Custom-built insurance

Cedric Stephens, Contributor

Question: I am a 24-year-old security guard. I am thinking very seriously about buying life insurance. This is mainly because of the work that I do and the risks that are involved. Can you offer me any advice? Which company would you recommend?

Helpline: Talk with your boss. That should be the next step in your search to find out more about life insurance. Employers in the security industry often insure the lives of their staff.

The sum insured for employer-provided coverage is usually a multiple of employees' annual salaries/wages. That benefit is offered under group life insurance contracts. If you have the coverage, obtain details about it — for example, who are the insurers, how much will your dependents get in the event of your death, where is the proof that your life is insured?

Custom-tailored garments are often preferred by those who wear suits. They have choices in fabric types, colours, and styles. Also, those garments are cut, fitted, and sewn to the buyer's body shape and size.

Off-the-rack suits are built to fit the average person. Life insurance should be tailored to fit the needs of each buyer - not the average Joe. In your case, the amount of coverage and policy that you buy should take into account the financial situation of you and your family.

Here are a few questions that you need to ask yourself in relation to the subject:

Are you the breadwinner in your family?

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  Do you have a spouse and any children? Is the spouse employed? Alternatively, are you living with your parents or other family members?
  
  
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  Assuming that you are not living with your parents and your partner is not employed at present, would he/she be willing to find a job in the event of your death? How much would he/she be able to earn?
  
  
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  How much can you regularly afford to spend?

Life insurance is intended to fill the gap between the financial resources that you and your family have, and the funds that it would need, assuming that you were to die now.

A family's financial needs on the death of a breadwinner can be put under three headings. These are: (a) funeral or final expenses; (b) debts; and (c) continuing income needs.

Funeral and other expenses for a person of modest means in the US can amount to 10-20 per cent of the value of the deceased's estate or assets.

What the comparable figures for final expenses are in Jamaica, given the preference in some quarters for a send-off with lots of bling, is anyone's guess. Obligations to repay third parties for goods and services that were incurred before the death occurred, debts, should also be considered. The family's continuing income requirements after the death of the breadwinneris another important factor.

His/her earnings and the value of assets will influence the amount of funds that the family will need. Sales people who say that you need to spend 'X' per cent of your annualincome or 'X' times your annual earnings should be viewed with suspicion. Their commission is based on how much premium you pay. The amount of coverage that you buy should be influenced largely by items (a), (b), and (c). Life insurance should be used to add to the family's financial resources.

Consumers must understand at least six things in order to have an appreciation about how life insurance works. This is what Joseph M. Belth, author of Life Insurance: a Consumer's Handbook (second edition) - my 'bible' - says.

Those are duration, death benefit, premiums, savings component, protection component, and dividend. Given my space limitations, I discuss the first five:

1. Duration: If the insured survives, a life insurance policy can remain in force for one, five, 10, 20, 25, 30, or more years. The insurance regulator calls them long-term contracts in contrast to non-life contracts that run for 12 months. It is, therefore, very important that consumers do lots of homework before deciding to buy.

2. Death benefit: This is the amount that is payable on the death of the insured. In many cases, that amount remains fixed throughout the life of the contract.

3. Premium: This is the sum that is paid to the insurer by the customer. Usually they remain fixed throughout the contract period. Premiums may be paid monthly, quarterly, or annually. The cost of life insurance becomes more expensive as a person ages.

4. Savings component: Part of the premium of some policies is used to provide a cash value. This is the amount that is paid to the buyer when premium payments are stopped and the policy is surrendered. These types of policies have a savings component. Policies that do not have a savings component do not have a cash value.

5. Protection component: This is the part of the premium that is used to pay for the death benefit.

Buyers need to match their needs with the insurer that offers the best deal. It is not my job to do so.

Cedric E. Stephens provides independent information and free advice about the management of risks and insurance.aegis@cwjamaica.comSMS/text message to 812-7233