How
Much Is Too Much? With Life Insurance,
The
Right Amount Is A Relative Thing.
by Cris Prystay
The
Asian Wall Street Journal
Chances
are you have been told at least once that its impossible to have too
much life-insurance coverage. That's an exaggeration, of course. But
the issue's murkier than you might think.
Consider
these 2 scenarios: Peter Zheng has a pair of policies with a combined
$295,000 in coverage. He describes himself as cautious. If Mr Zheng is
cautious, then Jeni Chen is arch-conservative. The Singaporean
entrepreneur has 14 policies worth some $1.2 million.
Who's
right? Probably both - or maybe neither. It all depends on your
perspective. In the end, getting appropriate life insurance coverage
hinges on 2 factors: how extensively you want to provide for your
dependents, and whether you are using your policies as financial
investments.
First
some basics. There are 2 kinds of life insurance: term and whole life.
With term, you pay a certain amount each year, and if you die within
the term (it could be 5, 10, 15 or 30 years), you will receive a set
amount. Whole life policies, on the other hand, invest part of the
premiums you pay in bonds, mutual funds or money market accounts -
generating returns you can claim after a set period of time.
Ms.
Chen, who though unmarried has a partner, sees her 14 whole-life
policies first and foremost as a way to save for the future. The
actual coverage - for death as well as some disabilities - is a lower
priority for her. The 38-year old Ms. Chen, who runs a gift-supply
business, is willing to pay extra for that flexibility. She's shelled
out commissions (between 1% to 1.4% of her premium) that are higher
than those charged by mutual funds. She probably could have saved on
commissions by buying fewer bigger policies. That said, its common to
acquire 5 or seven policies in a lifetime, experts say.
Financial
planners are divided over Ms. Chen's approach. Some believe it's fine
to suffer the added cost of a life-insurance investment, because the
premium is buying insurance as well as generating returns. Others
advocate splitting money between a mutual fund and a cheaper policy.
But
the answer is very subjective. While Ms. Chen is perfectly content
with her 14 policies - regardless of whether it may strike others as
excessive or inefficient - one Singaporean woman with only 2 policies
thinks she's been oversold. The woman, who is single and worked in the
financial industry until recently, pays more that $20,000 in annual
premiums for 2 identical whole-life insurance policies worth $600,000
in death benefits.
"He
told me I was underinsured, and that the rule was to insure for 14
times your salary" the woman, who declined to be identified, said
of her insurance salesman. "It's partly my fault. I should have
done my homework. But...he should have at least told me to diversify,
instead of selling me the exact same product." In fact, she could
have opted for a simple term policy which is cheaper, rather than the
more elaborate whole-life policy.
Mr.
Zheng, an advertising account manager and father of two, would like to
buy more coverage beyond his two policies but thinks that would take
too big a bit from his income.
Some
advisers say single people without kids like the unidentified woman
cited above don't need life insurance in the first place, because they
have no dependents to worry about. However, buying during your single
years can lock you in at a lower premium than waiting until you're
older and married.
Ms.
Chen's buying spree aside, Asians don't hold more life insurance than
anyone else. Consumers in the region's strongest economies, including
Singapore, spend about the same amount of life insurance as people in
Europe and North America, according to industry statistics. In 1997,
Japan spent the most, per capita, on annual life-insurance premiums,
closely followed by Switzerland and the United States; consumers in
Korea, Hong Kong and Singapore spend about the same, per capita, as
their counter parts in Western Europe. 
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