All China based entrepreneurs and senior business leaders know the case for life insurance. Ensuring that the wife or spouse and children and their futures are fully protected is easy to follow. But how much coverage is enough and which options should I pick? In China the answer is a little more tricky. Here are some key points that we advise our clients when shopping around for coverage.
Chinese Life Insurance vs. International Life Insurance
Buying your China based insurance means your estate gets paid RMB, which isn’t usually where the costs will be for most foreigners. This means your newly bereaved widow/widower will need to find a way to get the money out of the country, which can be time-consuming, frustrating and potentially costly. Of course some foreigners are married to locals that are likely to need RMB, so this might not be a concern for some, but it is a factor certainly worth considering.
Life insurance in China for individuals is also rarely competitive, price wise with international based insurance. The reason is that China is rather unique (who would have guessed!), due to government law, in paying out on suicide. That’s something that is never covered overseas due to the obvious moral hazard of a poor depressed soul taking coverage just prior to sacrificing themselves for their family’s bridge born start at a new life.
If you decide that China based insurance is the right path for you and your family it is better to be part of a group scheme rather than individual as this group risk thus defrays that risk and therefore cost. The other symptom of the government law is that individual coverage levels are rarely possible from most Chinese insurers for useful sizes of the $500,000 USD plus range.
This is true now, although the Chinese system and industry is changing fast. Given the complexity in China, it makes a lot of sense to get a broker. When seeking assistance on local insurance one tip that always makes sense is to not sign a “broker appointment letter.” Yes, don’t sign. Despite what some will tell you, you don’t need this to get a quote. A request for quotation is enough. The broker appointment letter is a tricky little way to block you talking to competition. Keep the field open and competitive. No good broker should fear competition.
It may seem that we are leading you to overseas insurance, but there are some useful things to understand there also. Firstly selling international or overseas based life insurance is strictly illegal in China, so you will need to contact a broker that has overseas offices, since they won’t (or shouldn’t) contact you. You will also need to travel to sign up, typically to Hong Kong, but most other Asian countries are usually fine to actually do the paperwork. There is nothing the Chinese government can do to stop you taking coverage out in a foreign country and it’s perfectly legal, but for some the otherwise unnecessary overseas travel can be annoying.
Another factor to consider is whether you are really covered back home. Ensure that the coverage you have from back home covers you when residing overseas or in several different countries. Often life insurance in home countries is written with the explicit assumption (buried in the fine print) that the country of residence will not change. Residing in China might derail your coverage, although your insurance company will be happy to keep taking your premiums. It certainly pays to check.
How Much is Enough?
Once you have found an insurer the next is to consider the amount. How much coverage is enough? Calculating the amount of coverage isn’t that hard with some useful rules of thumb. If you are a wage earner, then 6-8 times your annual earnings should be enough as a rule of thumb, but it also depends on how many children you have and what aspirations you have for their future. Remember that inflation for education costs is usually twice normal inflation at around 6% and therefore costs continue to rise rapidly. Ivy league education in the US (and many countries for that matter) don’t come cheap anymore.
If you are an entrepreneur the rule of thumb is a bit blurry. Consider your business without you. Would your company survive without you? How much would a replacement manager with your ability truly cost in the open market? If that wouldn’t be economical to run a business with that cost, what would the cost be to shut down the company?
Shutting down companies can be pretty costly in China like most places. The best life insurance coverage should cover all those costs, plus look after your family. Don’t be surprised if the preferred coverage should be in the $2 million plus range. Coverage isn’t as pricey as you might expect. With 20 years coverage for $700,000 for a healthy 40 year old can be less than $200 per month for peace of mind. That is, if you find the right broker.
Find a broker to see what questions they raise. If they fail to raise most of the points above they might not be the right one. Also it’s a bad sign if your broker doesn’t include several quotes from different insurers or tries to get you to sign a “broker appointment letter.” If you find the right broker though you can ensure your family is looked after with greater certainty. Almost as certain as death and taxes.