Article by aomMONEY School
Many people may start buying life insurance because they want tax deduction, which is not quite right. Actually, life insurance, as a financial instrument, has extra benefits on risk prevention, savings, and wealth transfer. It also serves as another source of pension.
So, before deciding to buy an insurance for tax incentive, please understand 10 ‘facts’ about life insurance to make sure that you choose the right insurance that truly fits your needs.
1. Life insurance is not savings. Although life insurance is similar to savings, it is a long-term agreement and the insured must pay a specific amount of premium to the insurer in exchange for life protection.
For savings, you can withdraw money anytime. For life insurance, you cannot withdraw money from your policy because you need to wait for dividend เงินคืน or until the maturity date. If you really need the money, you have to surrender the policy, which will definitely leave lower cash value in the policy than the premium you paid.
2. You cannot think of life insurance for tax incentive only because insurances mainly manage risks. If you want a lot of or full tax benefit, sometimes you may overpay the insurance policy and overlook the overall picture of proper financial planning.
3. Endowment insurance is not the only one that offers tax incentive. Actually, there are many types of insurance, ranging from life protection to long-term savings. Every kind of insurance can offer tax benefit. What you really need to think about is individual ‘need’. If you need life protection but apply for endowment insurance, you can still receive tax benefit but make a mistake in terms of risk management. That is because endowment insurance offers low coverage. If an unexpected incident occurs, the beneficiary will receive less money than they do from life insurance.
4. Short-term insurance is not better than long-term insurance. Someone chooses endowment insurance, focuses on savings, and intends to pay short-term premium because they think that long-term payment is burdensome. However, whether you need to make short-term or long-term payment, it depends on financial goal and needs in life. For example, if you save money for retirement, you need to do it in a long term. The needs such as raising children or having debt burden with 30-year installment needs long-term protection. You need to make sure that the insurance covers all of your needs.
5. Short-term premium payment is not better than long-term premium payment. Each type of insurance has its own pros and cons. Making a long-term premium payment is like making an installment for home loan. The longer payment term you choose, the less money per installment period you pay. Similarly, for two insurances with the same term of contract, the premium of insurance that requires long-term payment is lower than short-term type.
Therefore, the good thing about short-term premium payment is short period of burden while the weakness is high premium per installment period. This type is for those who can afford high premium. For long-term premium payment, the pro is low premium per installment period while the con is long-term burden. It is for those with lower payment ability.
6. The insurances with dividend are not better than those without dividend or term life insurances. Most insurances with dividend are endowment, applied to guarantee the savings. The insurances without dividend focus on life protection. Despite no dividend, they offer higher coverage than the first one at the same amount of premium. For term life insurance, the coverage is even higher.
7. Paying premium as much as you please may do more harm than good. The word ‘paying as you please’ will cause two things, overpayment and underpayment.
Overpayment means paying the premium more than necessary. However, with a good plan and a portion of money spent on investment, you will earn many times more and have money left for other plans.
Underpayment means those who have high financial burden but apply for insurance with low coverage, which may not provide sufficient risk coverage. That is why you must consider the comprehensive financial plan.
8. Life insurance is not worth the investment if you do not make a claim. People always think that life insurance is not worth the investment if they do not make any claim. Instead of paying premium every year without getting anything in return, they would rather spend money on investment. Then, they can use the interest they earn to pay for the treatment. In reality, no one knows when an adverse event will happen. If everyone knows the future, the insurance will not be necessary because everyone can manage risks.
Try to think about the idea of making a claim worth the investment. It means you must get sick. Do you think the suffer and time lost is the value you really need?
9. The condition about no physical checkup or no answer about health required is true. However, you need to separate between the insurance that does not require medical checkup and the insurance that does not require answer about health.
In case of no medical checkup required, when you apply for insurance, the agent will ask if you have any existing health condition or you are healthy. If you are healthy, do not have health condition, and never go through major surgery, in most cases you do not have to go for physical examination. That is normal. However, if you distort the answer or lie to avoid the physical exam but later need to claim for the existing health condition, the insurer can reject the claim because it finds out after the investigation that you lie.
ส่วนเรื่อง ไม่ต้องตอบคำถามสุขภาพ ส่วนใหญ่จะเจอกับประกันผู้สูงวัย ซึ่งแปลว่า ถึงเป็นโรคมาก่อน ก็รับทำประกัน แล้วค่อยมาวัดดวงกันว่า ถ้าเสียชีวิตภายใน 2 ปีตั้งแต่ทำประกัน ที่ไม่ได้เกิดจากอุบัติเหตุ เขาจะไม่จ่ายทุนประกันให้ แต่จะคืนเบี้ยบวกดอกเบี้ยให้เฉยๆ ซึ่งตรงนี้จะมีระบุในสัญญาไว้แล้ว
For no answer about health required, most cases are elderly insurance. This means the insurer accepts the application even though the applicant has existing health condition. Then, that person can test his or her luck. If the insured passes away from non-accident cause within two years after application, the insurer will pay only the premium and interest, but not the sum insured. This is also included in the contract.
Whether you can make a claim or not, you need to consider this carefully and study the contract to understand why you cannot make a claim.
10. Unit link is not the best insurance. Some people may have heard that unit link is a wonderful product, greater than traditional insurances. However, every financial product has its pros and cons.
The unit link is good for its flexibility. The insured can make a plan how many years he or she would like to pay the premium, how many years of coverage he or she wants, when he or she will lower the premium payment, when he or she can withdraw the money, and how much the return will be. Everything can be planned. Some products offer high coverage, 100 – 120 times higher than the premium. However, it is about the convenience. The real highlight of unit link is buy-one-get-two feature. The insured will get life coverage and make an investment at the same time. However, the return is not the key benefit. You cannot really say that this insurance is good because it yields high return. It cannot compete with direct investment in mutual funds because the insured of unit link needs to pay an extra fee to the insurer.
The weakness of unit link comes from its strength. Since the insured has a chance to gain a higher return than endowment insurance, it has higher risk. If he or she plans to receive 8-10% return a year but a financial crisis occurs, causing the stock values to drop to minus 40-50%, the investment value in the policy will be gone by half. It may not enough to renew the insurance in the following years and the coverage will disappear. So, in the strength, there is caution you need to take.
In conclusion, based on 10 facts you should know before buying life insurance for tax incentive, the most important thing is not about the insurance but it is about comprehensive financial plan that takes all aspects into consideration. You need to know what you really need and appropriately use the insurance as another tool to achieve the goal.