What, Why and How of Term Life Insurance

If you’re the primary earner for your family, you’re basically a walking ATM machine. Your family depends on your work to put food on the table, a roof over their heads, and the children through school. This means it’s very important for them to have you around.

Think about this, what would happen if all of a sudden, you passed away and was no longer able to earn income for your family. How would they fare? Probably not well. Your family may need to downsize their lifestyle, make cutbacks, sell the car, change school, or even sell the house and move to another neighbourhood in order to save money. How do you prevent this from happening? By buying life insurance!

There are a lot of reasons why someone might look into purchasing a life insurance policy. Some people purchase term life insurance in Hong Kong as part of a larger financial plan or estate planning strategy. Most people purchase life insurance because of some major life event like buying your first house with your spouse or having a child. In either case, you’re taking on some new responsibilities and you want to make sure that they’re taken care of no matter what happens to you.

If you’ve started researching life insurance, you might have already heard about the 2 types: whole life insurance (sometimes called permanent life insurance) or term life insurance. While they both have their pros and cons, today, we’re going to talk about term life insurance in Hong Kong.

What is Term Life Insurance?

Like all life insurance policies, a term life insurance policy pays your beneficiary(s) a lump-sum ‘death benefit’ if you pass away during the policy term. When purchasing the policy, you’re able to choose the amount of death benefit you want and the beneficiary(s) you want the money paid to (you can update or change this list anytime). If there are no surviving beneficiary(s), the money goes into your estate to be dealt with according to local probate laws.

The difference between a whole life insurance policy and a term life insurance policy is that a term policy is only active for a fixed period of time called a ‘term’. This term is chosen when you first purchase the policy and can be anywhere from 10, 15, 20, 25, 30, or even up to 35 years. If you outlive the policy term, it just lapses and nothing happens.

Why or When Should I Use Term Life Insurance?

Many clients struggle with deciding between a whole life insurance policy and a term life insurance policy. To help solve this conundrum, think about why you want to purchase life insurance in the first place.

If you’re looking to purchase life insurance because you’re having a new child, taking on a mortgage for your dream home or some other short-term goal with a fixed timeline, a term life insurance policy is a good choice.

If you’re looking to purchase life insurance because you’re having a new child, taking on a mortgage for your dream home or some other short-term goal with a fixed timeline, a term life insurance policy is a good choice.

Think about it, if you’re purchasing a life insurance policy because you want to make sure you have money to pay for housing, schooling, etc. until your child becomes self-sufficient, wouldn’t a 25 year life insurance policy be more than enough? By age 25, they should be self-sufficient and wouldn’t need your insurance money anyways! Why spend the money on a permanent life insurance policy if you only need protection for 25 years?

Same goes with a mortgage – if your amortization period is only 30 years, wouldn’t buying a 30 year term life insurance policy equal to the amount you’re borrowing be enough?

In most cases, the answer to those 2 questions is yes – a term life insurance policy is a better choice.

What else should I know about Term Life Insurance in Hong Kong?

There are 2 things we generally advise clients to consider: laddering and optional riders.

Laddering

Laddering is the layering of multiple term life insurance policies to ensure you have the right amount of insurance at the right time so you’re not wasting money.

Let’s use the example of an HK$2,000,000 mortgage amortized over 30 years. As you pay down the mortgage, you’ll owe less and less each year. An example of a laddering strategy would be to purchase a HK$1,000,000 term life insurance policy for 30 years and another HK$1,000,000 term life insurance policy for 15 years.

With this laddering strategy, you’ll have HK$2,000,000 in life insurance for the first 15 years which drops down to HK$1,000,000 for the next 15 – more than enough since you’ve paid down a significant portion of your mortgage by now.

With this laddering strategy, you’re never paying for more insurance than you need.

Optional Riders

One of the downsides of a term life insurance policy is that it expires. If that’s something you’re worried about, you can look to purchase a ‘conversion rider’. This lets you convert your term life insurance policy into a permanent one upon expiry.

You can also look at getting an ‘accelerated death benefit rider’. This lets you receive the death benefit ahead of time in the event you develop a terminal illness. This death benefit comes with no strings attached and many people use it to enhance their quality of life in their final months.

Many insurance brokers and companies will also give you the option to purchase a ‘long-term care rider’. This works just like the accelerated death benefit rider but is used to pay for medically necessary long-term care.

Arthur Bond with extensive experience in providing operations, finance & expense management solutions has gained a reputation in Trusted Union. In his career, he served as Chief Financial Officer in a reputed organization.