The concept of life insurance:
Life insurance means insurance that covers material losses arising from the realization of the phenomenon of death or reaching a certain age (life) or both (death and life).
Consequently, life insurance is one of the life risks management policies for the individual to face the financial loss arising from the realization of the phenomenon of death for those who depend on them or for the financial loss resulting from reaching a certain age and the inability to earn. It is a means of coping with the lack of income or interruption of income due to death or reaching a certain age or both.
Life insurance documents
A life insurance policy is a contract whereby the insurance company is obligated to pay the insurance amount to the insured, his heirs, or to the beneficiary or beneficiaries specified in the policy, in the event of the death of the insured on his life, or if the insured reaches his life to a specified age in the policy, in exchange for payment The insured has to pay a one-time installment upon contracting or annual installments.
Life insurance policies can be divided according to the benefits that beneficiaries receive from life insurance into three main sections:
The first section: insurance policies whose amounts are paid to the heirs and beneficiaries in the event of the insured’s death, such as temporary insurance policies, life insurance policies.
The second section : insurance policies whose amounts are paid in the event the insured survives, such as pure endowment insurance policies and life payments contracts (pensions).
Section Three : Insurance policies whose sums are paid in the event of death or life, and they are mixed insurance policies that guarantee payment of the insurance amount to the beneficiaries if the insured dies during the insurance contract period or if the insured personally receives the insurance amount if he is still alive at the end of the insurance period .
Who needs life insurance?
Anyone who has financially supportive individuals (father, mother, wife, or children) must insure his life from the risk of death, the intention of life insurance is to transfer the risk of death and income interruption to the insurance company in exchange for paying premiums and if the death occurs, the insurance company compensates the beneficiaries Who you have chosen in the insurance policy.
What is the best life insurance policy?
Of course, it is a temporary insurance policy because it is low-cost, so you can easily insure yourself for the amount your family needs, unlike any other life insurance policy that has a savings part such as a life insurance policy or a mixed insurance policy.
The temporary insurance policy has the advantage that it covers a temporary period, and most people choose a twenty-year or thirty-year-long document, and when choosing the term of the insurance policy, you must choose a document that extends its period until the youngest of your children is at the age of 23 years.
Which is better, temporary insurance, life insurance, or mixed insurance
In the next lines, we will explain a brief summary of why temporary insurance is better.
First, we must explain the difference between the cash value and the face value.
Cash value: It is the cash amount that the insurance company provides to the owner of the insurance policy when the contract is canceled. This term is usually used in life insurance.
The cash value is the sum of the premiums paid to the insurance company minus the value of the brokerage commission and the value of issuing the insurance policy with the addition of the interest value.
Face value : the nominal value in the field of insurance means the value of the insurance policy that you have purchased, for example when paying 2,145 dollars annually in a lifetime insurance policy for a 30-year-old person is equal to 250,000 dollars.
For example , you are a person in America , he said at the age of 30 years you want insurance on your life for $ 250,000 you will find the terms of the documents as follows: –
– insurance policy temporary (provide insurance protection in the event of death only) , which period covered 20 years annual its share of $ 150, temporary , which document Its coverage period is 30 years and its annual premium is $ 223.
– A life-long insurance policy that lasts throughout your life or until the last age on the schedule (in Egypt the last age of 85 and in America the last age of 101), its annual premium is $ 2,145 for a 30-year-old person.
But if you are in Egypt and you are a male and you are 30 years old and want to insure your life: –
– The temporary insurance policy with an annual premium of 500 pounds for 20 years, you will get 205,000 pounds in the event of death.
– The temporary insurance policy with an annual premium of $ 500 for 20 years will get you $ 205,000 in the event of death.
– The mixed insurance policy (insurance protection in case of life and death) with a monthly installment of 500 pounds (6000 pounds annually). The date of death (you will not get the cash value), and the profits are less than the percentage of any other investment, even less than depositing the money with the bank. In Egypt, the average annual profit in the insurance company is variable and often ranges from 6% – 7% at the present time.
We have now explained one of the many reasons why temporary insurance is the best type of insurance, but anyone will say that in temporary insurance, the heirs who have chosen will receive the insurance amount in the event of death, but in the case of life, I will not get anything, which is the eye of injustice?
– The response to that is that you pay compulsory insurance on your cars in most countries of the world, and it is possible that a car accident will not happen to you and therefore you did not benefit from the money you pay, and you pay fire insurance and it is possible that the fire did not occur and therefore did not benefit from the money.
The most important point is that you are my friend, the reader shuffling papers, you think that the insurance company is a bank that will invest your money and give you interest, but the insurance company is a company that bears the risks you are exposed to, such as the risk of death, and you give it installments in exchange for that, and if the death (risk) occurs, the insurance company will compensate the heirs But if the danger does not occur, you will not get anything.
For your information, insurance policies that have a saving part, such as mixed insurance policies or life-long insurance policies, give you less interest than any other investment, and we explained that in this article and the article that we will refer to in the next lines.
An example of how the work of insurance policies for life and documents of temporary insurance: –
If youperson in America at the age30 years and you want insurance on your life at $ 140,000 will face two options: –
– In temporary insurance policy will pay $ 7month only (be paidamountdocument In case of death only).
– In a lifetime insurance policy, you will pay one hundred dollars, of which only $ 7 goes to cover the risk of death, and $ 93 to be invested at a lower interest rate than any other investment, and often close to the interest rate, to deposit money in a savings account with the bank.
And for your information in America, if you own a life-long insurance policy and the death occurred, you will only get the nominal value of the document, which is 140,000 (the $ 7 that was going to cover the risk of death) and you will not get the accumulated money that you were paying monthly ($ 93) for the purpose of investment, which was a return. Its annual investment is less than any other investment.
In Egypt, the mixed insurance policy gives you the insurance amount (the nominal value of the policy) in addition to the profits until the date of death, meaning that you will not get the money that you were putting into the policy for the purpose of investment (the monetary value).The annual rate of return on investment in a mixed insurance policy is variable and in general (profits) less than the interest prevailing in the link. We discussed this point above and many other points in the article that we will refer to in the next lines.
If you think that the defects of life insurance policies that have a part of your savings have expired, unfortunately the defects are many and need a long explanation that will make us get out of the content of this article, and this article basically helps you determine the appropriate amount of insurance for your life.
What is the appropriate amount of insurance for my life?
There is a good proven rule, which is that if the insurance policy has a period of 20 years coverage, you must insure your life 10-15 times your annual income, and if the life insurance policy has a period of 30 years coverage, you must insure your life 15-20 times your annual income. But it depends on your individual financial circumstances.
A very important note: The
advice to double the annual income only works if you will insure yourself in the dollar and not in the local currency of your country, because the annual income doubling figure that I recommended above in the case of life insurance has taken into account the annual inflation rate of the dollar of 2.5% and it is difficult to put a number Times the income for each local Arab currency. Most insurance companies have a dollar life insurance policy.
But the question that you should ask my reader friend now, is what is the value of one dollar in ten years?
Time value of money and life insurance
Time value of money: The time value of money is based on the established fact that the value of the pound obtained now exceeds the value of the pound obtained in the future as a result of inflation that exists in the economy. The higher the rate of inflation in the economy, the lower the future value of money will be than the current value. to her
The concept of future value of money: When we talk about the future value, we are talking about the value that is calculated using the compound interest rate, and not using a simple interest rate. Meaning that the future value of the principal amount at the end of the period will be calculated by calculating the interest on the principal amount in addition to the interest on interest (interest on the amount interest) during the period from the date of deposit until the end of the period.
Present value concept: It is useful when making financing or investment decisions to determine the current value of money for all future cash flows. When calculating the present value, the expected future cash flows are discounted using the appropriate discount rate, depending on the nature of the project for which the returns are being evaluated. This rate may be the interest rate prevailing in the market or the interest rate required when evaluating investment alternatives in the form of stocks and bonds, or it may be the cost of capital when evaluating an investment project.
It became clear from the previous lines that the dollar that you will get today is more valuable than the dollar that you will get in the future due to inflation, and therefore when choosing the amount that you will insure your life with, you must bear in mind the concept of the time value of money, and we will give examples of this in the next lines.
A person whose monthly income is $ 600, and this income is sufficient for his monthly needs, so his annual income is $ 7200. Or $ 108,000 (7200 * 15).
– If you choose a life insurance policy for a period of 20 years and make the amount of the policy 10 times your annual income, and the death occurs after 10 years from the date of contracting the policy, the amount of the policy will suffice the heirs at the same rate of their current spending for a period of 7 years and 4 months. And if the death occurred five years after contracting the document, the amount of the document would suffice the heirs at the same rate as their current spending for 8 years and 6 months.
– If you choose a life insurance policy for a period of 20 years and make the amount of the policy 15 times your annual income, and the death occurs after 10 years from the date of contracting the policy, the amount of the policy will suffice the heirs at the same rate of their current spending for 11 years. If the death occurred five years after contracting the policy, the amount of the policy will suffice the heirs at the same rate as their current spending for 13 years
– if you choose a life insurance policy for a period of 30 years and make the amount of the policy 15 times your annual income, and the death occurred 15 years after the date of contracting on The document, the amount of the document will suffice the heirs at the same rate as their current spending for 9 years and 6 months. And if the death occurred ten years after contracting the document, the amount of the document would suffice the heirs at the same rate as their current spending for eleven years.
– If you choose a life insurance policy for a period of 30 years and make the amount of the policy 20 times your annual income and the death occurs 15 years after the date of contracting the policy, the amount of the policy will suffice the heirs at the same rate of their current spending for 13 years. And if the death occurred ten years after contracting the policy, the amount of the document would suffice the heirs at the same rate as their current spending for 15 years
. For clarification once more, the previous example is only valid if the security amount is in US dollars and not the local currency.
The difference between insuring your life in local currency or in dollars, in a practical example, in numbers.
Assuming that you decide to insure yourself in the local currency in Egypt with a temporary insurance policy, and your monthly income is 3400 Egyptian pounds, then your annual income is 40,800, and therefore your 10-year income is 408,000 pounds.
Assuming you are male and you are 30 years old, the temporary insurance policy with an annual premium of 1,000 pounds for 20 years will get 410,000 pounds in the event of death.
Assuming that the annual inflation rate of the Egyptian pound is 10%, and death occurs after ten years, the insurance policy will suffice the heirs at their current spending rate for a period of three years and three months.
Therefore, if you are in Egypt and will insure yourself in the local currency in the life insurance policy for a period of twenty years, you must at least multiply your annual income 30-45 times to counteract inflation.
Therefore, I advise the brothers in all Arab countries and the world to know what is the current value of their money that they will obtain in the future, and this is a vivid example of how the time value of money is applied in the field of insurance.
Steps for determining the appropriate amount of life insurance
1. The termination of the temporary life insurance policy must take place when your youngest child reaches the age of 23 years.
2. You must take into account your future plans, for example, you are now the father of a one-year-old child, but you intend to have another child after 4 years, so at least the end of the life insurance policy must be 4 years in addition to 23 years. The insurance policy is for a period of 27 years.
And you must take into account the material needs depending on future plans, for example your family now consists of your wife and one child, but after 3 years your family will consist of two children and therefore your expenses increased because of this child, and considering that your income will increase after 3 years to meet this increase in expenses, You must determine your annual income, which you will multiply 10-15 times (the insurance policy in dollars) based on your future plans to have children (your annual income or your annual expenses considering that your family consists of two children even though you have one child now).
3. You must determine whether you will add the amount of your children’s education in a private university to the insurance policy. If the answer is yes, you must know that the expenses for sending a one-year-old child to university in America in 2037 is $ 129,454, and therefore the best amount you should put on a document The insurance is $ 150,000 per child. External source.
4. If you are paying in installments Real estate financing and the contract with the mortgage finance company or the bank that financed you does not contain a condition that in the event of death or total disability the heirs do not demand to pay the rest of the mortgage loan amount, you must add the value of the mortgage loan to the insurance policy.
5. Determine the rest of the expenses and debts, such as funeral expenses, and debts that you are required to pay, such as credit card debts.
6. At this point, you may have a vision of the amount you want to insure your life. All you have to do now is deduct liquid assets such as money in the bank, money saved for your children’s education in a private university in the future, and the amount of any other life insurance policy.
7. You should know that buying an insurance policy with an amount slightly larger than your financial needs is better than buying an insurance policy for an amount less than your financial needs because your financial needs will increase in the future.