Buying liquidity and peace of mind
Recently, my wife and I have been thinking about death.
My in-laws are rewriting their will, so we have been helping them deal with the notary public and get the required paperwork.
I am also writing a will, mainly because I realized that my wife is my only official family member, so absent a will, if she died before me or at the same time as me, my assets would go to the Japanese government. Yikes.
And last weekend my wife was asked to help with a funeral.
When she got home after the final ceremony, she mentioned that she would be more comfortable if I had life insurance.
Now, I used to have life insurance when the kids were still living with us, but I cancelled it when the youngest finished university.
But this got me thinking. We probably have enough money, but most of it is invested, either in my accounts or my wife’s (but I largely control them at the moment -she’s not interested).
If I died suddenly I can see it being mildly stressful from a financial perspective, at least until my wife gets control of the accounts and figures out what she is doing.
So a life insurance policy might be a good idea.
Some people on the RetireJapan forum suggested increasing our cash reserves instead of getting life insurance, but I did some thinking and some research, and I don’t think that is the best option for us.
Check it out:
This is a rough back of the envelope calculation (please let me know in the comments if I am getting anything wrong!):
The cost of 10m yen’s worth of term life insurance: 360,000 yen (3,000 yen a month)
The opportunity cost of holding 10m yen in cash instead of investing it for ten years assuming 7% return: 10m yen (80,000 yen a month)
It is far cheaper to take out the term life insurance for the next ten years.
And we only need this cover for ten years. In ten years’ time, my wife will start to get her nenkin, I am planning to increase our cash reserves, and we will probably not be active owners of her school any more.
Completely different situation.
But for now, that life insurance policy is looking pretty good (I’d also get a minor tax break for it).
What do you think? Should I get the life insurance or is there a better option?
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Hello, Ben. Thank you for the article. I had American and British life insurance since living in Japan. I am excited to learn about Japanese life insurance that foreign residents can now get! I am so excited!!! ☺️
But….
1. term insurance isn’t flat rate. It almost always increases in price with age, (and gender).
(Ex – https://www.rakuten-life.co.jp/life/oneyear/pdf/oneyear-price.pdf)
2. That 7% assumes a lot…and your fixed income will not be making 7% rights?
3. Cash is… instantly available.
That PDF is specifically for １年更新型保険: is that the standard offering?
Cash in my bank account is not instantly available to my wife.
But regardless, the opportunity cost of holding 10m extra in cash seems much greater than the cost of life insurance, even if the rates rise slightly over time.
It will be interesting to learn more over the course of researching and buying the insurance.
Looking quickly on kakaku.com, the total cost of 10m yen life insurance for ten years for me (male, 46) starts at 297,600. The annual tax deduction for life insurance is up to 40,000 yen, and would basically bring the cost down to almost nothing.
Really does seem like a no-brainer.
As I understand it, you can deduct up to 40k from your taxable income, but 5% (or whatever it is) of 40k is not a lot of money.
Thanks! Yes, it is basically marginal tax rate x 40,000 (or whatever).
“Cash in my bank account is not instantly available to my wife.”
Why not split the emergency fund between you? Perhaps 3 months in your account and 3 months in hers. Then whichever one of you needs it first will have a 3-month cushion at least. I doubt the insurance payout will be instantly available either.
Oh, we both have cash reserves. It’s more about getting through the immediate aftermath (me dying would be pretty inconvenient for my wife’s business too). So an extra 10m would help.
I have heard life insurance pays out quite quickly, say within a month or so.
I imagine in ten years’ time our situation will likely have changed (we’ll have more assets and may not have the business), so I don’t imagine I will need the life insurance beyond that.
Can you change the title to “My wife wants to insure against the death of her most valuable employee”? 😉
That angle definitely changes things ….
Ha, ha, that may be the case…
If I die mysteriously in the next few months, send help.
Do you also have your wife comparably insured–are you taking out a similar policy on her at the same time?
Most of your reasoning likely applies in the opposite direction, too: getting thru the immediate aftermath, you assuming her roles/responsibilities in all of her (your?) business, and so on.
Good point! She already has life insurance, we’re checking the details now to see if it is adequate.
I don’t need it quite as much as she does because I have access to most of our accounts and understand them. But it would certainly help with the school a bit.
Any insurance policy is basically a bet – a bet against yourself. You have to figure out the odds of it paying out or not, and whether it’s worth the cost of hedging that money. And then you have to weigh it up against simply setting aside the same amount of money in some kind of saving or investment.
When you die in Japan, your accounts get frozen, until everything is cleared through the courts. However, there’s an exception that can be used where a spouse can request access to up to 1 million yen (check with your bank for exact terms and amounts) until all the paperwork is cleared. That can normally take care of the immediate needs following an early death. Regardless of whether you go for the insurance, I think you should do this first.
I personally have a life insurance policy, but my main reason isn’t economic – it’s to ensure that my wife (who makes considerably less than me) and child can basically live on normally as if I wasn’t dead for 1 year after my passing, to give them time to adjust to their new economic reality. It’s to give them a sense of safety and reliability, even if the worst possible thing should come to pass.
But it still all comes after everything else is in place; nenkin, ideco, NISA, offshore long term investments etc. An insurance policy is not an investment or savings account – it’s an emotional safety blanket. It’s a bet, a bet that you hope you never win.
In this case, the life insurance would just be buying liquidity and peace of mind (as we are more or less financially independent at this point).
And it seems like a cheap and easy way to do so.
Thanks for bringing this up, Ben. Immediate expenses after death hadn’t really crossed my mind. You call it “term life insurance”. Are there other types of life insurance? I know nothing about this so appreciate any explain-like-I’m-5 help.
OH HO. This sounds like a good topic for a YouTube video, and I’m currently trying to think of something that would be easy to make before Friday…
Win-win.
Can you hang on two days to find out?
Of course! Looking forward to it.
I don’t know much about it, but our life policies are fully paid up and will pay out whenever we die. Specifically, if my wife dies first, I will get ¥2m. If I die first our children will get that when my wife dies. The other policy is ¥5m and works vice versa. I was confused when I read about the 10-year term. If you’re going to make a video, maybe you could include these kinds of policies, too?
Sounds like you have paid off whole life policies. See the video here: https://youtu.be/12-ClGwJ0jk?si=0Mup6Bqd2D3Wy3TR
Would love a video at some point going over the ins and outs of making a will in Japan. Something many of us will have to do at some point.
Ah, ha! I am currently making a will with a notary public, so once the process is complete plan to make a video/blog post about it.
Great and looking forward to it. Mabe you could also expand on the part why J-Gov would take over your inheritance instead of wife and children.
Oh, that is very easy. I am referring to a scenario in which my wife dies before me, or at the same time.
Other than her, I don’t have any official heirs. No parents, siblings, grandparents, or children (I didn’t adopt my stepkids so legally they or their children have no relationship with me).
If there is no will and no heirs, assets revert to the state.
Nice post, thank you. I opted for a decreasing term insurance, the death benefit gradually reduces as I get older. It made sense to me because if I die at 40 or 60 years old, my family’s needs would be completely different. This option was significantly cheaper as well.