purchase an insurance policy, we often face the looming question— “Do we really need life insurance?”

Whether to purchase life insurance mostly depends on your financial obligations and goals. If any of the following criteria apply to you, we suggest that you consider buying life insurance :  

  1. You are the breadwinner

If you’re the breadwinner of the family, then you need life insurance to protect your loved ones from losing their main source of income in the event of your passing away. Insuring for an amount that approximates your total family expenses will provide adequate coverage in case of an emergency. 

  1. Your kids are still young

According to the Bauhinia Foundation Research Centre, the average cost of raising a child in Hong Kong from the first day of pregnancy to the day of his/ her obtaining the first degree is 5.5 million. If we take inflation into account, the average cost could reach 8.6 million. Thus you have to consider how your absence would affect your family and whether your spouse would be able to raise your kids alone. Purchasing life insurance is a smart way to help ensure your children’s financial security in the future. 

  1. You have a mortgage

If you have recurring debt obligations, such as your mortgage, if something were to happen to you, your family would have to shoulder the mortgage payments. Life insurance provides the financial support necessary to help your family if you die before your mortgage is paid off and protect your assets.

  1. You’re a company founder

As a business owner, your death could lead to your company shutting down. You should have life insurance that helps keep your business afloat in your absence. The death benefit can go toward covering bankruptcy expenses, liquidation expenses, severance to staff, etc. if the business closes. 

How to calculate your premium?

With a cash-value life policy, you typically get coverage for a defined length of time (e.g. 10 years to a lifetime). Within this time frame, premiums stay the same price. 

With a pure life policy that needs to be renewed regularly, premiums stay the same price throughout the term. But upon renewal, premiums can increase with age. 

Factors that may affect your insurance premium:

  1. Age: As you age, the likelihood an insurer will have to pay out on your policy increases; therefore premiums increase.
  2. Gender: Women tend to live longer than men. The average life expectancy for women is 5 years more than for men. Therefore, women generally pay less for life insurance than men do.
  3. Smoking: The health risks associated with smoking mean increased premiums. 
  4. Past Medical History & Family Health History: A history of medical conditions, such as high cholesterol or diabetes, or a family history of illness, will increase your premiums.

🎀 Insure with Bowtie: Breeze through the underwriting process by answering only 3 simple questions online. With the administrative costs saved, we give back to our customers by ensuring that they save more on their premiums. Same premiums, but higher benefits! Click here for more information.

How much life insurance do I need?

To calculate how much life insurance you need, consider the following 6 factors:

  1. Debt obligations, e.g. mortgage
  2. End-of-life expenses, e.g. funeral costs
  3. Dependent care expenses, e.g. monthly family expenses
  4. Children’s education expenses
  5. Existing coverage and assets
  6. Inflation rates

Use the Bowtie Personalized Coverage Calculator to help you determine your coverage needs.

Which factors to consider when buying life insurance?

  1. Evaluate your coverage needs

How much is your current financial contribution to your family? How many depend on you financially? In the event of your passing away, what can your family rely on for affording daily expenses and paying off debts?

Before shopping for life insurance, you must attend to the above questions. Otherwise, you cannot adequately determine the amount of coverage you need nor the optimal way of receiving a payout.

  1.  Comparing different types of life insurance

As detailed above, there are two primary types of life insurance: pure and cash value life. The former caters to those who are financially stable, seek a longer benefit period, and wish to accumulate cash value; the latter caters to those, typically young people, who have less risk-bearing capacity and need a higher sum insured. You should choose the life insurance type that suits your own needs. 

  1. Choose an insurance policy that you can afford

Before purchasing life insurance, you should make sure that you can afford the total premium cost within the benefit period. Overestimating your ability to pay may result in a late or missing payment, causing a lapse in coverage, in which case you won’t be protected.

  1. Understanding policy coverage

The types of life insurance on the market are various, and so are their levels of coverage. Before making a purchase, you should get a better grasp of your insurance policy by reading it with care. Understanding what is covered and the exclusions that take away coverage helps you minimize risk.

If you purchase the Bowtie Life Insurance, given that the policy is in force at the time of your demise, your beneficiary will receive the death benefit in full. The “suicide clause” is the only exclusion. Click here for more information.

  1. Checking insurers’ claim settlement history

You buy life insurance for the protection it affords at times of need. Failure to settle claims defeats the entire purpose of investing in a life insurance policy. To make sure that the insurer can pay out the full proceeds, it is imperative that you check the claim settlement history of the insurer. You may be dissuaded from purchasing if you find that an insurer has denied a claim for what you perceive to be unfair reasons.  

How to buy life insurance in Hong Kong?

Insurance traditionally has been sold through physical channels, i.e. Agents or Brokers. With the prevalence of digital insurance platforms, people in Hong Kong can now buy insurance policies online with great ease and speed.

What are the advantages of Bowtie Life Insurance?

According to the Insurance Authority’s 2021 “Mortality Protection Gap Study,” the MPG was estimated to be an average HK$1.9 million per EAA (Economically Active Adult). Bowtie Term Life Insurance is geared towards closing the protection gap, allowing Hong Kong people to receive greater protection at a more affordable price. 

Bowtie Life Insurance: For a policy with $1 million in coverage, the monthly premium can be as low as $24*, 30%^ lower than the cost of other term life policies on the market with the same coverage.

Bowtie is a truly customer-centric company that prioritizes customer feedback. Heeding our customers’ feedback, on 15 September 2021, Bowtie eliminated all exclusions but the suicide clause to match industry standards for flexibility while keeping prices low^.

  • * Based on average rates for an 18-year-old female nonsmoker
  • ^In 20 years, the total premium cost for Bowtie Life Insurance would be lower than the total average premium cost for other term life insurance (20-year term) on the market by 28% (sample rates are for a policy with $1 million in coverage for a 35-year-old female non-smoker; data is derived from the average standard premium, as of 1 July 2020, for term life insurance (20-year term) on the market, including digital term life insurance and 8 other term life insurance plans).
💡What is the Mortality Protection Gap?

The mortality protection gap can be understood as the impact on dependents in the event a major breadwinner dies prematurely. In general, the MPG is defined as the difference between the amount needed to substitute a household’s future income and the existing resources available.

Life insurance that keeps up with the times. Abrupt situations are also possibly covered?

Bowtie is an empathetic insurance company that aims to provide Hong Kong people with personalized and comprehensive protection.

As the COVID-19 pandemic continues, Bowtie has deliberately included related guidance into our policies. With Bowtie Life Insurance, if the insured dies of COVID-related complications or from COVID-19 vaccines, given that the policy is in force at the time of demise, the beneficiary will receive the death benefit in full. 

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