Life Insurance Explained

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