Life insurance is designed to cover the financial needs of your family or dependants in the event of your death. It pays them either a lump sum or regular payments. If you are the primary bread winner in your family, you should consider your need for life insurance. Life insurance may also be important if you have debts (eg mortgage) that might affect your family in the event of your death.
Common types of policies
There are several common types of policies available in Hong Kong:
- Term life policy pays a lump sum upon your death if it occurs within a fixed period of time (ie the term of the policy);
- Whole life policy generates a cash value and non-guaranteed dividend which will normally be increasing during your lifetime. The policy will provide a lump sum benefit to your beneficiary upon your death. If you surrender your policy too early, the cash value and dividend recovered might not be sufficient to cover the amount of premiums paid.
- Endowment policy generates a cash value and non-guaranteed dividend (some endowment policies offer guaranteed dividends) which will normally be increasing during the policy term. The policy will pay a lump sum upon reaching an agreed date if you survives or pay a death benefit if you die before that date. If you surrender your policy too early, the cash value and dividend recovered might not be sufficient to cover the amount of premiums paid.
Some life insurance policies may include other types of protection such as:
- Critical illness insurance pays a lump sum to you if you contract a specified critical illness. It can also be purchased separately from your life insurance policy;
- Disablement policy offers a lump sum if you become permanent disable caused by an accident;
- Income replacement plan offers a percentage amount of your salary to replace your income if you are unable to work due to illness or injury.
Some life insurance policies such as endowments or whole life policies include an element of savings. Where a life insurance policy which has investment features and its policy value is linked to performance of underlying fund(s), it is also named as Investment Linked Assurance Scheme (ILAS).
The premium of your life insurance is calculated with reference to various factors, such as:
- your personal background (eg age, health conditions, etc.)
- your habits (eg smoker, extreme sports enthusiast, etc.)
- the type of policy you choose
- the amount of cover you want
You may lower the premium of your life insurance, but that usually implies a change in policy. If you give up a certain protection, such as critical illness or income replacement plan, the premium can be reduced, as in the case if you reduce the duration of a policy. However, you should assess your financial obligation to your beneficiaries.
Always consider fees and charges against what you can afford, especially for payments over a long term.
Providing accurate information
Insurance is subject to the principle of utmost good faith. Tell the insurer all necessary information such as your existing medical conditions and career when applying for or renewing an insurance policy. If you provide incomplete or inaccurate information, the policy may become invalid.
Read the small print
It is important for you to read the small print before taking out the policy so that you know exactly what you are buying. Make sure you know what is and is not covered. Ask your insurer or insurance intermediary if you see something you don't understand.
Take note of the cooling-off period
Think carefully about your life insurance needs before committing to any policy. Is your primary goal to protect your family in the event of your death or are you prepared for long-term commitment?
It is required that new life policies come with a cooling-off period for policyholders to review the terms and conditions of their long-term insurance policies. The cooling-off period is 21 days after the delivery of a life insurance policy or issue of a notice to you or your representative, whichever is the earlier.
If you change your mind and wish to withdraw, you can give a written notice to your insurer within this period for a full refund of the insurance premiums (subject to a market value adjustment where applicable).