Why do we need life insurance?
The purpose of life insurance is to create a safety net for the family in case of an extreme event, God forbid, such as a sudden death. Sudden death has significant effects on the family unit. A significant and undeniable aspect of these effects is in the economic realm. The growth of a family and children requires substantial resources. Living expenses, education, celebrations, vacations, assistance in financial stability like buying a house, and profession, and more, all these can accumulate over the years to costs amounting to millions of currency units.
When one of the family’s providers passes away, especially if it’s the dominant provider, aside from coping with the profound implications of death, the entire family can face a genuine financial crisis. In many cases, sudden death also affects close family members and friends who may face financial and emotional turmoil due to their desire to assist the family during this complex and difficult time.
Life insurance provides a financial compensation, typically ranging from one to five million currency units in most cases. This payment is made as a lump sum, without restrictions or taxes, directly to the beneficiaries’ account. The purpose of this compensation is to create an economic safety net for the family’s future. This solution relieves the burden on the surviving spouse, as well as the immediate circle of the deceased – family and friends, thereby making it easier for the surviving spouse to recover and even start anew.
The cost of life insurance is a monthly premium, which starts at a low amount and increases over the years. For example, at the age of 30, a coverage of one million currency units might cost around 50 currency units per month.
For those with a pension income, isn’t that enough as part of the pension plan?
That’s a good question. Firstly, the question is relevant only to those who are employees or self-employed and have a structured pension plan. Within pension plans, you can find two types of life insurance.
In some pension plans, like managerial insurance and others, a portion of the contribution goes towards life insurance. In the event of a death, a lump sum payment is received. However, in practice, this is practically negligible. In such cases, it’s recommended to assess the cost and coverage. Often, better coverage can be obtained at a more favorable price with a regular policy outside the pension framework. If that’s the case, you can cancel the life insurance component within the pension plan and obtain a separate regular policy.
The second type, which is common in pension plans, is life insurance but in the form of a monthly pension. Additionally, the financial compensation is tied to the base component of the salary – the surviving spouse receives 60% of the secured salary for life, while children receive a combined 40% until the age of 21. The concept here is that the salary that was secured before the death continues to be paid to the family even after the death, until the children reach financial independence, and a certain amount continues to be paid to the surviving spouse until their end of life. While this is a blessed solution, there are several drawbacks to this annuity approach:
- The annuity only relates to the secured salary component, which can be problematic in fields where the salary is composed of a low base and high supplements.
- The annuity only relates to the last salary, not considering salary increases over the years.
- The annuity payment might not cover sudden expenses or provide financial flexibility.
- The annuity amount depends on the age of joining the plan, potentially resulting in lower payouts for those who join later in life.
While these annuities can be beneficial, it’s not wise to rely solely on them. As a complement, it’s advisable to consider adding a one-time lump sum payment option to the life insurance policy. Of course, if you’re not eligible for such annuities, it’s important to ensure that the coverage amount in case of death is sufficient.
How do you determine the appropriate coverage amount?
Of course, there is no “correct” answer to such a question. Each case and family are unique. However, there are models that can be seen as a kind of guideline:
- The simple calculation – a coverage of one million Shekels per child. When there are pension fund deductions, the amount can be reduced by up to half of that. The coverage amount is also a cultural matter – in South Africa, for example, it is common that shortly before a wedding, even before having children, the newlywed couple purchases a life insurance policy for a million dollars.
- The complex calculation – calculating the cumulative salary amount until the point where all the children reach adulthood (18-21). Deductions for expected future remittances can be subtracted from this, and additionally, monetary amounts for purposes like education and assistance in home purchasing can be added.
Can the policy be canceled at any time?
Certainly. If the policy is no longer needed, you can call the agent and request cancellation of the policy. Furthermore, not only can the policy be canceled, but the coverage amount can also be reduced. As the family unit matures, naturally the required coverage decreases. You can contact the agent and ask to reduce the insurance coverage, and the premium amount will decrease accordingly.
You contacted me through a call center and offered a cheaper price for the current policy. What should I do?
In principle, unlike other policies, a life insurance policy is quite straightforward. There are no different types of coverage, and by default, there’s no concern about comparing “apples to oranges.” However, there are various manipulations in which prices can be played with in a way that might be misleading. One simple way to mislead is by promising a lower and more attractive price. But with a brief review, you can learn that this is a short-term assumption – a year or a few years, but over the long term, there’s a possibility that the total payment might actually be higher. To make a true comparison between the new offer and the existing policy, the recommended method is to compare the total amount paid in the existing policy and the proposed policy. Only if this examination reveals a lower total cost, it’s worthwhile to cancel the current one and switch to the new policy.
Is it true that life insurance rates have decreased in recent years?
Yes! Life expectancy has increased, and statistically, this means that the actuarial likelihood of death is lower, resulting in lower prices. If you took out life insurance a few years ago or more, it’s highly recommended to investigate this matter.
Why does the insurance premium increase every year? Shouldn’t the client be updated about this?
The insurance premium is derived from age. As age increases, the likelihood of death also increases, and therefore, the price rises accordingly. When issuing the policy, as an inherent part of it in all insurance companies, there’s a structured breakdown known as the “premium development,” which details the cost of insurance each year until the policy’s end.
Are there situations where life insurance cannot be obtained?
There are age entry restrictions. Above the age of 70, you cannot start a policy. However, those who started before that age can continue their coverage until ages 75-80 (depending on the insurance company). Additionally, individuals with complex health conditions may be required to add an extra premium.
In contrast to health insurance policies, where certain exemptions can apply to specific conditions, with life insurance policies, there are no exemptions. It’s not possible to say to a client that if a specific cause of death occurs, there’s no financial compensation. Once a life insurance policy is in place, the insurance company is committed to paying the full compensation amount to the client. Given that there are complex health conditions where the insurance company demands an additional premium for life insurance, or even denies the possibility of purchasing life insurance, these situations exist.
Are there tax benefits to life insurance?
Yes. In life insurance, there’s a tax credit of 25%. And in life insurance through pension savings, there’s a tax credit of 35%. These credits have certain thresholds. If you have an account manager, it’s recommended to ensure that the tax credit is indeed applied. If you don’t have one, you can claim a tax credit not only for the current year but also for expenses incurred in the past six years!
Do you currently have a life insurance policy and want to explore the possibility of reducing it?Do you want to consider purchasing a new life insurance policy and receive a price proposal?
We would be happy to receive your inquiry!
Segal Insurance & Finance, Ra’anana