Why Invest In Life

People buy life insurance all the time. Their reasons for doing so vary widely and are far too numerous to discuss in this column. But it is worth discussing the more common motivations that people have.

For this purpose, I would like to categorize buyers into three groups. But overarching in this whole discussion is the fact that life insurance exists not because someone is going to die but because someone is going to live after the death of the insured. Life insurance delivers cash to the survivors on time, untouched and untaxed.

A: Family
Probably the original reasons that people first signed up for life insurance hundreds of years ago and surely the principal reason they still do so today is to protect loved ones against the prospect of the untimely death of the family breadwinner(s) or the parent who provides uncompensated services to the family and the household, usually the stay-at-home spouse.

A parent in the workforce is pretty well assured that the job and income are there for the long haul and plans to continue to support the family fully through the childrearing years and beyond, probably including at least part of the cost of higher education. Too often, of course, death gets in the way. While insurance cannot replace the love, affection, guidance, and moral support that a deceased parent would have provided, it can allow the family to have as normal as possible a future by being sure that ongoing bills can be paid and goals achieved.

As for the stay-at-home parent, economists estimate that these normal overall services are worth over RM50,000 per year during the young kids’ stage.

B: Seniors
Despite what is commonly believed, a lot of seniors buy new life insurance and do so for various reasons:

Spousal support: Bill may have never been able to afford a lot of coverage while other obligations got in the way. But now he can finally afford enough to protect his wife if his death ever takes away part or all of his pension or causes some debts to come due.

Replacement coverage: Al has coverage, but it is obsolete and expensive compared to the types of coverage that are available now. So he wants to upgrade.

Long-term care linked policy: Joe wants to get a good long-term-care arrangement by tying it to a new life-insurance policy.

C: Business
There are many uses for life insurance in the business setting:

Key person: Often the future profitability of a business is dependent on one or two key people. Their deaths, for example, might lead to a loss of customers or a loss of bank credit. Insurance can help the business bridge the gap until a competent replacement can be hired.

Buy sell: Life insurance is used to fund the buy-out of the business interest of an owner who dies. It provides the cash in a timely manner to assure that the business flow is not disrupted and outsiders do not get involved.

Estate equalization: Often a parent leaves the business to all the offspring while just one – call him Ah Chong – is chosen to run it. That means that the fruits of Ah Chong’s labor will be shared with his siblings in the form of dividends while Ah Chong would prefer to be plowing cash back into the business. This can lead to family conflict. When one offspring is deemed to be the most logical to take over the business, the business can be left to him or her while life insurance payable to the other children can equalize the inheritance and make sure that all the offspring will be treated fairly and continue to get along.