Do you need life insurance? Not everyone does. But more often than not, people have never given this question proper consideration. Here are some reasons why you should give it serious thought.
Life insurance is not necessarily a must for all expats. However, to be practical you need to evaluate if there is a real requirement for you as an individual or family. The trick here is to think of the practical situation you would leave behind if you unexpectedly died.
Starting with a piece of paper, what would you leave behind in terms of personal liabilities or commitments? Perhaps you have mortgages or loans? These are the first obvious obligations that you would not wish to leave as a burden to your loved ones. Paying off any debts comes first as this will be a great help to your family.
Your spouse will also incur expenses related to your funeral and other arrangements immediately after the event. After this, it's all about replacing your income. He or she will want to maintain a standard of living and that costs money. Making provision for children's education is also important, and the younger they are the more of a burden this will be on your surviving spouse or the guardians of your children should you both die at the same time.
Before we go on to discuss other possible reasons, just spend a few minutes thinking about what your family would really need if they were left without you. Some expats I meet just seem to pluck what appears to be a "grand" figure out of the air and go with it because they feel that sounds enough. If you are one of those, think again.
The first question to ask yourself is, if you predeceased your spouse, what standard of living would you want he or she and any children that you may have to enjoy following your death? In Thailand, even a local wife and a family are going to have difficulties living on what many believe is adequate. It is impossible to quantify because every person and his or her family has different standards.
So, instead of thinking that a one-off payment that you think is sufficient of, say, US$250,000 (7.67 million baht) or 200,000 (6.14 million baht), try to imagine what it would mean to you as an individual. Perhaps at your standard of living you would need an average of, say, $60,000 per year? If you felt that a family could survive on this, then calculate a typical example. Let's assume that growth and inflation are roughly the same. If the family needs to survive at $60,000 per year for, say, 20 years, that would make the minimum insurance level you need of $1.2 million. Wow, that is a lot more than you had perhaps imagined.
Then if you have a mortgage that will add more to the requirement. For the grand figure of $250,000 the family would be left with $12,500 per year. For the majority of families this would be insufficient. This is why you need to assess your personal situation to get a grip, not only on whether you need life insurance but at what level.
There are many other reasons that add to the requirement and these are generally overlooked or even dismissed as unimportant. However, they may make the situation much worse if ignored. So here are some major factors to consider:
1. Debts: You need to ensure that any debts you have will be repaid on your death or else you will leave heavy burdens on those you leave behind. Is this really what you want?
2. Family: As discussed above, you need to calculate what you would leave behind in terms of commitments. These should be similar to commitments while you are alive with your family. Why would they have to reduce their standard of living? Sufficient funds for your children to finish the education arrangements you have put in place will be required. Then you need to consider support for the remainder of the family for as long as may be necessary.
3. Business key person: If you have your own business or are a partner in a business, you should consider the cost to the business of an unscheduled departure. The grim reaper does not give notice and will usually strike at the most inappropriate time. The business would thus need financial assistance in continuing and making suitable arrangements after your departure.
4. Shareholder protection: If you are a key member of a company as a shareholder, it is no use assuming that upon your untimely demise the other shareholders of the business would buy your shares from your beneficiaries. They may not wish to do so or may not have the means. Your family will not be able to live on share certificates. It may also be that the other shareholders would not actually wish your beneficiaries to be involved in running the business if you died. It is therefore essential that you address this matter with the other shareholders as soon as possible so that you have a meaningful business succession plan.
5. Business loan protection: Again if you are an integral part of a business and you die when the company has an outstanding loan, the bank or financial institution may call the loan because they see difficulties for the continuation of the business. This would be disastrous for the organisation, but if you had sufficient life insurance to cover the loan, this could be avoided.
6. Inheritance tax planning: Many expats have not planned for inheritance tax. They suddenly realise the burden they will leave and find that the only way to cover the cost is through a life insurance plan that will pay the taxman if they die. This is sometimes just a temporary requirement while more permanent inheritance tax management measures are put in place.
7. Pension death benefit: While employed, many expats have a death benefit through their employer. However, once they retire this ceases and can often leave a gap that has not been filled. It is thus important that you review your situation when you are approaching retirement to ensure that you have left adequate provision for any fringe benefits that may cease.
8. Spouse insurance: Sometimes scoffed at, this is something to seriously consider. If you are the breadwinner and your spouse suddenly dies, you may be faced with increased costs in caring for your children if you are to continue your career. While this would not be the same insurance amount required for yourself, it may nevertheless be an essential if you think about it carefully.
These are many other essential reasons why you need to carefully consider whether you have sufficient life insurance. If you are wise you will have a look at this straight away to ensure you have sufficient provision in place. A review is always a good thing to conduct.
Andrew Wood has been an expat in Asia for 33 years and is executive director of PFS International. His articles, which cover the complete A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to firstname.lastname@example.org.
About the author
- Writer: Andrew Wood