Life insurance is the foundation of a solid financial plan for any family where dependents are involved. Without life cover, loved ones can be left in a precarious financial situation should anything happen to the breadwinners and guardians of the family.
Being an expat in Japan adds additional considerations regarding life insurance, making things even more complicated. For many foreigners, a domestic Japanese policy may not be the best solution because of language, portability, and eligibility limitations. Getting life cover from your home country is also not a realistic option, with insurers unwilling to take on clients living abroad.
Once you have decided that you want to establish life cover to protect your family, the next step is to determine what type of cover is most suitable for your circumstances.
While there are many ways a life insurance policy can be structured, the two most common types of policies are term life and whole of life. Understanding how these policies differ and what they are for is crucial to financially protecting you and your family if the worst happens.
Defining Term Life Cover
Term life is the simplest life insurance product you can buy: it covers you for a fixed period and only pays out if you die during the term. If you outlive the term, there is no payout, and your beneficiaries don’t receive any money. The fact that you are likely to live beyond the policy term means the insurance companies won’t have to pay out, thus making term life policies more cost-effective than other life insurance policies.
The policy period can range from a few years to decades and often may have a limitation on coverage based on your age. It is common for people to use term life cover during the period of most financial vulnerability for their families. For example, a 20 to 25-year policy would cover the period from when a child is born until they are (hopefully) financially independent.
Premiums for term life cover are usually fixed throughout the policy term and are less expensive than those of whole of life.
Term Life may be right for you if you:
Only need coverage for a specific period. This may be while your kids are still your dependents or when you have major temporary expenses, you would want to be paid off if you pass away. This could be the cost of raising a family, paying for education, or paying off a loan.
Want the most affordable cover. Because the policy is so simple, and it is less likely that the life assured will die during the term, premiums cost less. This is especially important if you want coverage now but are tied down by other expenses and cannot afford a Whole of Life policy.
Are cautious about insurance products. Many companies have created aspects of insurance products that act as investment vehicles, increasing costs and confusion. Because Term Life policies are straightforward and are purely for risk management, there is are easy to understand.
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Defining Whole of Life Cover
Whole of life is a type of permanent life insurance cover that you can keep your whole life. This means that your beneficiaries will receive a payout no matter when you die. Because there will be a payout, as long as you keep paying the premiums, whole-of-life policies are more expensive than term-life policies.
Whole of Life policies can be set up in various ways, some being very simple, while others may include an encashment value and investment element. Premiums are more expensive than with term life and may not be fixed throughout the policy’s life. In many cases, the premiums will increase in cost as you age.
Whole of life may be suitable for you if you:
Want to leave money behind for your heirs. You can use life insurance payouts on a whole-of-life policy as part of an inheritance for your heirs. This type of cover is often used in Japan to mitigate the heavy inheritance taxes, which can be as high as 55%. Your heirs can use the death benefit to pay the taxes due on the estate.
Feel more comfortable with the security of being covered for life. Because you can keep the policy for as long as you pay the premiums, you can keep the cover indefinitely even if you develop serious health issues after.
As you can expect, because everyone’s circumstances differ, there is no one right answer here. While term-life cover is more widely used, each type of cover fills a different purpose, and it is not unusual for people to use both whole-of-life and term-life covers simultaneously.
From our experience working with clients in Japan, we see that for most, the main reason for life cover is to ensure their families are financially taken care of should anything happen. In such cases, term cover is often adequate for their needs.
Some clients, however, want to make sure there will be a payout in the future as a way of passing on wealth to the next generation and, depending on the size of their future estates, to cover the heavy inheritance taxes in Japan.
Do you need professional advice?
If you are unsure which type is best for your family’s situation, we recommend sitting down with a professional advisor who can guide you through the decision process. Decisions regarding life insurance as a foreigner in Japan should be made in the context of an overall financial plan.
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 policy term.
Argentum Wealth does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Argentum Wealth Management is licensed through the Japanese Financial Services Authority to give financial advice. The FSA strongly recommends that you only receive financial advice and services from a locally licensed and regulated firm.