When we’re still young, wild and free, exploring and doing the adventures that we always dreamt about of doing, rarely we think about life protection. However, as we grow older, maybe we’re getting married and planning to start a family, the need for Life insurance seems more fundamentally important. The thought of a sudden loss of a loved one would be the most shocking experience that could happen. It’s an emotional and traumatic experience that we’re all afraid to go through. In fact, rarely comes to mind to have a conversation because it’s not a favourite subject for one to discuss!
Other events that we could experience is an accident where we sustain permanent disability or diagnosed with a critical illness. Again, we don’t want to talk about such things. Maybe we think we’re different and such sad events won’t happen to us so soon. It’s important to know that all these are insurable events but, maybe what first comes to mind is that this is another expense that you can do without. Here you have to reflect deeply and understand that life protection is to safeguard the people you leave behind that you most love from economic hardship after you die. If this is your objective then yes, life insurance is a must to have.
For dependents on you, if you are gone and for them, you were the breadwinner and if they don’t have enough money to pay the bills and ongoing living expenses, what they will do? Maybe the spouse has to sell the house or maybe you have kids and are still in their tender years, the spouse cannot support the family so there’s no option but to go out and work. If you think about these situations, you surely realize that a life cover costs next to nothing for the benefit personal insurance can provide.
Insurance can pay off any debts that you may leave behind. It can even provide cover against someone in the event of suffering a financial loss. So, what are the basic principles of insurance? It’s a form of risk transfer mechanism where people put money in form of premiums in a pool of funds, whereby the contributions of many will pay the losses of the few. For insurance to exist there has to be an insurable interest on the life of the person as a policyholder or another person. An insured sum has to be established as well, the time that the insurance policy will cover and the premium to be paid. The most common insurable interest is on a person’s life; parent or a child over 18 years; spouses; a person taking out a loan from the bank and for the business on the life of its key employee, shareholders or partners
I’m not going into all the technical aspects of insurance policies. That can be given in detail by a Financial Advisor. Here I will provide what’s important that you should need to know about life policies.
A person taking an insurance must act in the utmost good faith, which means the person has the duty to disclose with the insurer all material facts on himself or herself, whether it is specifically requested or not, that would influence the insurer when deciding whether to insure the person or not and the terms and conditions they want to apply. Also, you need to know the insurance terms, which consist of the Life Insurance Policy, which is a contract between the policy owner and the insurer, and the Policy Document or Schedule provides terms and conditions of the contract of insurance. Moreover, an Endorsement Document indicates any alteration to the policy document
The most common types of insurance that one can take are Term and Whole-of-Life. Term Life insurance is fairly cheap and most affordable since it covers a specified period of years while paying a premium each year to remain active. So, if the insured person dies during the period, the policy will pay the insured sum at death. Of course, there are different kinds under this category, such as Level Term and Decreasing Term insurance. The choice depends on the scope one is taking an insurance policy. It could be either to cover a bank loan or just to have life cover. It can be chosen to cover the life of another person, such as a spouse, a child or a key person in a business. Additional cover can also be taken, called riders. By paying an additional premium the insurance will pay in the event of accidental death, permanent total disability, injury benefit or critical illness.
The whole of life insurance guarantees to pay a lump sum on your death whenever it occurs, so there is no specified time frame. This type of cover may be slightly more expensive, but it is designed more to protects one’s family, so it has additional benefits than Level term on death. For example, apart from a cash lump sum paid, if the insured is diagnosed with a terminal illness. It also pays funeral expenses and any taxes or duties and maintains the lifestyle of one’s family.
A life policy can also be a saving and investment tool, known as Life With Profits. By paying regular premiums, the amount paid is divided between a contribution to a term life cover and the other part is invested. Therefore, the sum assured grows yearly through cumulative bonuses. Once the insurer declares to the policy holder the value of the sum assured, this is guaranteed and cannot be revised. However, one has to be careful that a With Profits policy is a contractual agreement over a period of years, usually last not more than 25 years. Hence, if the policy is liquidated early, the insurer can impose a penalty on the declared value, called Market Value Reduction (MVR). This to discourage policyholders to retire from the policy early since the sum is market-linked. This is contrary to other types of stand-alone savings plans one can find, where no penalties are incurred if withdrawn early. Conversely, the advantages of With Profits is its guaranteed element, so when taking a bank loan, the set sum can be placed as collateral against the loan sum.
As you can realise, Life Insurance is not just a normal product that you just buy it and leave it there. It is can be a safe and secure form of saving which needs to be revised periodically to accomplish any change in life’s objectives and reflecting the changing scenarios of life.
It has a particular purpose in our life and for our loved ones – to safeguard against those ‘what if’ situations. As we go through life building our wealth, our portfolio is incomplete without a proper protection plan to safeguard what we’ve built with hardship. A Life insurance policy must be an integrated part of our financial planning process.
Another one of my writings, this time focusing on Life insurance and how much we need to give its due importance in our financial planning process.
The Calamatta Cuschieri Traders Blog is available daily on CC WebTrader. Other market coverage including coverage of the International Bond Markets is also available.
The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Similarly any views or opinions expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the particular circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Calamatta Cuschieri & Co. Ltd. (CC) has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. CC does not accept liability for losses suffered by persons as a result of information, views or opinions appearing on this website.
This website is owned and operated by Calamatta Cuschieri & Co. Ltd (Co. Reg. No. C13729) of 5th Floor, Valletta Buildings, South Street, Valletta VLT 1103, Malta. CC is licensed to conduct Investment Services in Malta by the Malta Financial Services Authority.