Connect with us

Insurance

How Much Life Insurance Should an Individual Carry?

Published

on

Very few people enjoy thinking about the inevitability of death. Fewer yet take pleasure in the possibility of an accidental or early death. If there are people who depend on you and your income, however, it is one of those unpleasant things you have to consider. In this narrative, I’ll approach the topic of life insurance in two ways: First I’ll point out some of the misconceptions, then I’ll look at how to evaluate how much and what type of life insurance one needs.

 

Does Everyone Need Life Insurance?

Buying life insurance doesn’t make sense for everyone. If you have no dependents and enough assets to cover your debts and the cost of dying (funeral, estate lawyer’s fees, etc.), then it is an unnecessary cost for you. If you do have dependents and you have enough assets to provide for them after your death (investments, trusts, etc.), you still do not need life insurance.

However, if you have dependents (especially if you are the primary provider) or significant debts that outweigh your assets, you likely will need insurance to ensure your dependents are looked after if something happens to you.

 

Insurance and Age

One of the biggest myths aggressive life insurance agents perpetuate is “insurance is harder to qualify for as you age, so you better get it while you are young.” To put it bluntly, insurance companies make money by betting on how long you will live. When you are young, your premiums will be relatively cheap. If you die suddenly and the company has to pay out, you were a bad bet. Fortunately, many young people survive to old age, paying higher and higher premiums as they age (the increased risk of them dying makes the odds less attractive).

Insurance is cheaper when you are young, but it is no easier to qualify for. The simple fact is insurance companies will want higher premiums to cover the odds on older people, but it is a very rare that an insurance company will refuse coverage to someone who is willing to pay the premiums for their risk category. That said, get insurance if you need it and when you need it. Do not get insurance because you are scared of not qualifying later in life.

 

Is Life Insurance an Investment?

Many people see life insurance as an investment, but when compared to other investment vehicles, referring to insurance as an investment simply doesn’t make sense. Certain types of life insurance are touted as vehicles for saving or investing money for retirement, commonly called cash-value policies. These are insurance policies in which you build up a pool of capital that gains interest. This interest accrues because the insurance company is investing that money for their benefit, much like banks, and are paying you a percentage for the use of your money.

However, if you were to take the money from the forced savings program and invest it in an index fund, you would likely see much better returns. For people who lack the discipline to invest regularly, a cash-value insurance policy may be beneficial. A disciplined investor, on the other hand, has no need for scraps from an insurance company’s table.

 

Cash Value vs. Term

Insurance companies love cash-value policies and promote them heavily by giving commissions to agents who sell these policies. If you try to surrender the policy (demand your savings portion back and cancel the insurance), an insurance company will often suggest that you take a loan from your own savings to continue paying the premiums. Although this may seem like a simple solution, keep in mind that if the loan is not paid off by the time of your death, it will be subtracted from the death benefit.

Term insurance is insurance pure and simple. You buy a policy that pays out a set amount if you die during the period to which the policy applies. If you don’t die, you get nothing (don’t be disappointed, you are alive after all). The purpose of this insurance is to hold you over until you can become self-insured by your assets. Unfortunately, not all term insurance is equally desirable. Regardless of the specifics of a person’s situation (lifestyle, income, debts), most people are best served by renewable and convertible term insurance policies. They offer just as much coverage, are cheaper than cash-value policies, and, with the advent of internet comparisons driving down premiums for comparable policies, you can purchase them at competitive rates.

The renewable clause in a term life insurance policy allows you to renew your policy at a set rate without undergoing a medical exam. This means if an insured person is diagnosed with a fatal disease just as the term runs out, he or she will be able to renew the policy at a competitive rate despite the fact the insurance company is certain to have to pay a death benefit at some point.

The convertible insurance policy provides the option to change the face value of the policy into a cash-value policy offered by the insurer in case you reach 65 years of age and are not financially secured enough to go without insurance. Even if you are planning on having enough retirement income, it is better to be safe, and the premium is usually quite inexpensive.

 

Evaluating Your Insurance Needs

A large part of choosing a life insurance policy is determining how much money your dependents will need. Choosing the face value (the amount your policy pays if you die) depends on:

  • How much debt you have. All of your debts must be paid off in full, including car loans, mortgages, credit cards, loans, etc. If you have a $200,000 mortgage and a $4,000 car loan, you need at least $204,000 in your policy to cover your debts (and possibly a little more to take care of the interest as well).
  • Income replacement. One of the biggest factors for life insurance is for income replacement. If you are the only provider for your dependents and you bring in $40,000 a year, you will need a policy payout that is large enough to replace your income plus a little extra to guard against inflation. To err on the safe side, assume that the lump sum payout of your policy is invested at 8% (if you do not trust your dependents to invest, you can appoint a trustee or select a financial planner and calculate his or her cost as part of the payout). Just to replace your income, you will need a $500,000 policy. This is not a set rule, but adding your yearly income back into the policy (500,000 + 40,000 = 540,000 in this case) is a fairly good guard against inflation. Once you determine the required face value of your insurance policy, you can start shopping around. There are many online insurance estimators that can help you determine how much insurance you will need.
  • Insuring others. Obviously there are other people in your life who are important to you and you may wonder if you should insure them. As a rule, you should only insure people whose death would mean a financial loss to you. The death of a child, while emotionally devastating, does not constitute a financial loss because children cost money to raise. The death of an income-earning spouse, however, does create a situation with both emotional and financial losses. In that case, follow the income replacement calculation we went through earlier with his or her income. This also goes for any business partners with which you have a financial relationship (for example, shared responsibility for mortgage payments on a co-owned property).

 

Other Ways to Calculate Your Needs

Most insurance companies say a reasonable amount for life insurance is six to 10 times the amount of annual salary. Another way of calculating the amount of life insurance needed is to multiply your annual salary by the number of years left until retirement. For example, if a 40-year-old man currently makes $20,000 a year, under this approach, the man will need $400,000 (20 years x $20,000) in life insurance.

The standard of living method is based on the amount of money the survivors would need to maintain their standard of living if the insured died. You take that amount and multiply it by 20. The thought process here is the survivors can take a 5% withdrawal from the death benefit each year (which is equivalent to the standard of living amount) while investing the death benefit principal and earning 5% or better.

 

Alternatives to Life Insurance

If you are getting life insurance purely to cover debts and have no dependents, there is another way to go about it. Lending institutions have seen the profits of insurance companies and are getting in on the act. Credit card companies and banks offer insurance deductibles on your outstanding balances. Often this amounts to a few dollars a month and in the case of your death, the policy will pay that particular debt in full. If you opt for this coverage from a lending institution, make sure to subtract that debt from any calculations you are making for life insurance—being doubly insured is a needless cost.

 

 

 

Continue Reading
Advertisement
Click to comment

Insurance

Differentiating in a Radically Changing Marketplace– Customer-Centricity in Insurance, Digital Innovations

Published

on

Sweeping technological advances have created major growth opportunities in the Global insurance space, both for industry leaders and for innovative third-party providers. Insurers are reinventing their consumer engagement experience models, digitizing their distribution and operations, and embracing big data and analytics as they seek to lead the industry wherever they find themselves.

Against this background, many insurers all over the world are leveraging new Technologies to gain the upper hand from their data and transform their new and old business models to align with the new digital age.

Today’s consumers have more complex needs and are more knowledgeable about their choices and needs and therefore require personalized offerings as well as customized communications. They expect insurers to deliver services that meet the high benchmarks set by global digital giants with offerings that gives shorter response times; personalized service, top of the range quality services, seamless interaction among others. To survive in this new digital natives’ market-space, insurers must become truly customer-centric, embrace innovation to remain relevant, satisfy and retain their customer in today’s radically changing marketplace.

Why has is it Become Necessary to Innovate:

Moving towards customer-centric Insurance through digital innovations, there are some critical questions that as insurers we must ask ourselves:

  1. How effective would digital and mobile channels help insurers achieve growth and profitability in the market by retaining existing customers and most importantly gaining new customers.
  2. What are the best steps to take to close the communication gap and strengthen relationships with customers – this emanates from the fact that the modern consumers want frequent, meaningful and personalized communications.
  3. And thirdly, how can insurers build on first-generation agency portals with new capabilities through digital innovations to support distribution channels – this is because, insurance sales executives, agents and brokers always want better data and tools to better serve their customers and most important compete for new businesses.

The scale, reach and pace of tech-driven disruption in the insurance industry continue with such unprecedented speed pushing insurers to a new phase – adaptation of underlying business models.

Digital innovation through new technologies is the key driver of change in the insurance sector hence leading to customer-centric gains.

Innovation and new technologies have the potential to affect the fortunes of insurance companies. Examples the world over shows that the rewards are significant for companies that create strategies that successfully use digital channels.

These channels allow insurers to engage directly with customers, a critical requirement in the new digital age when customers expect continuous interactions with their service providers. Again, through these innovative channels, insurers can gain insight into unmet needs that provides ideas for new offerings. Third, insurers can gather information that helps them improve how they underwrite and market their products. 

In answering the above question on why has it become necessary to innovate, I dare say that innovation has become an imperative for insurers because without a strong digital strategy to differentiate oneself in the digital natives’ market-space,  insurance companies could lose the slice of the margins they earn from distribution and eventually impact their bottom line negatively.

How insurers responds to these economical and society-wide technological innovations, and provide insurance processes and policies that integrate such changes to bring about differentiation in the industry is a discourse worth considering.

Permit me to share with you a good example of one such disruptive innovation that has led one company to differentiate from the competition in the insurance space.

The Case of BIMA

BIMA is a leading insurance tech player that uses mobile technology to disrupt the global insurance industry. Even though it is a Swedish Microfinance Company, BIMA provides insurance services in developing and emerging markets in Africa in particular.

In Ghana, BIMA mostly provides mobile-delivered insurance and health services to the underserved market mostly within the informal sector thus pushing the agenda of micro insurance and insurance penetration forward. BIMA is less than ten years in Ghana but through its disruptive digital strategy, it currently serves and adds about 575,000 customers to its base monthly bringing about 75% first timers to insurance on board.

The BIMA business model allows their customers to register for an insurance policy via their mobile handset and pay for cover through deduction of prepaid airtime credit, or through their postpaid bills.  BIMA has developed an industry leading pay-as-you-go (‘PAYG’) insurance product that is the first of its kind in most markets.

The concept of real-time visibility has become a reality. This is the observation of processes or events in the precise time of occurrence. Real-time visibility helps in improving customer experience by proactively solving needs and concerns, cuts down on operating costs and improves business agility. Internet technologies and the use of digital hand held devices are making it possible for insurers across many markets bring about differentiation. Smart contracts have become enabled by the use of blockchain technology which has dramatically decreased paper-based transactions and turnaround times.

Cloud technology strategy is another digital innovation which provides an agile, scalable and flexible technology to improve the overall modeling capabilities for insurers.  These cloud technologies are been used in delivering value to business customers as well as building and managing bespoke IT systems to give cost competitive advantage and differentiation to many insurers. As pointed out by an article in The Record in the winter 2017 issue, “by leveraging high-performance computing (HPC) in the cloud, insurers are achieving levels of risk modeling that were not possible before”.

Despite the intense competition within the insurance industry, new non insurance-industry entrants into the insurance space is also raising the levels of competition and consequently increasing choice and consumer expectations.

To remain relevant in this radically changing marketplace, tomorrow’s insurance leaders and winners must prepare for the adoption of these new digital innovations. Great strides have been made in this direction and insurers leading the pack on the innovative front are taking action and making investments now that will help them become more customer-centric, improve their pricing to stay ahead of the competition and create operational efficiencies.  With these ever-changing digital environment, the question is, “where are the right areas to focus to achieve the expected goals”?

  • Research done by Celent found out that 37% of insurance customers prefer using smart technology rather than having someone physically to talk to. This gives customers immediate answers to their questions, their inquiries whenever they want. This empowers consumers and facilitates quick decision making. For example, Progressive Insurance’s Flo Chatbot that combines Artificial Intelligence (AI) and quoting technology to answer questions and start the auto insurance quoting process on Facebook Messenger  has created a niche that reaches the younger generation that are hooked to new technologies. This innovative approach has separated Progressive Insurance from its competitors in its market.
  • As indicated by Accenture, a global management consulting and professional services firm that provides strategy, consulting, digital, technology and operations services “The biggest innovations in insurance over the next three years will not be in the technology tools themselves, but how insurers design them with customers, agents, employees and other human partners in mind”.

In conclusion, a research conducted by Goldman’s Sachs Investment Research Department in 2016, found out that there is a strong recognition that the millennial cohort, which is one of the largest age group worldwide and are entering their highest consumption period and have a preference for digital solutions available for transactions.

As insurers, differentiating in a radically changing marketplace and becoming customer-centric in our insurance delivery through digital innovation is a must!

For our customer-centric based systems, we need to be strategic and take advantage of the various modern technologies such as AI, Blockchain and the cloud to help us deliver to customers’ expectation, profitability and remain highly competitive.

Whilst deploying these technological and innovative digital systems to ensure that our companies are the most efficient and customer-centric in our industry, we equally have a responsibility to develop clear strategies for fostering and managing these digital innovations.

These strategies must aim at enhancing the capabilities of our workforce and the efficiency of our operations.

Again our strategies must address the issue of integration where insurers extend the benefits of our technology enabled value chain to other industries to create dependable ecosystems with other service providers.

And finally, our insurtech strategies should grow and position our companies to share and possibly sell developed, tested and deployed innovative technology solutions to other industries.

The insurance industry has recognized this new phenomenon and through introspection, the industry is reviewing how to approach product and service distribution, claim management among other processes. The millennials are clearly dissatisfied with the conventional insurance solutions hence it has become imperative for our industry to adapt to solutions that digitally innovative so we can remain differentiated and relevant in the face of radical changes in our marketplace.

Continue Reading

Trending