Life Insurance in Hong Kong: How to Choose the Right Plan?
October 7, 2021
Life is unpredictable. We can’t always plan ahead for every challenge in life, but it’s never too late to start preparing.
Purchasing life insurance is an important decision, especially when you think of it as a commitment for the next 10 or 20 years, or even more. When looking for a policy, you may find yourself drowned in a sea of jargons and questions: What’s the difference between term and whole life policies? How does life insurance work? How much does it cost? Which one is right for me? Look no further: as Alea is here to answer all your questions about life insurance.
What is life insurance?
Life insurance is a risk management tool that aims to provide financial security for your family members or any named beneficiary upon the unfortunate event that you (the insured person) pass away; or with critical illness insurance, for (your) diagnosis and treatment costs as well.
Over time, insurance providers have developed an array of life insurance products with different levels of cover, benefit terms, financial goals, etc. For example, some life insurance products contain a saving or investment component and have gained popularity as long-term wealth management tools.
How does life insurance work?
Whichever life insurance plan you opt for, over the policy term, you as the policyholder have to pay a monthly or annual premium in exchange for a lump sum known as “death benefit” paid to your beneficiary/beneficiaries when you/the insured person dies; whereas critical illness plans comprise a lump sum benefit upon diagnosis of a critical condition.
In Hong Kong, all insurance benefits are tax-free, meaning that the beneficiary can receive the coverage in full without deducting the tax.
Oftentimes the policyholder may also be the insured, but one can also take out life insurance on a spouse, a parent, a child or even a business partner with their consent, at the same time be the policy’s beneficiary.
Cash value is a portion of the premium that earns interest in a life insurance plan and can be withdrawn by the policyholder.
Take a whole life policy or a critical illness policy as an example, the premium paid will go to the insurance benefit, the insurance company’s costs and profits, and the remaining part to the cash values, earned via the insurance company’s investments. Contrarily, a term plan normally has no cash value.
In Hong Kong, the Insurance Authority requires insurance companies to provide a 21-day cooling-off period upon delivery of the life insurance policy or the Cooling-off Notice, as a protection of the policyholder’s interests. During this period, you can reflect on your decision and cancel the policy for a full refund. The insurer bears the responsibility to clearly explain this right to clients.
Types of life insurance: Critical illness vs. Term vs. Whole life policies
Life insurance can be categorized into three main types: critical illness insurance, term life insurance and whole life insurance. They serve different purposes and come with different costs and conditions.
Critical illness insurance
Hong Kong has the world’s second most expensive private healthcare system. While your health insurance may be able to get you covered for most common conditions, in the face of a life-threatening condition like cancer, organ failure or stroke, treatment can cost millions and easily exceed your health insurance’s coverage. More distressing, one will likely be unable to work or earn any income for months in case of severe illness — and this is where critical illness insurance kicks in.
As its name suggests, critical illness insurance secures you financially with a lump sum upon diagnosis of a serious health condition. Such coverage safeguards your family’s quality of living by providing financial support for daily living expenses, rents, mortgage payments and so on, during a battle against terminal illnesses.
Every insurance company may have different definitions for “critical illnesses” but on average they cover 50-60 named illnesses or conditions. Note that any pre-existing conditions may lead to exclusions or premium loadings.
*A waiting period of 1-3 years may apply for reimbursements for the same conditions
Term life insurance
Term life insurance covers the death of the insured only for the premium paying term, usually 10 years, 20 years or 30 years, and most can only cover up to a certain age, e.g. 65 years old. As the policy term ends, the policyholder has the option to extend it or convert it to a whole life policy (underwriting needed). You can expect premiums to increase exponentially at each renewal as you get older.
If you decide to discontinue your coverage after the term ends, the plan simply expires with no retrievable value. An exception is Return of Premium (ROP) plans, a subcategory of term life insurance that gives you the option to refund the total amount of premiums paid when you outlive the policy, but they are attached with higher premiums than regular term policies.
Term life insurance in general does not have a savings component and is more suitable for those who are exposed to huge financial risks, having to repay large sums of mortgage, loans or debts, for instance.
Whole life insurance
Whole life policies offer lifelong protection, or sometimes protection until 100 years old. They often come with a savings element and a fixed premium that must be paid within an optional installment period (e.g. 5 years to 25 years). Unlike term policies, premiums of whole life policies stay the same regardless of your age. Owing to its ability to accumulate cash value and its prolonged coverage, whole life insurance typically has much pricier premiums that can be 4 or more times that of term life insurance.
Compare critical illness insurance, term and whole life insurance at a glance:
|Critical illness insurance||Term life insurance||Whole life insurance|
|Period of coverage||Lifetime||Within the term of 10/20/30 years||Lifetime|
|Insurance benefit||Lump-sum benefit paid to the insured upon diagnosis of a critical illness||Death benefit paid to beneficiaries||Death benefit paid to beneficiaries|
|Premiums||- Highest |
- Level premium, paid within an installment period of 5-25 years
|- Lower |
- Level premiums, which may increase with age at end of term / policy conversion
*30 years plan with Return of Premium (ROP) option
|- Higher |
- Level premium paid within an installment period of 5-25 years
|Savings element||Yes, with additional cash values/dividends||No||Yes, with additional cash values/dividends|
|Suitable for||Those who want lifelong coverage for critical illness treatment or a savings component||Those with liabilities, i.e. loans, mortgage, debts to repay||Those who want lifelong coverage or a savings component|
Do you need life insurance?
Whether you need to be insured or not all comes down to your life planning: whether you have a family to support, have any liabilities to repay, have any plans for retirement, and the list goes on. The most common reason to get life insurance is to protect your children or loved ones against uncertainties. Some insurers offer specific life insurance plans to cater to specific financial needs through different life episodes, such as:
- Mortgage or rent
- Car loan
- Funeral cost
- Education fund
- Living expenses of dependents
- Retirement planning
Different stages of life bring different needs and goals. You never know what the future holds. While it is never too late to take action and get valuable protection, it is recommended to get insured when you are still young and healthy. That way you can lock in a lower premium, get a peace of mind and protect your loved ones in case any health condition arises, making you uninsurable in the future.
Group life insurance
Some large companies would also offer group life insurance to their employees, particularly for senior management staff. Most employers favor term life policies that are renewable yearly. Such plans generally have no savings element and will terminate if you switch or quit your job. Therefore, it is important to get your own insurance, independent of your employment status.
Not sure about what you need? Schedule a free consultation to discuss your situation with an Alea advisor!
How much life insurance coverage do you need?
Life insurance products come in all shapes and sizes. Most insurers set a minimum life insurance coverage at US$30,000-50,000, whereas there is generally no maximum, but more requirements may apply when the amount goes beyond US$500,000.
Rationales to assess your coverage amount:
1. Critical illness insurance:
At least 6-12 times your monthly salary → for treatment costs and to sustain living of the family while you are away from your job due to illnesses
2. Term / Whole life insurance:
10-15 times your annual income → to cover your family’s expenses in your absence until your children become financially independent
3. Or specifically for term life insurance:
The same amount as your liability (mortgage or loans) → to lift the economic burden off your family
Here are some key factors you may want to pay attention to when choosing one for yourself or your family.
Living expense of dependents
The purpose of purchasing a life insurance policy is often to assure your family’s quality of living should anything happen to you, especially if your family depends heavily on your income. So first and foremost you should take into account how much your family will need to make ends meet dealing with everyday household expenses and carrying on with their lives in comfort. This includes groceries, entertainment, rents, clothes, etc.; multiplied by the number of children (or dependents) in the family and the number of years to support or until they become adults; subtracting your existing savings, investments, MPF and other assets.
Raising children is a long-term commitment and you will want to give them all the best things in life. On top of their childcare, daily living and medical expenses, college tuition — let alone other extra-curricular activities — are a heavy financial burden for a family. A UGC-funded university degree program in Hong Kong costs HK$42,100 per year, but the number can shoot up to 5-10 times that if you plan to send your kids abroad for studies.
Making after-death arrangements in advance can be a great relief for your family. Part of your death benefit can be used towards funeral preparation. Burial, cremation, parting ritual, crematorium or cemetery costs in Hong Kong can range from HK$10,000-100,000 or more in total, depending on the styles and scales chosen. Doing so abroad can be significantly more expensive.
Liabilities to repay
Include any outstanding liabilities when determining your coverage, such that mortgages, debts, and loans can be settled even when you are no longer there to support the family.
Last but not least, bear in mind the possible impacts of inflations when you draft the blueprint of your future. Over the past 10 years (2011-2020), Hong Kong has seen an average 3% increase per year in the Consumer Price Index (CPI), a widely adopted indicator of inflation, in other words, consumer products today on average cost about 30% more than those 10 years ago!
It is always better to brace yourself with an extra amount for future inflation when calculating costs of living, education, accommodation, medical services and so forth.
The “split” approach
We at Alea have seen growing interests in critical illness products in Hong Kong in recent years. It is also common for people to split their investments into a critical illness policy, for their own use in case of a terminal condition, plus a whole life policy, to leave peace of mind to their family if the unfortunate happens.
Try the Life Protection Coverage Calculator by the Investor and Financial Education Council to estimate your ideal life insurance cover. Talk to your advisor for a more thorough analysis of your needs.
How much do life insurance premiums cost?
After you apply, your insurer will assess your risk by asking you to fill in an underwriting questionnaire and sometimes undergo a body checkup (if your coverage exceeds a certain amount, e.g. US$500,000). Below are some factors that may affect how insurance companies determine your premiums:
- Smoker or non-smoker
- Family medical history
- Coverage needed
Alea advisors will guide you through your application process. We offer plans with level premiums — premiums that stay the same throughout the life of the policy, regardless of changes in your age or health condition.
The best way to find out the cost of a life insurance policy is to get a free quote from your insurance broker. This will help you compare coverage and premiums, and make the right choice.
As an expert in life insurance, Alea has all the latest product and market information you need. We go the extra mile to guide you through your options and find the right plan, tailored for you. Get in touch with an advisor today to compare different plans in Hong Kong.
1. What is the use of life insurance?
Life insurance is a risk management tool that aims to provide financial security for the family upon the loss of a “breadwinner”. By paying for a premium over one’s lifetime, the insurance company will provide a lump sum known as death benefit to the named beneficiary when the insured passes away.
2. How much life insurance coverage do I need?
Experts suggest multiplying your annual income by 10-15 times to estimate your cover amount for term or whole life plans; and at least 6-12 times your monthly salary for critical illness plans. When calculating your ideal coverage, you should consider the living expense of your dependents, education fees for your children, as well as any liabilities of the family, susceptible to future inflations.
3. When is the best time to buy life insurance?
Premiums increase with your age and with medical conditions. As a rule of thumb, purchasing a life policy when you are still young and healthy can lock you in better rates for lifelong protection. Some people consider buying life insurance when they reach important milestones in life — getting married, starting a family or buying a home.
4. Do I need to undergo a medical assessment to apply for life insurance?
Most of the time there is no medical assessment but an underwriting questionnaire is required to apply for a life insurance plan. The exception is when your coverage exceeds a certain amount, i.e. US$500,000.
5. Who can be the beneficiary of my life insurance policy?
Insurers usually have no limit on the number of beneficiaries you name, but your beneficiaries should be people with whom you have “insurable interests” (people who would suffer financially if you die). They can be your spouse, children, sometimes your parents, or even a trust (a charity or a business).
6. How can the beneficiaries claim a life insurance policy?
To make a death claim, the beneficiaries will need to provide the original death certificate of the insured, the life insurance policy document, a completed claim form, along with identification documents and proof of relationship with the insured. Please check your insurer’s policy for any additional documents required.
7. What happens if I want to surrender my policy?
You will lose the protection and any paid premiums if you decide to cancel your life insurance policy. For critical illness and whole life policies, you may be able to retrieve the accumulated cash value.
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This article was independently written by Alea and is not sponsored. It is informative only and not intended to be a substitute for professional advice and should never be relied upon for specific advice.