According to figures released by the Life Insurance Association of the Republic of China, 175,986 death benefits were paid out in Taiwan last year. It was the first time the total number of benefits paid exceeded the total number of deaths for the year, which last year stood at 172,405.
The total amount paid out was NT$98.3 billion (US$3.24 billion).
Life insurance companies handle an average of nearly 500 death benefits cases each year, paying out a total of NT$270 million on average. At first glance, they make a considerable contribution to social stability.
However, a closer look at the figures shows that the average death benefit paid out per policy is NT$559,000, which makes one wonder whether a Taiwanese’s life is really worth less than the price of an ordinary car.
Can it be that, should you unfortunately suffer an early death, you will only leave your family with enough money to live on for one or two years?
Taiwan’s life insurance companies have combined capital of more than NT$23 trillion, and the world’s highest insurance penetration rate, meaning total insurance premiums as a percentage of GDP.
Taiwanese pay tens of thousands of New Taiwan dollars in insurance premiums each year, so why is insurance cover for death so paltry? Are such claims enough to lighten the financial burden of the policyholder’s surviving family members?
Why are life insurance death benefits so low? The main reason is most people buy endowment or investment-linked insurance policies to earn dividends. Since their main concern is to get a return on their policies, they pay high premiums, but get pitiful coverage in return.
Consider, for example, a 30-year-old non-smoking man with an insured amount of NT$1 million. His annual premiums for a whole-life endowment policy would be in excess of NT$30,000, whereas for term life insurance, which simply provides protection, his annual premiums would be just over NT$3,000.
The difference between the two in terms of cost-performance ratio is obvious, but the proportion of people choosing term life insurance has always been excessively low.
Why do consumers choose the more expensive option instead of the cheaper one?
Since most people misunderstand insurance as being a type of investment, they expect to “get back” the money they pay out in premiums, and are therefore not very interested in purely consumer term life insurance.
Moreover, because consumers do not shop around, life insurance companies and agents generally just give them what they ask for, with the result that the market is dominated by products that demand high premiums and emphasize dividends over coverage.
Taiwanese have a relatively immature understanding of insurance, so they buy this “intangible” product mostly through insurance agents or brokers. Since people have a limited knowledge of the features and details of different products, agents wield a strong influence over their clients’ purchasing behavior.
Insurance agents can earn bigger commissions from endowment or investment-linked policies, giving them an incentive to promote these kinds of product.
As a result, a lot of people who have bought insurance have not bought the right kind or enough. The purpose of life insurance is to give the policyholder the assurance that their family will be compensated for the loss of income after their death.
In contrast, the return that people seek from their savings or investment is to bring added wealth for themselves or to pay for their own living expenses after retirement.
Since insurance and investment have such different purposes, the two should be handled separately.
If the two are jumbled together, it often results in neither purpose being fully achieved.
The insurance business has a “double 10 rule,” that is, the right amount of insurance for individuals should be 10 times their annual income, while annual premiums should not exceed one-tenth of their annual income.
By this standard, what we need is term (pure) life insurance, followed by medical insurance, critical disease insurance, etc. These are the kinds of policy that fulfill the basic functions of insurance, and they are just as important as the mandatory liability insurance that drivers have to buy before going out on the road.
As for endowment and investment-linked life insurance policies, which are characterized by high premiums and combine the functions of investment, wealth management and return of principal, they are something to consider for those who have money left over after dealing with the basics.
As the saying goes, you must learn to walk before you can run.
Jason Yeh is an associate professor of finance at the Chinese University of Hong Kong.
Translated by Julian Clegg
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