Oran Hall | Buy life insurance to satisfy your needs

Life insurance is a very important element of personal financial planning. It has many benefits, but there are so many different types of policies, and individuals have so many different needs, that a very careful evaluation must be made before committing to building a life insurance portfolio.

When I managed investment funds at a life insurance company, I found it quite interesting that the managers of the employees who sold life insurance products were quick to blame the investment division for their failure to outperform the competition. They often argued that they were not given good enough investment performance to sell the insurance products.

It was common practice then, and I believe it persists today, for those selling insurance to do so on the basis of how much money the prospective policyholder could get from the policy several years down the road. The truth is, the cash values and the values of units were often based on projections and were not guaranteed.

Prospective customers were expected to buy, not so much to get coverage, as to be able to get good investment returns. Some individuals still buy insurance products expecting to get returns which they can convert to cash.

Although these returns can be of good value, especially in periods of crisis, it is inadvisable to encash units or take cash from insurance policies by other means. In many cases, this may compromise the ability of the policy to generate good values in the long term and, depending on the terms of the policy, may cause the policyholder to lose coverage eventually. The financial adviser who focuses on meeting the needs of the public through life insurance products by emphasising the cash aspect of life insurance, is not one to be entertained.

People in the industry may not like this, but it is true that life insurance is not necessarily for everyone. Generally, most insurance products pay a benefit to the beneficiaries, whether directly or through a will, upon the death of the policyholder.

The proceeds of the policies provide an income to replace that lost because of the death of the insured, and provide funds to settle an estate and any outstanding debts of the insured. Some policies also generate sufficient cash values and investment values to boost retirement income upon being converted to cash.

There is a wide range of products to meet the needs of people who do not have beneficiaries. Individuals, for example, may choose to purchase critical illness insurance to address their own needs, in the event of such a situation arising.

There are products to meet short-term needs such as for the education of children. These are essentially savings instruments. These, and other products which are for a limited term, 15 years, for example, are beneficial in that they pay the sum assured and any associated benefits if the insured dies before the policy matures.

Individuals should also consider the cost of insurance. The older persons are, the higher their premiums. Put another way, for the same premium a younger person pays, the older person gets a lower coverage.

If the primary reason for buying insurance is to provide funds to settle an estate, especially if it is a sizeable one, perhaps a term policy may be the best option. It is relatively cheap and gives a higher level of coverage.

EXCITING PROSPECT

Buying an equity-linked policy, which is generally supported by a segregated fund, can be an exciting prospect, especially if it is linked to a fund that invests for capital appreciation, because fund values can increase meaningfully when the market is moving in the right direction. However, there is the other side: fund values can fall sharply in a bad market. The course to take is not to panic and encash the units, for better days will almost certainly come again. One blessing of this situation is that new units will be purchased at relatively low prices.

It is useful to understand the terms of the policy. For example, for some policies, the sum to be paid when a death claim is made is the higher of the sum assured or the value of the investment portion of the policy. For others, it is the sum of both.

Affordability should not be overlooked when considering buying a policy. Insurance people are trained to show the prospect that they can afford the policy. As important as life insurance is, affordability is an important consideration. It is better to buy what can be afforded now and then buy more later, when it can be afforded, even though it will be at a higher premium, than to buy now and risk losing the policy because of the inadequate funds.

If there are provisions for conversion, buy now and convert to permanent insurance later, even for a higher premium, when income has improved.

People should buy insurance. It should not be sold to them. They should see the need for the product and make a commitment on that basis. It is the interest of the prospective insurance customer that is paramount.

Life insurance is good, so buy as much as is necessary and affordable, but do your homework and seek good guidance before making a commitment.

- Oran A. Hall, the author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email: finviser.jm@gmail.com