What Type of Life Insurance Should Foreign Expats in Japan Have?

life insurance protects family and loved ones

Life insurance is important. International residents of Japan, especially those with dependents, should consider life insurance. If a household’s breadwinner dies, life insurance can substitute lost income, and help pay any accrued medical expenses or debts.
Automobile collision Japan life insurance
Life insurance functions like other types of insurance. The policyholder pays a premium, typically monthly. If they die, their family receives a payment from the insurance company.

However, there are many different types of life insurance. Consequently, residents of Japan should consider the various kinds of life insurance available.

Term Life Insurance and Permanent Life Insurance

Term life insurance and permanent life insurance are the most common life insurance policies. English speakers living in Japan will find most Japanese and international insurance companies will offer some variation of either term life insurance or permanent life insurance.

Term Life Insurance

Term life insurance is straightforward and affordable. As the name implies, term life insurance provides coverage for a term agreed upon by the insurance company and policyholder. If the policyholder dies before they reach the end of their term, their family receives payment from the insurance company- the “sum assured”.

Suppose the policyholder outlives the term. If they still need coverage, they will need to renew their expired policy or purchase a new one. Typically, standard term lengths range from 10 to 30 years. However, many insurance companies offer customized policies.

Life insurance contract

Those looking for simple and affordable life insurance should consider term life insurance. With some strategic planning, term life insurance can provide a sufficient safety net if the breadwinner dies.

Term life insurance is inexpensive because it is statistically unlikely that the insurance company will have to pay death benefits. Most choose a term that expires when they are older and no longer have dependents.

In Japan, the average life expectancy is over 84 years, and most retire in their middle 60s. Because most people retire when they no longer have dependents, life insurance may not be necessary once retired. Thus because of Japan’s high life expectancy and young retirement age, insurance companies can provide inexpensive term life insurance policies for people living in Japan.

Some insurance companies try to upsell complicated policies. These complicated policies can provide unnecessary cover at an unnecessary price. Financial planners experienced in insurance can reduce life insurance costs and ensure one receives the correct life cover at a minimal cost.

Permanent Life Insurance

Permanent life insurance is another option. With permanent life insurance, cover continues indefinitely. Indefinite cover means the policyholder does not face a term constraint.

Because everyone dies eventually, permanent life insurance guarantees the family payment at some point. This guaranteed death benefit comes at a cost, however.

It can be helpful to look at permanent life insurance as a managed investment account. Each month, the policyholder pays a premium. The insurance company then takes this premium and invests it. Typically, life insurance companies invest in long-term assets, such as equities and bonds.

Policyholders can imagine the death benefit as a portion of the growth of their premium payments in the life insurance company’s investment portfolio. As with all actively managed investments, the insurance company keeps some of the growth as compensation for their services. The policyholder and insurance company determine the death benefit when they create the permanent life insurance policy contract.

old people with permanent life insurance

Whole Life Insurance

Whole life insurance is a type of permanent life insurance. The difference is that whole life policies have cash value accounts. Essentially, a portion of the premium goes to a cash savings account. The returns on these cash accounts will be like the returns most banks offer on traditional savings accounts.

This cash value account is unique to insurance. Some whole life insurance policies let people choose how much cash (separate from the premium), goes into this cash value account.

The insurance companies offer these cash value accounts to sell their expensive permanent life insurance. The idea is policyholders can use the cash value account to offset the cost of their premium. 

Another benefit of these cash accounts is they can serve as collateral for loans. Suppose an unexpected medical bill comes up. Whole life insurance policyholders can borrow against the value of their cash value account to pay this bill.

Universal Life Insurance

Universal life insurance is another variation of whole life insurance. Like whole life insurance, universal life insurance has a cash value account. The difference is that universal life insurance allows policyholders to reduce monthly premiums if the cash account grows to a certain amount.

However, most policies still have minimum monthly premiums. Regardless of how much the cash value account grows, insurance companies will still require a minimum premium payment to keep the insurance policy active.

Important Note on Permanent Life Insurance:

Permanent life insurance is best for those who want a guaranteed level of security for their loved ones. Also, people looking to build long-term wealth can benefit from permanent life insurance if they are not confident in their own abilities to invest or do not have a financial adviser.

However, it is important to keep costs in mind. Those looking for a way to build long-term wealth could see more growth if they invest the money themselves. Those who want to build generational wealth would benefit more from working with a qualified investment adviser, rather than paying for costly permanent life insurance.

Other Life Insurance Policies

Term life insurance and permanent life insurance are the most common kinds of life insurance. However, there are more specialized life insurance policies. Keep in mind only some of the more common alternative life insurance policies will be covered here.

Group Life Insurance

Some employers offer group life insurance. Employer-provided group life insurance is a compensation incentive, like employer-provided health insurance. An employer purchases a single group life insurance policy contract and extends this policy to employees. The employees are the group.

moving with international life insuranceThe group life insurance company provides the employer with certificates of coverage. The employer then gives these certificates of coverage to employees.

With group life insurance, there is a single policy; the employer holds the policy, not the employees. Typically, a group policy comes in the form of standard term life insurance.

Those offered group life insurance should consider this option. Group policies provide adequate cover in most cases and can save people costly premium payments. The employer usually pays the entire cost of the insurance or at least subsidizes it.

However, it is important to keep in mind that group life insurance is not portable. Lacking portability means the life insurance doesn’t follow someone when they change jobs. This lack of portability can be a logistical problem for those who change jobs; lacking portability can lead to gaps in life cover.

As a result, those who do not stay at a single company for long may want to purchase independent life insurance. Some insurance companies let people convert their group cover into an independent policy.

Critical Illness Insurance

Critical illness insurance is not life insurance. Usually, critical illness insurance is a complement to life insurance. However, critical illness insurance serves some of the same purposes as life insurance.

Critical illness insurance provides financial support if diagnosed with a debilitating illness.  Some examples of debilitating illnesses are cancer, heart attack, stroke, brain damage, or dementia.


Critical illness/cancer insurance
However, there are many more illnesses that qualify as critical. Critical illness insurance policies will specify which illnesses qualify for benefits.

The most straightforward critical illness insurance policies pay a lump sum upon proof of diagnosis. The policyholder has the freedom to spend this payment however they please. Some people spend it on alternative treatment, medical expenses, or as a substitute for lost income.

The key difference between life insurance and critical illness insurance: the policyholder does not need to die to receive critical illness insurance money. This is where the benefits of critical illness insurance really are; where life insurance is absent, critical illness insurance can provide cover.

Those who get an illness that prevents them from working may end up in a financial predicament. Critical illness insurance is a good option for those who would like to have an extra layer of financial security that traditional life insurance does not provide.

Joint Life Insurance

Joint life insurance is shared life insurance. Typically, a married couple shares joint life insurance. These policies usually come in the form of permanent life insurance.

The couple holds a single policy that covers the death of either partner. Usually, joint life insurance policies pay benefits once. Some policies pay benefits when one partner dies. Other policies pay benefits once both are deceased.

There are multiple types of joint life insurance. The most common are first-to-die and second-to-die life insurance.

First-to-Die Joint Life Insurance

With first-to-die life insurance, the insurance company pays out when the first member of the joint policy dies. This type of life insurance policy can act as a substitute for lost income and can help support the remaining partner.

However, the insurance company only pays benefits once. The policy ends once the first partner dies; the remaining partner will have to find a new life insurance policy or forgo life insurance.

Joint life insurance policies are usually cheaper than individual policies. Therefore, a first-to-die policy is an option for those with a tighter budget, or for those looking to save money. Joint life insurance policies also help those whose partners couldn’t get an independent life insurance policy due to preexisting conditions.

first-to-die and second-to-die life insurance

As mentioned previously, joint life insurance policies, including first-to-die life insurance, are usually permanent life insurance. So, if the insurance holder pays the monthly premiums, the cover will not expire. Eventually, the couple is guaranteed payment, regardless of age.

The death of a partner brings financial and emotional stress. First-to-die life insurance can help alleviate some of these stresses and help people with the transition to life without their partner.

Second-to-Die Joint Life Insurance

Second-to-die life insurance works nearly the same as first-to-die life insurance. As the name suggests, the insurance company pays out only after both members of the joint policy have died.

Insurance companies gear second-to-die life insurance towards those who could continue to support their families if their partner died, without receiving supplementation from an insurance company. For example, if both partners have high incomes, they could be fine without individual or first-to-die life insurance.

Those looking for a cheaper alternative to traditional permanent life insurance can benefit from joint policies. An experienced financial adviser can help determine if joint life insurance is the correct option given one’s unique financial situation.

Life Insurance Conclusion

Anything involving families and finances is complicated. Some life insurance policies are simple, and others are not.

While insurance companies can argue that “niche” life insurance policies could be more beneficial, term life insurance usually gets the job done. However, there are many factors to consider when selecting a life insurance policy, from optimal coverage, and optimal term length, to whether one is predisposed to early death.

Financial advisors can help determine which policy is best and ensure that one’s insurance has them covered.

 

Sources and Further Reading

- Brown, Mark J and Kim, Kihong. “Am International Analysis of Life Insurance Demand.” The Journal of Risk and Insurance, Volume 60 No. 4

- Cox-Steib, Joshua. “Joint Life Insurance Policies” BankRate (2021)

- “Guide to Critical Illness Insurance Policies: Are They Right for You?” Healthcare Solutions Team®

- Lewis, Frank D. “Dependents and the Demand for Life Insurance.” The American Economic Review (1989)

- Nealon, Lizzie. “What Happens to Your Life Insurance When You Leave a Job?” BankRate (2021)