Critically Discuss Whether Life Insurance Should Be Perceived as a Luxury or Need In The Context of the Evolving Dependency Dynamic of the Modern Family.
Abstract
The purpose of this paper is to examine the primary purpose of life insurance as a financial product and to analyze what are the advantages and disadvantages of having life insurance. Some recent statistics were used to create a framework of why and how many people purchase this product and what are the determinants which influence their decisions. When discussing whether life insurance is a necessity or a luxury, the price is the important aspect we have to look at. The paper is also looking at statistics of current aging society as this is highly correlated to life insurance consumption.
Introduction
If you wish to offer financial security to the people of your priority, life insurance is a better place to be. It provides your loved ones with death benefits so that they indeed have one less thing to worry about in case of death. This insurance is a contract between an insurance policy institution (holder) and an insurer or the assured. Under the contract, the assured or the insurer promises to pay a sum of money (benefit) in exchange for a premium in case the insured person passes on. Critical illnesses or terminal illnesses can apply in life insurance terms. The policyholder in the contract pays premiums regularly or as a one lump sum depending on the agreement with the insurance company.
A frequent reason given as a result of lack of depth in the life insurance markets in developing nations is that people perceive life insurance as an item of luxury. The penetration of life insurance is definite to the income level of the country. People in these nations do not buy life insurance due to some reason: some think life insurance is not a requirement, after all, death is natural and everybody must die at the end of life; life assurance do not benefit the payer, it is, therefore, senseless. Others think life insurance is a luxury and modern way of living, just an unnecessary need in life. In developing nations, in particular, the assumption that life insurance is a luxury as some perceive it implies that insurance is only spent in small quantities. It is somewhat obvious that spending money to protect one in the case of death of another person is not feasible unless the insured person has reasonably high income (Steuer, 2007).
Particularly, in developing nations, traditional thinking holds life insurance services are of interest mostly to the top economic groups and the corrupt “big folks” who earn money without considerable struggles. However, anyone who takes it that way gets it all wrong, life assurance is a channel of life-smoothing behavior and protection. For instance, if a breadwinner in the family dies without having a life insurance and l leaves behind a young family, his title will be gone, and his family will never live the same life as before. If he/she had enrolled in a life assurance program, their family would benefit from whatever he/she saved during their lifetime. At this moment, life assurance becomes a reality, not a luxury. Another example, a person starts paying for life insurance at thirty years old, he pays for over fifty years till he dies at eighty-five years old; then his assurance cover was meaningless.
Many people do pros and cons analysis before spending their money and buying products, especially when it comes to various types of life insurance. People want to know why they should pay premiums to a company on a monthly basis without having an immediate benefit out of it. First of all, life insurance offers peace of mind, ensuring that our loved ones will not be financially ruined in case of our death. Another advantage is providing a secure and profitable investment. Life insurance is also a great tool regarding savings because putting savings regularly in a bank may seem more difficult than paying monthly premiums to the insurer (Ford 2016).
‘’The primary purpose of life insurance is to protect dependents against the financial consequences of the death of the breadwinner” (The Consumer Union report on life insurance, 1980). In the other words, what this definition is trying to say, is that people themselves are not benefiting from purchasing life insurance. Households purchase varying amounts of life insurance to make sure their loved ones will not struggle, especially economically, in the case of any tragedy. Humans have always been looking for security, and this has been proved by studies of the history of humanity. Societies in the past used to rely on family and encourage solidarity in communities. With the countries experiencing economic growth and progress, this type of security seems to be disappearing. As a result of societies’ desire for security, insurance has been a universal response (Black and Skipper, 2000).
Family financial protection is the major reason why people buy life insurance. When one or more persons in the family are financially dependent on another person, the need for this type of protection is emphasized by insurance market and encourages people to purchase. According to The Consumer Union report on life insurance 1980, in the case of a family of two working adults and no other dependents, financial dependence women on men is decreasing due to the rise of working women, who now earn enough to support themselves individually and also in the event of their spouse’s death. The different story starts, when the child arrives. This scenario usually means that one of the working parents is not working anymore, and therefore, a couple living previously on two salaries is now living on one salary plus have bigger economic dependence. Children are significant financial responsibilities calling for the purchasing of life insurance (The Consumer Union report on life insurance, 1980).
One of the life insurance companies in Ireland called Irish Life informed public about the research done in May 2015 regarding Irish parents and their financial planning for the family. Findings of this survey showed, that 45% of Irish parents, which is more than 500 000 with dependent children younger 17 have no life insurance (Press Release Irish Life Insurance Campaign 2015). There are some factors related to demand and supply for life insurance. Positively similar demographics and economic determinants are the ratio of young dependants to the working-age population, education, and income. Demand for life insurance increases the probability of the breadwinner’s death, a higher level of education, lower inflation, higher revenue and greater competition of the market. Religion as such is also one of the demographics determinants and Browne and Kim (1993), found that there is a negative correlation with demand for life insurance, especially in Islamic countries, as well as the country’s social security system (Thorsten and Ian, 2003).
The way people protect their financial future against an event that can have catastrophic consequences brought on by illness and death is also influenced by their relevant risk perception and attitude. The amount of coverage the potential client purchase is directly linked to his position regarding risk and also to the wealth effect. Our perception of increased income in the future will influence our living habits at the moment (Ford, 2016). Household’s wealth is one of the determinants decreasing the consumption of life insurance (Thorsten, and Ian, 2003).
The use of life insurance has been declining with increasing life expectancy and decreasing mortality. Diseases that growth in frequency as the country becomes more industrialized, advances in technology, better nutrition and diet and also better access to health services in western societies cause that people live longer now than in the past decades. Since 1990, Ireland has experienced the biggest growth in life expectancy across the continent, with an increase of 4.4 years. An average Irish man can now live up to 78.7 years and for women, it is 83.2 years (The Irish Times, 2014).The aging society appears to be a major challenge for the present population. An increasing number of elderly people has terrific consequences and most likely will result in greater social inequality and less economic resources in the future. Decreased fertility with the combination of reduced mortality results in aging world’s population. The elderly require considerably high personal attention, and if the family cannot rely on welfare state due to the lack of financial resources, the burden of care is usually placed on one of the family members. The metaphor, sandwich generation’’ generally refers to women between age 40 and 59, who financially and also non-financially support their children and their elderly parents at the same time. Meanwhile, the number of women in the labor force is also on the rise and therefore they have to face competing demand from job market as well (Harald Kunemund, 2006). Many countries have experienced an atypical increase in birth rates following World War II, followed by a significant decline in these rates. As a consequence of this phenomenon, the persons born between 1946 and 1964 were referred to as a baby boom generation. As the demand for life insurance products and the level of country’s economic development are directly linked, the existence of baby boomers tends to encourage request for the products sold by life insurance companies (Black and Skipper, 2000).
Pricing and cost of life insurance
Financing and need for long-term care will continue to have an impact on insurance product design, pricing and consumption. Pricing of life insurance can be an important factor regarding the debate about whether life insurance is a luxury or necessity. There are three essential elements regarding pricing premium rates. The amount of premiums paid by the insured now and in the future plus earnings from investments should cover all benefits and related expenses. Rates charged for life insurance should correspondent with insured’s expected loss and should be equitable to all policy owners. As prices charged for life insurance vary from one insurer to other, rates could be unreasonably high, even though market competition within insurance discourages excessive rates (Black and Skipper 2000, pp. 27-28). Insurance provides many social and economic benefits to society, but it also carries certain costs. First of all, as part of the business and sales, the insurer has to deal with all expenses related to selling their products and these costs increase the cost of insurance. Secondly, the existence of insurance encourages moral hazard and therefore claim costs end up being higher than they would normally be (Black and Skipper, 2000).
Dan R. Anderson and John R. Nevin dedicated their time to examine the amount of life insurance purchased by a sample of young freshly-married couples. These young couples are quite relevant to life insurance market as this is usually a stage of the life when insurance products are purchased for the first time. Decisions about life coverage straight after the wedding may be closely related to life insurance investments in the future. This study paid the attention to current income in the families, expected earnings in the future, age and occupation of husband and wife, type of house, family size and few other variables. Surprisingly, newly-married couples were not purchasing more life insurance with increasing household income. The pairs with lower and upper-income purchase more than middle-income couples. These findings were explained by simply salespersons not putting enough effort to sell the product in this market. With the view of higher commission earnings, insurance sales representatives are more likely to visit higher income households than those with middle or lower income (The Journal of Risk and Insurance, 1975).
Conclusion
As discussed in the article, life insurance is a policy that has merits and demerits. The beneficiary feels the fate of the plan, either direct or indirectly and either positively or negatively: some people benefit from this program, others do not help at all. For those who benefit from life insurance program, they are consoled from the unfortunate of life. For those that do not seem to take advantage of this program, it is certain that life is fair by their side, little or no uncertainties find their lives.
The truth of the matter is, death is natural, it is not meant for anybody and nobody knows when they will die. Life insurance is just a way of redemption or investment to a breadwinner to his/her loved ones if uncertainty (death) strikes. Just like investments make losses, an insurer with the life assurance should feel it is normal, and living is just by the grace of the Almighty.
References
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The Irish Times. (2014). Life expectancy is growing faster in the Republic of Ireland than in rest of Europe. [online] Available at: http://www.irishtimes.com/news/health/life-expectancy-growing-faster-in-ireland-than-in-rest-of-europe-1.2024610 [Accessed 5 Apr. 2016].
