Let’s face it – most people hate thinking or talking about insurance. When an insurance agent tries to convince us to buy or expand a policy, and bases his points on the high statistical probability of debilitating illness or untimely death, the potential cost of a lost career, and other similarly cheerful points, our first thought is that if we tune him out as quickly as possible, we’ll be able to avert that disaster!
However, unfortunately there has to be a however! Insurance is a crucial part of every well-rounded financial plan. Having sufficient insurance means that your assets are protected – and your primary assets are your earning power, and your ability to care for yourself and your family. Although ideally your comprehensive insurance package will be tailor-made to suit your requirements, it must be reassessed for each different stage in life.
Everyone needs to draw up a highly-effective comprehensive financial plan which takes into account all the stages and changes in life, and is adjusted according to your age and resources. A young couple must focus on how to start a financial plan and live within a budget during those challenging early years. As you enter your 40s and 50s wealth management issues surface as you struggle to make your assets grow to meet your current and expected future needs. Retirement planning ensures you have a clear retirement savings plan for accumulating assets and using them in retirement with maximum flexibility.
And insurance planning is a key part of lifecycle financial planning. The insurance requirements of a new family are very different to those of a couple approaching retirement. As a young family you will need the security of life insurance and a disability pension to ensure that your family will be able to function effectively in the most adverse situation. Your concerns as you approach retirement are directed more towards your ability to sustain your desired lifestyle, in the event that you have no salary or employment income.
Let’s look at how to approach one of the most important insurance policies from a financial planning perspective.
Life insurance
Life insurance gives you the security of knowing that you’ll be protected in the event of the unknown. This feeling has real value, which is why the insurance business is a very large and developed industry. If you grew up in a home where a parent passed away at an early age, leaving the family to deal with financial hardship, it’s likely you’ll view life insurance in a very different manner than someone who never experienced any financial insecurity.
Israel does not currently have any estate tax which is one of the reasons why whole life insurance (life insurance that remains in force until your death) is not available here. Israel’s life insurance products are all term-based. That means that any life insurance that you buy in Israel will probably expire when you turn 65 or 70. So even though you might pay into a policy for many years, in the best case scenario you will receive no payment for all the years you have contributed.
As you age and your responsibility to provide for others grows, your insurance initially should grow, and then in mid-life, it should be actively reduced due to the following critical factors.
- As you save money for your retirement, these savings become a substitute for insurance proceeds. Why continue to pay for life insurance, if you have other means of supporting your family in the event of your untimely passing.
- With age, not only does wisdom grow, but so too your insurance premiums. Most policies are priced to increase yearly until they become very expensive in your 50s and 60s. These higher premiums mean that many people cannot afford the same insurance coverage they had when they were young. While it’s possible to buy term insurance in Israel with fixed premiums for the life of the policy, these policies are not always worthwhile because they assume you’ll need the same amount of life insurance as you age, which is not necessarily true, as noted above in point 1 .
- As already mentioned, life insurance in Israel will end at a specific age, usually 65 or 70. So as you approach these ages, your chances of needing your insurance is reduced as the number of remaining years to the policy decreases.
- As retirement approaches, your day-to-day living expenses and those of your dependents generally go down, thus reducing the amount of insurance you need.
If you are a relatively new oleh be aware that life insurance packages sold in Israel are not the same tax and estate planning tool as in other countries. If you continue to hold assets outside of Israel or you are required to pay estate taxes on international assets (as per US regulations), then you need to consider whether to keep your whole life policies even after making aliya, to protect yourself against a future tax liability. This decision should be taken in the context of your estate and tax planning. If you need whole life insurance for tax structuring reasons, it makes sense in most cases to keep your life insurance policy in the currency of your future liability. So if you think you’ll owe US dollars, keep your policy in that currency to avoid unnecessary currency risk.
The biggest question you need to ask yourself regarding most types of insurance, including life insurance, is whether you can truly afford the extra cost. In many cases, it pays to self-insure yourself by saving for a rainy day, instead of paying into a policy that you might never need. Go over your expenses to see whether you can really afford the insurance, and at what level of coverage. Often historical policies that once made sense, whether they are part of your pension savings plan (like a Bituach Menahalim or Keren Pensia) or not, need to be evaluated to see whether they truly fit your current needs.
We’d all like to be comprehensively insured for every possibility, but in most cases that’s just not realistic. If relevant, be sure and check with a financial planner and your insurance agent before cancelling any policies. Adjust your insurance policies every number of years as necessary, and then you can forget all about them and enjoy life to the fullest!