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Life insurance can be a very important investment for you, especially if you have a growing family. You can get hassle-free wealth distribution among your children, emergency loans at low interest, assured benefits and in the end, a death benefit. All you need to do is to work out a sensible plan with your insurance advisor, through which you can avail yourself of these aspects of your life insurance policy.

In this article, we'll show you how these life insurance concepts can make a huge difference in your life now.

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The most prominent feature of a life insurance policy is the beneficiary clause, which facilitates the easy transfer of your money to your successors. (For more information on the beneficiary classes, see Life Insurance Clauses Determine Your Coverage.)

However, you need to be aware of the different kinds of beneficiaries in life insurance:

Multiple Beneficiaries
You can have your children as multiple beneficiaries. All you have to do is to indicate the names of these recipients and the amount of proceeds that they are going to get.

Contingent Beneficiary
Naming a contingent beneficiary is always practical. Suppose that your first (primary) beneficiary dies near the time of your own death. In this case, your children will qualify for your insurance money if you nominate them as contingent (secondary) beneficiaries. A contingent beneficiary can get life insurance proceeds if the primary beneficiary dies before he or she can receive the assets.

Minor as a Beneficiary
If you have named your minor child as a beneficiary, you will have to appoint a guardian/trustee who will administer the insurance proceeds upon your death.

Revocable Beneficiary
Here, the recipient can be changed any time during the policy.

Irrevocable beneficiary
In this type of beneficiary class, you cannot change your beneficiary's name unless they consent to it. With an irrevocable beneficiary, creditors cannot touch the policy proceeds as these monies are not considered to be a part of your assets.

It can happen that due to certain circumstances you forget to pay your premiums, even in the specified grace period. Unfortunately, because you have missed the deadline your policy will lapse.

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Consequently, your insurance company can stop covering you or may provide you reduced insurance coverage equivalent to the total premiums paid formerly (also called paid-up policies). Nonetheless, a lapsed policy may be renewed in some plans, although the exact renewal procedure varies among different insurers.

Cash Surrender Value
Permanent life insurance policies like universal life insurance, whole life insurance and variable life insurance are more attractive thanks to the presence of built-in cash value. (Term life insurance policies do not offer cash values). The interesting aspect of these policies is that you can surrender your policy and get the accrued cash value in your hands provided you have a substantial amount of cash value.

Cash Value
Here, a part of your premium is put in savings or another investment account according to the type of policy you purchase. As a result, the ongoing interest you receive from your investment account gradually increases your cash value.

Non-Forfeiture Options
In permanent life insurance policies, if you fail to pay the premiums in the grace period, you won't lose your life insurance - your accumulated cash value will come to your rescue with the following options: 
  1. Terminate your policy and get the cash surrender value in hard cash.
  2. Go for reduced coverage for the remaining term of the policy with no future premiums. (i.e. paid-up policy)
  3. Use your accumulated cash value to pay the future premiums (also referred as automatic premium loan).
  4. Buy an extended term insurance with the remaining cash surrender value. (no further premiums required)
The above non-forfeiture options may differ from one insurance company to another.

It is always easy to terminate (surrender) your policy and get the entire cash surrender value, which will solve your liquidity problems. However, you need to consider many factors before surrendering your policy, such as the increase in the cash surrender value if your policy is maintained for the full term. Consult your insurance advisor to about the full consequences of these issues before deciding whether the policy should be cashed or kept.

Policy Loans
Another positive characteristic of a life insurance policy is that you can take out a policy loan against your policy to cater to your emergency needs. The interest is relatively low and the policy loan can be repaid in a lump sum or installments.

If you are incapable of repaying your policy loan, your insurance company will use your cash value to settle the loan.

Participating Vs. Non-Participating Policies
You can opt for participating policies in which you participate in the profits of your insurance company and get dividends annually. Here, the premiums are somewhat higher.

Conversely, non-participating policies do not participate in the profits of the insurance company and therefore do not have the dividend option. Here, the premiums are relatively lower.

Unlike permanent life insurance policies, term life insurance policies are non-participating policies. (To further explore the differences between term and permanent life insurance, see Buying Life Insurance: Term Versus Permanent and What is the difference between term and universal life insurance?)

Policy Dividends
Dividends are the earnings paid out by the insurer to its shareholders and/or policyholders. You are entitled to enjoy the fruits of your insurance company's labor, for example, dividends if you own a participating policy.

If you do receive a dividend, it is up to you to decide how to make use of it. Here are some common options:
  1. Get your dividends in cash.
  2. Use your dividends to reduce existing premiums.
  3. Keep the dividends on deposit with your insurance company where they will steadily earn and accumulate interest.
  4. Use your dividends to purchase extra coverage, such as a one-year term insurance or whole life insurance, that  matures along with your original policy.
There are many benefits to owning a suitable life insurance policy, including fast loans at comparatively low interest rates (with no restrictions on how to spend the loan amount), annual policy dividends and the presence of the cash surrender value. Life insurance also comes with the assurance that the financial worries of your loved ones will be taken care of in your presence as well as your absence!



Gaining financial knowledge– Is it worth the effort?

It may not come as a great surprise to learn that investors often take risks when making financial decisions.  Financial theory tells us that return and risk are joined at the hip, so by taking greater risks investors can make considerable gains from their investments. 

Investors can also make poor decisions when it comes to risk taking, simply because they lack the knowledge to make better decisions.  This sounds perfectly logical in theory, but in reality, how much does financial education actually help us?  Will it improve our financial behaviour (which we’ll consider later), and will it allow us to make better investment decisions by giving us a better grasp of the risks involved?

A fair bit or research has gone into the benefits of acquiring financial knowledge.  This has shown that financial knowledge has two important components: objective knowledge and subjective knowledge.  Objective knowledge can be defined as the accurate financial information that you have stored in memory, while subjective knowledge is your belief about the extent of that knowledge.  Or, to put it plainly, objective knowledge is what you actually know, and subjective knowledge is what you think you know.

Past research has shown that these two different types of knowledge influence our financial behaviour in different ways.  Accurate decision making depends on objective knowledge, while subjective knowledge can serve to boost an investors’ confidence because of what he thinks he knows.  Subjective knowledge, then, is something of a two-edged sword.  If a higher level of confidence is based on a solid foundation of objective knowledge, the investor will have both the required theoretical knowledge and the confidence to be able to assess risks and make better investment decisions.

However, high subjective (or imagined) knowledge and low objective (or real) knowledge results in someone low on know-how but high on confidence – not a great combination, nor a great predictor of investment success!  Research conducted on investments in unit trust funds showed that investors with low real knowledge used “piecemeal processing” to make investment decisions.  In other words, they considered the various shares making up a unit trust on a one-by-one basis, and with difficulty.  They also struggled to compare one unit trust to another in the same category.

On the other hand, high levels of real knowledge allowed investors to be able to make category-based decisions, i.e. to be able to appreciate the nature of the shares making up a particular unit trust, as well as being able to compare different unit trusts in a particular category.  What is more, they could do this in an effortless way.  New information relating to the unit trusts was also absorbed more easily by these investors.
These studies suggest that investors with higher levels of real knowledge can maximize their skills or proficiencies in understanding, interpreting, and connecting financial information.  They can process financial information more schematically than novices; as a result, real knowledge may enhance subjective knowledge, as a positive relationship has been found to exist between real knowledge and subjective knowledge.  In other words, real knowledge increases our belief that we know, and thereby raises our confidence levels.

However, real knowledge and subjective knowledge may influence behaviour differently.  Real knowledge is more likely to help process financial information analytically by applying decision criteria that are readily available from memory.  Investors with high real knowledge are therefore less likely to rely on heuristics (rules of thumb) when analysing products and making decisions.

A 2009 study showed that men generally have higher levels of real and subjective knowledge than women, and that they generally fared better than women when it came to investment returns.  It is believed that this is due to the higher levels of risk assumed by male investors, which in turn is the result of their higher confidence levels.

Financial Behaviour

Studies examining the behavioural effects of financial education generally support the idea that financial education improves financial behaviour.  Taking a financial education course has been shown to increase contributions to savings plans, and to improve household knowledge of relative asset returns and pension plans.

Research has also found a positive relationship between financial education and retirement planning behaviours.   It was established that the availability of financial education in the workplace stimulates retirement savings among individuals in the lowest half of the savings population, while female participants, enrolled in a financial education seminar that focused on retirement planning, increased their ability to set up a retirement plan.

Joo and Grable [2005] found that respondents who had participated in a financial education programme were more likely to have a retirement savings program in place.  Other studies examining the effects of specific types of financial education found that individuals who participated in credit counselling practised responsible financial behaviours following the experience.

Further research found that financial management behaviours were related to self-directed financial learning.  In addition, it was found that good financial management practices were positively inter-correlated with greater financial and career satisfaction.  For example, participants in retirement planning seminars were more likely to increase their retirement goals, start new tax-effective savings accounts, increase contributions to current retirement plans, and reallocate their investments.

Other studies have explored the importance of the link between financial knowledge and behaviour, and focused on four broad categories of financial practices: cash-flow management, credit management, saving, and investments.  They have found that financial knowledge in a specific area is positively correlated with financial practices in that area.  They have also found that learning about financial matters from family, friends, and personal experiences is also highly correlated with positive improvements in financial behaviours.

Finally, it has been found that those who scored highest on questions relating to credit management, saving, and investing are most likely to exhibit good credit management, saving, and investing habits, respectively.  Perry and Morris [2005] tested the relationship between financial knowledge and responsible financial behaviour, and concluded that financial knowledge has the greatest effect on bringing about responsible financial behaviour.

Chen and Volpe [1998] have also reported that people with higher levels of financial knowledge tend to have right opinions and make correct decisions related to savings, borrowing, and investing. Others have found that the advanced level of financial knowledge category contains a greater proportion of individuals with a sufficient emergency fund (31.7%) than both the intermediate financial knowledge (12.2%) and low financial knowledge (3.9%) categories.

Only 9.8% of individuals in the advanced financial knowledge group lacked an emergency fund altogether, compared to 22.5% of those with intermediate financial knowledge and 49% of those with low financial knowledge.  The researchers concluded that individuals with a higher level of financial knowledge made decisions that more closely mirrored experts’ recommendations than did those with a lower level of financial knowledge.


There is little doubt that better financial education increases financial knowledge, analytical ability and confidence.  The fact that men (who were found to have, on average, higher levels of real financial knowledge and more confidence) obtained higher investment returns than women (who generally had less real financial knowledge and less confidence), strongly underscores the importance of financial education.  The positive effects of financial education on financial behaviour are also not to be sniffed at.

If you make just one financial resolution for 2011, why not commit to improving your financial knowledge?  Research shows that it is bound to pay dividends, in more ways than one!


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