Oran Hall | Choosing between life insurance and savings plan
QUESTION: I recently reached out to a financial adviser regarding a savings account that can make the money work for me, sort of, like the extra, let’s say, $5,000 out of my salary that I normally use to buy clothes, shoes, maybe go out with, the cash outside what I save in my regular account. I don’t earn more than an average $40,000 in my job as a sales agent and a half goes to the Students Loan Bureau. She suggested the Sagi-Gold Accumulator policy, after asking if my goal is long term or short term, primarily because I wanted more discipline when saving.
I read an article you wrote about life insurance as investment and it sounds more like life insurance to my beneficiary rather than a savings plan I can use to maybe put a deposit on a house later, for example. I am now really confused as insurance or banking and finance are not my specialities, so I wanted to see if you could explain it better for me.
FINANCIAL ADVISER: Life insurance policies are primarily for coverage, but some do provide an additional benefit. The more traditional policies have cash values, and equity-linked policies, which are generally linked to segregated investment funds, may generate financial benefits depending on the performance of the segregated funds.
Life insurance policies do provide benefits to the named beneficiaries or estates of the policy holders upon their death, but policy holders may generally choose to access some of these benefits while they are alive. For example, they may surrender units in the segregated funds attached to equity-linked policies for cash. They may also withdraw, in some cases, funds from the cash values of their policies.
In the case of endowment policies, the situation is different. These life insurance contracts are for a set period, ten years or fifteen years, for example. In such cases, the life insurance company contracts to pay a lump sum at maturity – the end of the term specified in the contract.
DEATH OF POLICY HOLDER
In such cases, policy holders are free to use the proceeds as they determine ,. Should the policy holder die before the end of the period specified in the policy contract, the insurance company pays the contracted sum – death benefit – to the named beneficiaries or estate of the policy holder.
The policy to which you refer is an equity-linked policy. The literature states that it “is an equity-linked insurance plan which is structured to provide insurance protection with medium term fund accumulation to individuals up to age 60, and insurance protection to individuals aged 61-75.”
You see, it is an insurance product and, yes, benefits would be paid to your beneficiaries in the event of your death should you enter into such a contract with the life insurance company.
But you could derive benefits during your life time by encashing units in any of the segregated funds linked to the policy. You would be required to pay a transaction fee and an additional fee expressed as a percentage of the bid value of the units encashed.
You could also choose to surrender your policy for its fund value – the value of all the units allocated to it – less a transaction fee, but surrendering tit would mean the end of the contract
Because this is an insurance policy, policy holders are required to pay a premium. Premium rates vary by age and gender and a portion of each premium is allocated to purchase units in the Sagicor Segregated Funds on behalf of the policy holder. The company cancels units in the funds each month to cover the cost of insurance and administrative expenses.
The policy holder may determine the proportion of each premium to be invested in each segregated fund. The funds are described as segregated funds because they are not mixed, or commingled, with the general funds of the insurance company.
There are several of these separate and identifiable funds – the balanced fund, equity fund, fixed income fund, for example. The value of the funds and of the units – into which they are divided – fluctuate consistent with changes in the market values of the assets in the funds.
Because of these fluctuations, the benefits payable under this plan and others like it are not guaranteed. Only the basic sum insured and the returns from the Interest Fund are guaranteed.
Having a life insurance policy is one way to develop the habit of putting money aside, but insurance policies should not be bought just for the sake of buying a policy or saving. It is important to first determine what your needs are and then to identify a policy which is suitable.
Financial advisers who offer life insurance policies to satisfy the needs of prospects are trained to evaluate such needs and to recommend a suitable solution. It makes sense to have a discussion with representatives of more than one company and to ask for literature on the solutions being offered before making up your mind, but bear in mind that you risk losing your money if the policy lapses due to non-payment of the premiums.
Perhaps you should also consider the merits of a pooled investment arrangement.
- Oran A. Hall, the principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel. firstname.lastname@example.org