Life assurance for Expats: What is it ? Do you need it ?

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Life assurance for expats is a regular premium contract (you pay monthly or quarterly for example) which provides a lump sum payment (to an estate, trust or survivors) on the death of the life assured. These plans generally have no investment element so the cover provided and premiums payable are purely assurance related – a little like car insurance. If the life assured is still alive at the end of the set term, the policy ends and no money will be paid out. Such a plan can be held jointly, for a husband and wife for example. In truth, many different permutations exist but it is a little too early to go into them here.

Generally, life assurance plans will pay a lump sum. There are a few available that pay an annual income after death (often known as Family Income Benefit policies or FIB) but these are very much in the minority. The lump sum can then be used to repay debts (possibly a mortgage) or invested to generate an income for dependants to live on.

Calculating the size of lump sum required is not always easy. Obviously, if life cover is required to repay a mortgage this is a simple task of knowing how much is owed on the mortgage and arranging cover for that sum. (If the mortgage is of a capital repayment variety, policies are available with a sum assured that reduces in line with the mortgage balance. These policies are known as Decreasing Term Assurance. As you might imagine, they cost less than a level amount of cover.)

Trying to calculate how much cover might be needed to support family is a far less straightforward decision. The reason being that none of us truly know how much we spend on our significant others or what would be required to support them.

To make this easier, many expats in Shanghai put in place cover for the ‘family’ and will have a life assurance contract run until the children are aged 18 or 21. This may not provide much help for a mother that is not employed but instead raises a family because when children reach mid teen age and she may return to work, she may no longer have the necessary skills to find suitable jobs.

A simplistic way of calculating required cover might look like this: I earn 20,000 per year and support the family with this wage. My wife does not earn an income. We have twins aged 10. I wish to be able to support them potentially until they are aged 21. Therefore, 21 minus 10 = 11, 11 multiplied by 20,000 = 220,000. I need 220,000 of life cover for an 11 year term.

If you really care about your family, a better solution might be to put in place cover of 220,000 plus a separate plan that will repay your mortgage as well. If something happens to you, your family will be relatively well prepared financially for the future.

(In reality, this calculation might prove to be too generous, but if costs are low, it would be an ideal solution. However, an annual income is subject to deductions for taxes and social security costs which may be between 25% and 50% of the total. If you are supporting a family on the net payment each month, then it is unlikely in the short term that they would need the same amount of income, all things being equal. If life cover has repaid a mortgage as well, then the majority of major costs are removed for the surviving family.)

An issue that many overlook when arranging life assurance is the role of a partner. The above example is ideal to demonstrate this.

The wife in my above example stays at home each day, involved with looking after the twins. If she were to die prematurely, replacing her income would be easy, there is none. However, replacing her work with the children each day would be very costly indeed.

Think about it. She will be meeting the children after school, helping with their homework, getting them ready each morning and full time care and supervision through school holidays. On top of that, most wives (without trying to be sexist) will cook most meals, clean the home, wash clothes, food shop for the family, etc, etc, etc. Replacing someone like this will not be cheap. It’s hard work!

If you are preparing to put cover in place for the family, it is highly likely that both partners should be protected. It might be reasonable to arrange different levels of cover for each individual, possibly with a lower level for a partner without an income, but life assurance will still need to be put in place.

All of these numbers probably look rather worrying. After all, if you take your annual salary and multiply it by 6, 8 or perhaps 10 it is a fairly substantial number. How much does such cover cost?

Alas, I cannot tell you that. Each policy could potentially be written on different terms and at different rates. The best I can offer is that your policy will likely be of a different cost to anyone else that you know.

However, advances in medical science plus average life expectancies increasing have meant that the average person is living far longer. This has caused claims for life assurance to fall and as such premium rates have plummeted. Certainly in the UK, between 1998 and 2002, rates for life assurance were falling virtually every month with the market becoming increasingly competitive. These days the client gets a very good deal.

So although you may need quite a lot of cover and you may not view the costs as cheap, the reality is that cover is about as affordable right now as it has ever been. In terms of constant pounds (taking inflation into consideration), your parents were probably paying three or four times as much for the same cover!

When looking for life assurance whilst living in Shanghai, you may find the internet to be an amazing tool. Almost every provider will be happy to offer a quotation and sites that compare average prices abound. Getting a great deal is easy. It is important to remember that life assurance is a commodity product. By this, I mean that the actual product is almost identical from one provider to another. Think of it a little like a barrel of oil. This is a generalisation, I know, but oil is oil. Life assurance is life assurance. If you die, they should pay, if you don’t they won’t. As such added value does not mean too much and so price is everything. Click here to get a health or life assurance quote.

With all this choice, there is often a benefit to buying with a Shanghai based broker. Many are able to offer a planning service and the best quote with supreme efficiency. From the perspective of an adviser, this is hell! But this is great for consumers.

Make the most of it.