We all know that life insurance is an essential part of life planning. Yet too few of us stop to think about the financial consequences to our loved ones if we were to pass away unexpectedly.
Such an event would bring not only emotional distress, but also potentially catastrophic financial ruin. This is compounded further when dealing with life insurance as a foreigner in Japan.
Once you’ve decided you need life cover, there are so many different types of coverage and policies that it can be a daunting experience. It can result in not taking any action at all.
If you are a foreigner in Japan, deciding on types of cover can be even more challenging, as most local insurance policies are designed for the domestic market, and not suitable for ex-pats who may not be in Japan forever, or for those who are not fluent in Japanese.
Have tattoos? Not surprisingly, even this can be an issue with some insurance companies. Insurers from your home county are also unlikely to sign off on cover to anyone living internationally.
Here are 6 points to consider if you are planning on getting life insurance as a foreigner in Japan:
What is life insurance?
Life insurance is a contract between you and a life insurance company. You agree to pay for the policy on a regular basis, and the insurer agrees to pay a sum of money to your beneficiaries if you die. It is designed to protect your loved ones after you die or are no longer able to work.
With the right coverage, your family will have enough to cover outstanding debts and maintain their current way of living.
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Why do you need life cover in Japan?
The most common reason to take out life cover is to ensure your family is financially secure if you are suddenly not around to do so.
Too often, when an income earner dies, loved ones are forced to make tough decisions during an emotionally hard time.
Life insurance gives your loved ones a chance to adjust over time rather than having to move to a downsized home or find a new job right away. It can help your family pay off existing debts and mortgages, children`s education, maintain ongoing living expenses, and so much more.
Another reason for opening a life insurance policy (as a foreigner in Japan) is to help offset the Japanese inheritance tax your family will have to deal with, should you pass away. Japan has high inheritance taxes, and as a long-term foreign resident, your family may be on the hook for taxes, even on your foreign assets.
One way to ensure your family can cover the tax bill is to take out a whole-of-life insurance policy for the amount your estate will owe. This way, your beneficiaries won’t be forced to sell their home or any other assets to pay the tax bill, if they’re unable to fund the bill from other sources.
Already have some cover through your workplace? Probably not a good idea to only rely on it.
If you have cover through your work, you should review how much protection you have, and also what the terms and conditions are.
As a general rule, we advise keeping your private life insurance separate from your work cover. Most work insurance plans will only cover you while your company employs you. In most cases, if you quit, or if your employment is terminated for any reason, the cover also goes away.
Should this happen, you may then be forced to take out private cover, which may be more expensive as you are now older.
For ex-pats, a forced move to another country by their company could also cause their life cover to end suddenly.
Having private cover ensures that no matter who you work for, or where your career may take you, you can keep your family protected financially. Work insurance should be the icing on the cake, rather than your primary source of cover.
What can you afford?
Before you choose how much coverage you and your family need, you need to decide on how much of a premium you can afford. Missing payments can result in the termination of your policy, which means you might have to take out a new policy with a higher premium when you’re older.
Therefore, it’s necessary to decide on an affordable premium for the policy than to risk losing coverage altogether when you fall on hard times.
It’s also important to note that life insurance policies are just one component of one’s financial planning. Other areas need to be considered, such as retirement planning, mortgage payments, and education for the children.
How much coverage and for how long?
The amount of life cover you need depends on several factors.
First of all, if your main priority is income replacement and family protection, then you will need to think about how much income will be lost if you pass away. This means not just the salary for one year, but for however many years your family would require it.
Generally speaking, if you have a young family with small children who will depend on your earnings for the next 15-20 years, then the multiples of your yearly income that need to be replaced will be more.
You also need to add any loans and liabilities, education costs, funeral costs, and (potentially) tax liabilities for your family. This all needs to be balanced with a monthly premium that will make sense for your situation. There are rules of thumb, such as 5-10 times salary for higher earners. However, no rule will fit everyone perfectly.
How long should you be covered? This will again really depend on your particular circumstances and goals. If your main priority is to protect your family financially, then you may want to choose a term that matches the time when your children will become financially independent. The thinking is that by then, you will have amassed enough assets that even if anything were to happen, your spouse would be well taken care of financially.
If you are a high net worth individual and you are living in Japan and expect to stay long term, then you may want to seriously consider a whole of life policy, which will give you the option to remain covered for the entirety of your life. The payout on the event of your death can then be used by your loved ones to cover any inheritance tax liability.
We recommend you contact a financial advisor before you decide on a policy. Decisions regarding life insurance as a foreigner in Japan should be made in the context of an overall financial plan. There are many aspects of your personal finances you need to evaluate before deciding on the right policy for you.
To make things even more complicated, planning for one’s death can be an emotional experience. Having a non-biased opinion from a financial advisor will benefit you when it comes to making the correct decisions on the monthly budget, coverage, and term of the policy.
If you are interested in ensuring your family’s financial security should anything happen to you, feel free to contact us here at Argentum Wealth for a free consultation. We’d be happy to help.