Q&A - Answers to basic questions No. 18 to 21
18. Should children be insured?
For most families, there are probably many objectives much more important than getting insurance protection for a child. A child's death is very unlikely, and even when it happens, it's not financially horrible. There might be a need in a child's life for costly medical treatments or long term care as well, but - again - its probability is very low, especially compared to that of something bad happening to the parents (when it means not just extra cost but usually also a loss of income). However, there are some valid arguments supporting the idea of insuring children that people who have obtained the proper insurance portfolio for themselves, with large enough coverages, might consider:
- The child may lose insurability, due to health problems, by the time he / she will really need it as an adult. If a policy is in force, possible poor health becomes a non-issue.
- The younger the age, the lower the insurance premiums are. For a child's life insurance, one has to pay really small amounts monthly. If it is a permanent policy, it means almost free coverage by the time he / she grows up. (The other side of the coin is that the contracted benefit, if it stays constant, will lose most of its purchasing power as well on the very long run.)
- Perhaps the strongest argument is related to using universal life insurance as a vehicle to creating a tax-shelter. There are several creative applications of such policies; for example, for tax deferred educational and retirement savings, or tax-advantaged transfer of family wealth to next generation/s/. Children's involvement in such policies may significantly decrease the cost of creating a tax shelter, and it initiates really long term programs, where the time factor can work at its best.
19. I am very healthy. Do I still have to pay the regular premium price?
Health is valuable in financial terms too.
- One of the new developments in insurance is the creation of more than the traditional two (smoker - nonsmoker) classes for establishing costs of insurance protection. Some companies charge 3-5 different rates for the same life coverage for people with varying degrees of health and family background. One company distinguishes even smaller segments: they have 8 risk categories and premiums for the same death benefit amount. Obviously, screening is stricter for the more advantageous classifications. Current health, health history, life style, family health history are all considered.
- A related issue is that with certain disability and critical illness plans staying healthy triggers premium payback after a certain period
- The above mentioned differentiation of various risks referred to term life policies. The really big news on this front is that today one can buy even a universal life policy with reduced protection charges if he / she is in very good health. With this policy, this saving can induce very substantial differences in the cash value of the policy, especially on the long run.
20. I have had health problems. Can I still buy insurance protection?
It is not always easy to tell in advance, whether someone can buy a certain insurance policy or not. There are some limiting or excluding guidelines or rules, but also there are flexibility (e.g., availability of protection but for a higher premium), dissimilarities among companies, and changes in the treatment of certain health facts compared to how they were treated several years ago.
- as an example, one can buy life insurance coverage much sooner after a heart attack today than was the case earlier
- application for critical illness insurance starts with a list of health history questions, - a yes answer to any of them makes the whole application pointless; one can get critical insurance payout only once in a lifetime
- if someone has had a certain health problem, sometime he / she can buy the wanted coverage, but with exclusion, meaning that the policy will pay if something new strikes the insured, but not if the old problem crops up again
- even if you cannot buy one type of insurance, you may be eligible for another type
The lesson is that if you really need and want insurance, do not give up on it too early. It doesn't cost you more than a little time and attention to invest, and that can result in a sensible decision-making situation. If you cannot get what you want, you may get it from somewhere else; and if you don't like a particular offer, you can refuse it without consequences.
21. How can one calculate the need for insurance?
Talking about basic life insurance, one way of calculating the amount needed by survivors is by trying to add up all the items in their future budget (this amount for shelter, that amount for food, clothing, transportation, etc.); the other is to set out from the amount being spent on the family's current lifestyle, and take a reasonable percentage of it. While the first one seems to be more accurate, it can also be cumbersome, and one can easily get lost in the details. The second method's strength is its simplicity that allows us to focus on the larger issue of time. The length of the period for which a certain annual / monthly amount is needed is crucial in determining the total capital need to be covered by the insurance benefit. With computer, it's quite easy to calculate this need for various time periods, with various assumptions on inflation and investment returns.
When life insurance is sought for estate planning purposes, estimating the future capital gains tax payable is usually the main issue. Indivisibility of certain assets can be also a factor when someone wants to treat heirs equally.
If insurance is bought mainly to create a tax-shelter, the investment side of the arrangement (how much money to invest, timing of the investment, intended capital / income level in x years, assumptions on returns), together with personal factors influencing the premium, determine the necessary size of insurance needed for this application.
Disability insurance is inherently limited to about two third of previous income (or frequently less, if we think of 'natural' increases in income over the years due to inflation and job progression / promotion), so the general rule is to try as much coverage as one can get.
Critical illness and long term care insurance have their respective ceilings. Probably no-one can be said to be over-insured with the maximums; however, the general rule applies: there is no exact method that would tell you how much insurance you must have. It's a choice everyone should finally make considering all the available resources, emotional things, and personal circumstances.
When insurance is bought for business purposes, it's less about emotions and affordability, and more about calculations, business assumptions, negotiation and contractual arrangements among partners, and perhaps even spouses and key employees. Considering all possible scenarios, and involvement of accountants and lawyers is quite indispensable in these cases. (Not because these other professionals could foretell the basic components of calculating the need for insurance, but because in calculating various scenarios and elaborating contractual arrangements they do have their role.) It is a good habit to revisit insurance arrangements from time to time for anyone (especially after important changes in one's life), but it's especially important when businesses are involved.
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