I have often reminded readers of the importance of protecting
dependents. Most expatriates in Jakarta have a degree of life
cover. This is because they generally work for large companies
so an element of life insurance, perhaps the equivalent of
a couple of years’ salary will typically form part of
a package in addition to a lifelong pension for a widow. But
few expats in Bali work for large companies and are therefore
responsible for arranging their own insurance. The problem
is, most of them do not!
Who needs life insurance?
Those who need it most are the breadwinners of young families.
Once you have built up assets that are sufficient for your
family to survive and prosper or if you have no dependents
then you may not need insurance. It is less essential in later
life unless you have inheritance tax issues, in which case
having an insurance policy can help to prevent your family
selling off part of your estate to pay the tax bill.
How much cover do you need?
No two persons’ situations are the same but a simple
way to calculate is to work out how much would be needed annually
for your family to maintain their current standard of living
and if you have children to see them complete their education.
Then multiply this annual figure by 25 (representing an annual
return on capital of 4%). You may find the total figure you
are looking at is from half to a million dollars. If the value
of your current assets is less than this then the shortfall
should be covered by insurance.
Why people do not have cover?
Frequent objections to having life cover include ‘I’m
perfectly healthy’ or ‘I don’t need life
cover at my age’. But probably the real objection is
cost. Expats in Bali have many demands on their income. If
the income is linked to the tourist industry it is subject
to frequent shocks as we all know. But you should ask yourself
if you can afford not to have insurance. How many will say
they cannot afford insurance yet still splash out on non-essentials?
It is not easy to sacrifice lifestyle for an asset or product
that is intangible! As for age, a recent study in the US determined
that at birth there is a 35% chance of not reaching 65.
Is life insurance expensive?
If you are relatively young (under 45), in good health and
do not smoke, even a significant level of cover, say US$500,000,
may be affordable. If you smoke however, the premiums can
double! Also, as you get older, the premiums escalate sharply.
Yet if you take out cover early in life it is cheap and certain
products funded entirely when you are young can cover you
later in life. But what kind of policy is right for you?
- Annual escalating premiums
This is the cheapest form of cover in the very short term.
It is the best choice for someone who needs to provide urgent
cover for a year or two. The premiums rise every year but
can be stopped at any time. If not renewed, the policy lapses
and there is no surrender value.
- Level term assurance
This is an excellent option for someone who can predict the
time span over which cover will be needed. For example, a
person may need cover until children have completed their
higher education, say in ten years’ time. The premiums
will be fixed for the whole term. Using a currently available
plan as an example, a 45-year old could obtain cover of $300,000
for a period of ten years for less than $1,000 a year. Cover
at this rate would not be available at the end of the term
however and there is no surrender value.
- Whole of life assurance
This is more expensive but as the name implies it should cover
you for the whole of your lifetime. Again, if you take it
out when you are young it will be much cheaper. You can even
pay premiums for just ten years but then be covered for life.
The way it works is that part of the premium is invested and
this in turn funds the higher cost of cover in later life.
If you terminate the policy at any time after the first couple
of years there would also be a surrender value so if you decide
the time has come when cover is no longer necessary you could
have a small nest egg to enjoy.
A word of caution
When taking out a policy it is wise to do so through a large
broker who can provide support for you if you have any issues
with the insurer. The policy should also be with a large international
company that is financially sound. And most important, when
you make an application answer all the questions truthfully.
A claim can be refused if information is found to be inaccurate.
A claim can also be refused if death is the result of an undeclared
pre-existing condition – even if you did not know about
it! So don’t wait till you think you may have a problem.
Once one has developed it is probably too late. The best time
to take out insurance is when you are relatively young and
healthy; that way you will continue to be covered when the
ravages of time and the good life in Bali catch up with you
later on!
Colin Bloodworth is a senior adviser with Financial Partners
International. The opinions expressed are his own. If you
have any questions regarding personal finance you may contact
him at 021 520 8099 or colin.bloodworth@financial-partners.biz
