Death is a part of life. Whether from an accident, violence, or a disease, death can happen when we least expect it. Even in Japan, a country highly regarded for its safety and healthcare system, people die every day.
Death can create many problems, especially for your loved ones. Fortunately, life insurance can mitigate some of the issues that death brings. While life insurance cannot reduce your risks of dying, it can provide your family with an extra layer of financial security. Understanding how to choose a life insurance policy ensures that your family is adequately protected if you die.
What is Life Insurance?
Life insurance can provide your family with a financial safety net if you die. The financial safety net comes in the form of cash payments. Usually, Insurance companies pay life insurance benefits in a lump sum (single payment) or a series of smaller installments.
Your family can use the life insurance money for anything. Medical bills, mortgage payments, living expenses, and education expenses are all examples of what your family can spend life insurance money on.
Suppose you died but already had a significant financial safety net. In that case, your family could invest the life insurance money and further grow their wealth.
In essence, life insurance serves as a substitute for your earnings if you die.
Who Needs Life Insurance?
Anyone can benefit from the extra financial protection life insurance can provide. However, life insurance is most important for people who are working age and have dependents.
Dependents are usually children, and the more children you have, the more critical life insurance is. The younger your children are, the more critical life insurance is. However, there are many more factors that come into play when determining your need for life insurance.
Another important factor when determining your need for life insurance is your career. If your job is dangerous, life insurance is more beneficial for you. For example, somebody who frequently travels abroad for work is at higher risk of death than somebody who lives and works in Japan.
In general, the more dangerous your life is, the greater your need for life insurance is. Lifestyle can give you a decent idea of your risk of death.
However, often, death is random and unpredictable. Every year, thousands of people living in “low risk” countries working in “low risk” professions die unexpectedly from accidents, illness, or medical complications.
Because of the unpredictability of death, everyone can benefit from life insurance.
How Much Life Insurance Cover Do I Need?
The optimal amount of life insurance cover you need depends on your current expenses and future expenses. For example, suppose you have young children. In that case, you may need a higher level of cover than somebody who has teenagers, especially if you want to pay for your children to attend higher education.
Life insurance needs could also depend on your current level of financial security. If you are starting your journey towards financial freedom, you may need a higher level of coverage.
Younger parents may need a very high level of life insurance cover. On the other hand, consider someone who opted to start a family later in life. They may already have a high level of financial security and need less life insurance cover.
Financial advisors can help you choose the correct amount of life insurance cover. Tracking current expenses, predicting future costs, and discounting cash flows are examples of a few tools used to calculate your life insurance needs.
It is important to remember that insurance companies in Japan may try to sell you more coverage than you need. Furthermore, they can fail to assess the needs of a non-Japanese family accurately.
Types of Life Insurance Policies
Term Life Insurance
Term life insurance is a widespread and straightforward type of life insurance policy. With term life insurance, your policy has a specified term or time frame. If you die during the time frame of your cover, your family will receive the life insurance benefit.
The length of the term will vary. Usually, the time can be between 1-30 years. There are many factors taken into consideration when an insurance company determines your premium for term life insurance. Age plays a crucial part in how an insurance company decides the price of your policy.
Age also plays a role in the length of the term you can purchase. Some insurance companies will not sell a term policy if you are over a certain age when it expires. For example, if you are 50 years old, an insurance company may refuse to sell you a 30-year term.
Decreasing Term Insurance
Insurance companies use decreasing term insurance to capitalize on the increased risk that comes with age. With decreasing term insurance, the potential death benefit decreases over time.
For example, suppose you purchased a 20-year term policy. With decreasing term insurance, the death benefit could 10 billion JPY five years into the term. Ten years into the term, the death benefit could be 8 billion JPY.
The rate and frequency with which the benefits fall depend on your specific policy. Usually, the benefits decrease at an increasing rate as you age. In some cases, they may fall at a constant rate.
One of the main benefits of a decreasing term life insurance policy is the cost. Decreasing term life insurance policies will cost substantially less than a level-term life insurance policy. Decreasing term policies are also the most common types of policies bought by people wanting to insure against the cost of their outstanding mortgages and home loans in Japan.
Level-term life insurance benefits do not change over time. With level term life insurance, your insurance policy will specify a specific death benefit, which will be the same. Regardless of whether you die at 60 or 95, the insurance company pays you the same amount with level-term life insurance.
For example, say the death benefit stated in your 30-year policy is 10 billion JPY. In the case of level-term insurance, if you die aged 45, you will receive 10 billion JPY. If you die aged 65, you will still receive 10 billion JPY.
There are many factors to consider when deciding which type of term life insurance policy is right for you. For some people, a level-term policy would be best. For others, a decreasing term policy could be best.
Speaking with a financial advisor regarding which term life insurance policy best suits your needs may be beneficial.
Whole of Life/Permanent Insurance
Whole life insurance policies are different from term insurance policies. With whole life insurance, the policy covers you until you die. Whole life insurance does not expire, and the insurance company pays the death benefit regardless of when you die.
With whole life insurance, premiums are usually substantially higher. Even at the beginning of the policy, when your odds of dying are slim, premiums can be very high. In some cases, the premiums can increase as time goes on.
Traditional whole life insurance comes with a constant premium. Even as you age, the amount you pay does not change. With traditional whole life insurance, you can expect to be paying a very high premium initially to make up for the costs of insuring you as you age.
Critical Illness Insurance
Critical illness insurance is not the same as life insurance.
If doctors diagnose you with a severe disease such as cancer, stroke, or a heart attack, critical illness insurance pays you a benefit. The size of the benefit depends on your specific policy. Critical illness insurance benefits can range from a few thousand dollars to a few hundred thousand dollars.
In contrast to life insurance, you do not need to die to receive critical illness insurance benefits. You receive critical illness insurance payment upon diagnosis of a qualifying disease.
Suppose doctors diagnose you with terminal cancer (guaranteed death). If you have life insurance, you can use your expected life insurance benefits to pay your medical bills and family expenses. The expected life insurance payout can cover your family when you cannot work while getting treatment.
Now suppose doctors diagnose you with non-terminal cancer. Since you will not ultimately die, you will not receive life insurance benefits. In this case, you cannot depend on life insurance as a financial safety net.
You may not be able to work while you battle non-terminal cancer. Or the healthcare system may force you to seek treatments not covered by your insurance.
Non-terminal cancer could financially ruin your family if it prevents you from working and forces you to seek alternative therapies. However, critical illness insurance could provide you with a financial safety net if this situation occurs.
Unless the cancer is terminal, you cannot depend on life insurance to cover your expenses. Many people elect to purchase critical illness insurance on top of life insurance.
Critical illness insurance is popular in Japan, where government-subsidized treatments are less effective than newer, non-government subsidized treatments.
Length of Cover
How to choose life insurance cover length is relatively simple. The first step to selecting a length of cover is to consider your length of liability. Your length of liability is essentially the length of time in which other people are dependent on you and the expected length of your debt.
Figuring out your length of liability is simple. The most apparent liability is dependents, such as children. Figuring out how much longer your children will be dependent on your income is a good starting point.
For example, if you currently have a 2-year-old child, a 20-year life insurance term might be a good option. This 20-year life insurance term would cover the child into adulthood and until they finish university.
However, children are not the only potential liability to consider. If you have a partner who does not work, you may also want to have a life insurance term to cover them through retirement.
Next, factor in the length of your current debt. Current debt can be anything from a financed car to your mortgage. Factoring debt into your life insurance cover length can ensure that you do not leave your family with an enormous debt burden if you die.
For example, suppose your home mortgage has 25 years remaining. In this case, you may want to purchase a term length that covers your family until you have paid off your home mortgage (25 years).
Speaking with a financial advisor can help find the optimal length of cover. Additionally, financial advisors can help you determine your size of liability more accurately. Financial advisors can also help decide which type of life insurance policy suits your needs.
[ Sources ]
– “How to Choose the Right Type of Life Insurance.” Insurance Information Institute.
– Li, Donghui., Moshirian, Fariborz., Nguyen, Pascal., Wee, Timothy., “The Demand For Life Insurance In OECD Countries.” The Journal of Risk and Insurance. Vol. 74, No. 3 (2007)
– Shoenthal, Rebecca., Gambhir, Nupur., “How Long Should My Life Insurance Coverage Last?” Policygenius (2021)
– “What are the Principal Types of Life insurance.” Insurance Information Institute.