Chapter 2: Family and Personal uses of Life Insurance (Part 1/3)

With a better understanding on the term Economic Life Value as coined by Professor Huebner, I'll now digest chapter two and share my views on it. As it is a rather long chapter, I would be breaking it down into three parts.

In the first part, I will be giving my inputs on the following five sub points of this chapter. They are

• Capitalization of the Value of a Human Life and Indemnification of that Value
• The Duty to Insure
• Eliminates Worry and Increases Initiative
• Life Insurance Makes Savings Possible

The primary purpose of life insurance is the protection of the family. Every familiy is dependent for subsistence upon an income which necessarily varies in amount with the particular circumstances surrounding its case. In some instances this income is obtained from the return on invested funds which have been accumulated or inherited, but in the overwhelming majority of cases the subsistence of the family depends upon the current earnings of the husband.

The chapter starts of with the following paragraph indicating the importance of protecting the family with life insurance as it helps to secure the financial pillar of any household. This is especially so where the majority of families are dependent on the earnings of a bread winner or in Singapore's context dual bread winner (Both husband and wife). Thus as the professor puts it that this income must be secured as it is the "subsitence" for the bread winner's dependents. It is also mentioned that there will be a handful of individuals who have accumulated or inherited this known income. In my view, this income should also be protected. As mentioned in Chapter 1, a known hazard we all face unlike the 1900s would be the hazard of health. In the unfortunate instances of a health hazard, income that is generated from the accumulation of assets or inheritance would erode due to medical bills/ healthcare cost. This would compromise on the income the individual or family requires for their dependents.

• Capitalization of the Value of a Human Life and Indemnification of that Value

”Briefly stated, life insurance makes possible the capitalisation of that value. By furnishing this capitalised value in the event of death, life insurance may be said to perpetuate the earning capacity of the life for the benefit of those dependent upon it.”

From this point the professor goes on to mentioned that it is possible to capitalised the value of a human life based on his earning ability for his dependents. His dependents whom get to enjoy the current and future lifestyle would require this value to be perpetuated even in the unlikely event of pre-mature death as mentioned as a potential hazard we all face.

The golden questioned is, how much life insurance should a breadwinner be taking? Professor Huebner goes on to say the following statement, “A man’s life insurance should be large enough, when invested at the current rate of interest, to produce an income half as large as he earned while living.”

In an article by The Straits Times published on 10th September 2017 titled “Look out for gaps in insurance coverage” the writer goes on to quote a 2012 study by the Life Insurance Association (LIA) that there is a $462 billion gap for working Singaporeans and permanent residents. This is a alarming gap which goes to show that there are many whom has not bought sufficient life insurance to transfer the gap of pre-mature death. The writer later goes on to mentioned that on an individual level, the life insurance sum assured comes to an amount of $242,500 for a working adult or an estimate of 3.7 times his annual income after taking into account CPF savings. In my view, with inference to Professor’s calculation on how much life insurance a breadwinner should be taking, a life insurance sum assured of $242,500 if invested at an assumed rate of return of 4% p.a would only generate an annual income of $9,700. That would be to say that the individual is only earning $404 per month which is obviously not the case when LIA commissioned the 2012 study. I could see why it is such an alarming gap. The writer goes on to mentioned that this study has not factored in the critical illness coverage protection gap. As shared in Chapter 1 and I would like to re-illiterate once again, health hazard which I feel is probably attributed to our lifestyle here brings about the need to transfer the health risk to a Life Insurer through critical illness coverage.

• The Duty to Insure

In the next subpoint as the header suggest, there is an innate duty for the breadwinner to insure on his Economic Life Value. Be it an high income earner or an average earner. The Professor goes on to mention the following statement, "in the great majority of instances, life insurance is the only recourse open to the man of moderate income who finds its difficult or impossible by force of circumstances to accumulate a savings fund for those dependents who may outlive him."

“The growth of life insurance implies an increasing development of the sense of responsibility. The idea of providing only for the present must give way to a recognition of the fact that a person’s responsibility to his family is not limited to the years of survival. Emphasis should be laid on the “crime of not insuring,” and the finger of scorn should be pointed at any man who, although has provided well while alive, has not seen fit to discount the uncertain future for the benefit of a dependent household."

In a pandemic ridden world with COVID19, a survey was conducted by a Local Singapore Bank as mentioned by The Straits Times on 1st June 2020. In the survey itself, during the period of circuit breaker, two-thirds of working Singaporeans and permanent residents had indicated that they did not have enough savings to last them beyond six months. Just imagine, having two- thirds of the working population coming to a halt in view of a pandemic due to insufficient savings. In my view, the risk of not addressing contingency funds due to COVID19 is devasting for the breadwinner's dependents. Even worst still should the virus take his life rendering him not able to provide the constant stream of income he so requires for his dependents.

• Eliminates Worry and Increase Initiative. -

Professor Huebner being a person of wisdom was probably aware that in his time, constant worry was found in the minds of most people. Having an adequate and well calculated life insurance policy would be a power force to help ease that worry.

“Life insurance would be found to be a powerful indirect force in the production of wealth in that it relieves the policyholder of worry and increases his efficiency. Constant worry is one of the greatest curses that can fall to the lot of man, and life insurance, if universally used, would lift that curse from innumerable shoulders.

As the statement speaks for itself, the need to worry is lifted away. Breadwinners whose responsibility to provide for his loves would be addressed in the event of pre mature dealth. They can fully utilise their energy and time to increase their earning ability and build wealth.

"By thus removing a load of care from the mind, life insurance promotes efficiency and makes life happier. For this reason life insurance should be regarded by the average man as one of his most treasured possessions, and premium payments should be not be looked on merely as an expense to be grudgingly borne." When Professor Huebner ends of this subpoint with the following statement, in my view and practice, I seldom hear friends having such high regard for a financial instrument called life insurance.When the professor coins that life insurance is the most "treasured possession", I would have to agree with him totally as I have personally not gained the assets with equivalence to my economic life value.

• Life Insurance Makes Savings Possible

On savings, the Professor has the following words of wisdom, "The habits of saving should by all means be encouraged, but it should be borne in mind that the saving of a competence involves the necessary time to save, and that life insurance is the only certain method to use as a hedge against the possibility of the saving period being cut short."

In this context, be it saving or investing of a competence amount, both would require time unless there is a sizable gift or inheritance. A simple example would be saving an amount of $100 per month. At the end of 15 years, this savings amount would be $18,000 without factoring any form of deposit interest. A similar insurance savings plan would probably offer the same savings amount not factoring any form of interest. The only difference would be in the event of pre-mature death on the 5th year, the insurance sum assured of $18,000 would be paid out to the breadwinner's dependents where as a savings amount up to the 5th year would only be $6,000. Most insurance savings plan would also come with waiver of premiums to address the risk of critical illness in the event of a health hazard. With this illustration, the professor sums it up with the following.

"A policy of saving can yield only a small amount at the start, while a policy of insurance from its beginning guarantees the full value and thus safeguards the policyholder against failure through early death to have sufficient time to save adequately through other channels."

In conclusion to this sub point on savings the Professor gives his view that protecting the breadwinner's ability to save through an insurance policy is a better alternative to just pure savings, "Both should be practiced, and, if only one is possible because of limited means, insurance should be selected because of its much greater certainty in leaving a stipulated fund for the support of the family whenever the breadwinner’s income-producing capacity is cut short by death."

With that, the 4 points mentioned about life insurance serves to help individuals such as breadwinners go on with their responsibilities in life by being a provider without the need to be concern that their efforts would be gone to waste. In part 2, the following 3 points would be explored with regards to Life Insurance and its uses for the individual and family,

• Furnishes a Profitable and Safe Investment
• Forces and Encourages Thrift
• Facilitates the purchase of a Home