Insurance Helpline with Cedric Stephens

Question: I am 22 years old, single, and a final-year student at a tertiary institution. I also manage a retail store part time. I am very interested in real estate; even just purchasing land for now. What would be your advice about investing in life assurance? What type of coverage would you recommend and how would one go about it?

- rog1985@hotmail.com

Answer: Life assurance should not be on your agenda, at least for now.

I do not see how it will help you reach your goal to buy real estate. Insurance is to support dependants, in case of death.

So, if you do not have children or a partner that relies on you financially, there is no reason to spend money buying coverage. In other words: life assurance is a good thing, but it is not for everybody.

Buying real estate is number three on your list of priorities. It comes after completing your studies and finding a full-time job. Your need at this time is to get advice about building a nest egg to invest in real estate - not about buying insurance.

Investment objective

I contacted a life insurer and three investment advisers and told them about your goals. I asked them to say which of their products could help you to realise your investment objective.

Unfortunately, only one company replied. Lisa Walker of PanCaribbean Financial Services, in my opinion, understands your needs. She gave what I thought was excellent advice, especially for a young person like you. Here is what she said:

"Watch your spending. Create a budget and stick with it. A budget serves as a guide, so watch what goes out of your wallet as carefully as you monitor what comes in.

"Be consistent in your savings. invest something every month, no matter how small the amount. Compound interest and consistency works wonders, as the effects of consistent investing over an extended period of time can lead you to your goals one step at a time."

We offer you the traditional way of saving with the added bonus of higher interest rates than a commercial bank.

"Create an emergency fund. It is advisable to be prepared for any surprises you may encounter in life, by having three to six months of living expenses set aside.

This will ensure that if a situation presents itself, you will have the necessary funding to take care of day-to-day expenses.

"Get advice. Educating yourself on investment options will allow you to focus on long-term investments with attractive returns, while hedging against inflation and devaluation.

Basic rules about buying life assurance: If, on the other hand, you disagree with me and decide that life assurance is a priority, here are a few basic rules:

1. You need to work out exactly how much coverage your dependants would need if the worst happened. This would be your sum assured.

That amount, plus your sex, age and state of health would be used to fix the amount of your premium - how much you would pay each month to be insured.

2. There is term and whole-life assurance. The amount you pay varies with the type you choose. Term provides the cheapest and simplest form of coverage. It is taken out at the time of your biggest financial commitment, for instance when you buy a house.

It is for a fixed period. It ensures that should you die, your mortgage will be paid off. If death does not occur during the term of the policy, when the policy expires it will have no value.

3. Whole life remains in place during the life of the insured. A payout takes place on death. Because a payout is guaranteed, premiums are higher than for term life.

There are different types of whole-life policies.

Whole-life policies

Some are investment linked - also called equity linked - and others offer a set sum from the outset. Investment-linked policies are popular.

The size of the payouts depends on how the investment part of the policy performs.

The rates of the return from these policies are less than the double-digit rates that many persons say they earn per month from the very popular investments schemes that are the talk of the town.

On the other hand, they are probably less risky.

4. Shop around for the best deal. Compare prices.

Most persons who sell life assurance specialise in the art of selling. Success for them is measured on how much they sell.

Cedric E. Stephens provides independent information and advice about risk and insurance. For free information or counsel, email Mr. Stephens: aegis@cwjamaica.com