Life insurance is a simple, low-cost way to provide for your loved ones in the event of a tragedy. But what kind of insurance is best? Those living in Japan may think that domestic Japanese life insurance is all they need. Unfortunately, many people don’t realize the problems with Japanese life insurance until it is too late…
How Does Japanese Life Insurance Work?
Domestic life insurance policies in Japan work by establishing a financial contract between a policyholder and a licensed insurance provider operating within the country. The purpose of domestic life insurance is to offer financial security and assistance to the insured’s loved ones after the death of an income earner. The contracts typically define a number of key parties and exchanges between the insurance provider and those included in the policy. These include:
- -Policyholder: The policyholder is the person who owns and manages the life insurance policy. They take responsibility for paying the premiums to keep the policy active. As the policyholder, they have the authority to make important decisions regarding the policy, such as selecting the coverage amount, choosing beneficiaries, and updating personal information as needed.
- -Life Assured: The life assured is the individual whose life is covered by the insurance policy. If the life assured passes away, the policy will pay out a death benefit to the designated beneficiaries. Typically, the life assured is also the policyholder. Factors like the life assured’s age, health, lifestyle, and other considerations are taken into account when determining the premium and coverage amount for the policy.
- -Premiums: Premiums are the payments made by the policyholder to the insurance company in exchange for coverage of the life assured. The amount of premiums varies based on factors such as age, health, and type of policy. These factors affect the likelihood of the insurance company having to pay out the policy’s benefits.
- -Death Benefit: The death benefit is a sum of money paid out to the beneficiaries of the life insurance policy upon the death of the insured person, who is the life assured. This benefit is designed to provide financial protection and support to the insured’s loved ones. It can help cover various expenses, including funeral costs, outstanding debts, mortgage payments, and everyday living expenses.
- -Beneficiary: The beneficiaries are the people or entities designated by the policyholder to receive the death benefit upon the death of the life assured. Beneficiaries can be individuals, such as family members, friends, business partners, or organizations like charities, trusts, or nonprofit entities. The policyholder can name one or multiple beneficiaries and may specify the percentage of the death benefit that each beneficiary should receive.
These terms are common to most domestic and international life insurance policies. However, Japanese tax law deals with insurance policies differently than many other countries.
What Is The Difference Between Japanese Life Insurance And International Life Insurance?
In most instances, the main difference between international life insurance and domestic life insurance lies in the scope of coverage and the geographical boundaries within which the policies apply. Similar types of policies are available with both domestic and international insurance, each with its own characteristics and benefits. Some of these include:
- -Term Life Insurance: Term life insurance is a straightforward and affordable option. It provides coverage for a specific term, agreed upon by the insurance company and the policyholder. If the policyholder passes away during the term, their family receives a payment called the “sum assured.” If the policyholder outlives the term, they may need to renew the policy or purchase a new one for continued coverage. Term lengths typically range from 10 to 30 years, but customizable options are also available. Term life insurance is a good choice for those seeking simplicity and cost-effectiveness. It can provide a safety net for the family if the primary earner passes away.
- -Permanent Life Insurance: Permanent life insurance offers coverage that continues indefinitely. It guarantees a death benefit payment to the family at some point in the future. Permanent life insurance can be seen as a managed investment account. The policyholder pays monthly premiums, which the insurance company invests in long-term assets such as equities and bonds. The death benefit is derived from the growth of these premium payments. Permanent life insurance provides a level of security for loved ones and can serve as an investment option. However, it’s important to consider the associated costs and whether alternative investment strategies may yield better returns.
- -Whole-of-Life Insurance: Whole-of-life insurance is a type of permanent life insurance that includes a cash value account. A portion of the premium goes into this account, which accumulates returns similar to a traditional savings account. Policyholders may have the option to choose how much cash goes into the account, separate from the premium. The cash value account can be used to offset premium costs or serve as collateral for loans. Whole life insurance is designed to provide a combination of coverage and savings.
- -Universal Life Insurance: Universal life insurance is another form of permanent life insurance. Like whole life insurance, it includes a cash value account. However, universal life insurance offers the flexibility to adjust monthly premiums if the cash account reaches a certain amount. Minimum monthly premiums may still be required to keep the policy active.
These same policies are available with domestic Japanese life insurance, there are also specialized life insurance policies, such as group life insurance offered by employers, joint life insurance for couples, and first-to-die or second-to-die joint life insurance. These policies have their own unique features and benefits, providing coverage tailored to specific situations.
There is also another significant difference between domestic life insurance in Japan and international life insurance that has been previously mentioned: how these policies are treated by Japanese tax law.
In Japan, policyholders can deduct premiums paid to life insurance from their income tax if they are the same person as the life assured. If the policyholder is not the life assured but the beneficiary, deductions may be applied to the death benefit payout depending on the circumstances.
International insurance policies, on the other hand, do not qualify for standard tax deductions in Japan. Despite this limitation, many international families may still choose international insurance over domestic insurance for a number of reasons.
What Are the Problems with Japanese Life Insurance for Foreign Residents of Japan?
Overall, the problems with Japanese life insurance for foreign residents stem from the limitations of domestic policies come down to their ability to support an international lifestyle. These limitations include:
- -Language barrier: Domestic insurance policies in Japan typically provide customer support and documentation in Japanese, which can pose difficulties for non-Japanese speakers. The contract itself is governed by Japanese law and is written in Japanese. This language barrier can make it challenging for foreign residents to understand the terms and conditions of the policy and effectively communicate with the insurance company.
- -Limited coverage outside Japan: Domestic insurance policies in Japan usually provide coverage only within the country. This can be a problem for foreign residents who travel frequently, relocate, or have plans to move back to their home or another country in the future. International insurance policies, on the other hand, offer global coverage, ensuring continuous protection regardless of the policyholder’s location.
- -Beneficiary complications: In the case of international families residing in Japan, their beneficiaries may be living outside of Japan and may not speak Japanese. Domestic insurance policies might not provide adequate support for beneficiaries in their native language, making it difficult for them to understand and receive their benefits. International insurance policies are more likely to address this issue by offering support in the beneficiary’s native language.
- -Limited currency options: Domestic insurance policies in Japan typically pay benefits in the local currency (Japanese yen). For foreign residents who wish to repatriate funds to their home country or receive benefits in a different currency, this lack of flexibility can be a disadvantage and introduces currency exchange risk. International insurance policies often provide the option to receive benefits in major currencies like USD, GBP, or EUR, allowing for greater convenience and financial flexibility.
- -Lower death benefit relative to cost: Domestic insurance policies in Japan usually offer a lower death benefit compared to international insurance policies. This means that foreign residents may have to pay more for a domestic policy to receive a similar level of coverage compared to an international policy.
International insurance policies often address these issues and provide additional benefits that make them more appealing to foreign residents living in Japan. Furthermore, although domestic insurance policies offer tax deductions on premiums, international insurance policies may offer tax planning opportunities and death benefits that can be of greater overall value.
What Kind of Life Insurance Is Right For You?
Ultimately, the best life insurance policy for each individual comes down to his or her personal circumstances. A financial adviser can help you better understand the variety of insurance options and which policies are suitable for your individual needs. Remember, foregoing life insurance or choosing the wrong coverage could leave your family in dire financial straits should you die unexpectedly.