"In this world nothing can be said to be certain except death and taxes."
- Benjamin Franklin, a former American president.
.

     Life assurance is not a "dirty word"; but I believe it is a worthy industry which can greatly help the "man
or women in the street". I have written this short manuscript for just that person. I have written it in simple
easy-to-understand language (at least I think so!). By understanding life assurance better and what it can do
for you, I hope to give you the knowledge to understand it a little better. Then you can make it work better
for you so making life easier for yourself and your family.

     1. Family Protection: Life Assurance is the only means by which you can purchase a certain amount of
future income for a small amount per month.

     2. As an Aide to Thrift: Life Assurance is indispensable. I don't believe many people will doubt that point
(they just don't like paying for it!) . Most people want to save as much as possible, but also want to enjoy their
daily lives to the fullest. They are not sure how much to allow for present and future needs. A recent report 
found that the most important objective is to provide an emergency fund to be used for possible prolonged
illnesses or unemployment, and that people's prime need in life was for security.

     Two savings objectives stood out for long range uses : retirement income and children's education
(for which most people do not have a specific plan).

     3. Life Assurance Offers By Far The Easiest Terms. You "pay as you go".

     What are our most common financial NEEDS?:

a) A last expense fund -: So set aside 2 or 3% of the amount involved each year.

b) Estate duties.

c) Education ( insurance to provide the capital for this important need).

d) Retirement income.

e) Family protection.

f) Estate planning .

     Signing a life assurance application creates an immediate estate whose distribution is controlled. Avoid the
possibility of capital losses through bad investments .No one knows when they are going to die - just that they
will die someday. Therefore life assurance buys time for us, the survivors.

     4. It protects Human Life Values.  It is estimated that 9/10ths of the average estate consists of the life
value compared with 1/10th for the property portion., i.e.. one's life endeavors are far far more important than 
property owned.

     5. As an Investment.

With particular reference to:

SAFETY

SECURITY

STABILITY

COLLATERAL

     Life Assurance is the best balanced investment for the average person - one that is unsurpassed in security,
marketability, stability of value , freedom from care , and all the other qualifications of an ideal investment -
and I firmly believe it should be the cornerstone of everyone's personal investment program. 
(Well being in the business I would have to say that, wouldn't I?!).

     6. As a device for Business Finance.

     In the form of : PARTNERSHIP and KEYMAN assurance.

     Because life assurance is essential in the continuation of many businesses once disaster strikes,
just as it is in the preservation of homes.

     7. The concept of Life Assurance as "A Way Of Life".

     A frequently quoted survey asked the following questions...

The first question... 'What is your greatest hope in life?'
The most common answers were:
To be financially secure.
To have happiness and security.
To be carefree in my old age.
To be sure that my family will be secure.
To retain my health and my job
and
To have the respect of my family and friends.

To sum it up: the greatest hope in life was the hope for security!

Hardly surprising is it!

The second question: 'What is your greatest fear in life?'
The answers...
* Fear of insecurity
* Not being able to carry on working for self and family
* Sickness and unemployment
* Poverty and death
* Dependence on others in old age*

* and often quoted figures show that out of every 100 25-year olds,
something like 93 will be struggling financially in old age:
dependent on others and the state pension for survival -frightening!

In one word , all these fears add up to insecurity.

     We ( all life assurance salespeople) sell security which is what people have always wanted...and life
assurance offers people the most efficient method of achieving economic security.

What are the threats to our financial security? I believe there are four main threats:

UNEMPLOYMENT

DISABILITY

DEATH
and

OLD AGE.

     For most people life assurance is the ONLY instrument that can provide security with dignity and freedom.
Life assurance not only insures a life - it insures a way of life when we protect the home , we protect the family,
the very basic unit in our national structure; because a country composed of secure homes is a strong country.

     Didn't that great man, Winston Churchill say words to that effect?

WHAT CAN LIFE INSURANCE DO FOR ME?

     As an investment, it offers TAX PAID RETURNS: The proceeds of the policy at maturity are tax free
as the company has already paid tax on your behalf.

     As a COMPULSORY SAVINGS plan. Your life assurance policy is an asset that you can make use of
for financial security and loans; thus your premiums are working for you - day by day.

     DEATH COVER: This may not be the most important reason to buy insurance at the moment . 
BUT it will be the best advantage the policy gives you in the future...not if, but WHEN you die.

     Nothing can replace the loss of a loved one, However, the proceeds of a life assurance policy will give 
your family security and peace of mind.

     It will protect your business for them , if you are fortunate enough to be in the position of being a business
owner. It is the ONLY way to GUARANTEE cash being available in the future- at an unknown time.

     FOR THE AVERAGE MAN, OR WOMAN , IT IS THE PEACE OF MIND & PROTECTION THAT A POLICY
GIVES FOR THE UNTIMELY DEATH OF A HUSBAND OR WIFE that is the main benefit:
     To protect a family from financial pressures at a time when there is enough pressure of an emotional kind.

THIS WILL ALWAYS BE THE BEST REASON FOR BUYING LIFE ASSURANCE .

     Some other important points to remember about your policy...

     LOANS: The policy will be of use to you in that after two years it has a loan value (rather than a cash value).

     It may also open a door to Mortgage finance, or just bridge the gap between your mortgage and your other
savings. As an important asset it will certainly strengthen your credit rating with banks and other financial
institutions.

     REMEMBER: Premiums are cheaper, the younger you are. The sooner you start the sooner it will be
of use to you and the sooner your money will start working for you through the 'magic' of compound interest.

     Assuring one's life so that one's dependents do not end up in penury (penniless) is essential for most people.

     A life assurance policy is one product you can't test before buying. This makes it all the harder to choose
from the huge range of policies on offer from the various companies in New Zealand. It is especially difficult
when faced with a persuasive salesman or woman who often cannot explain why their company's product is
superior to others available on the market. In this we have assumed that the salesman has identified that you 
have a genuine need or shortfall of cash in your estate should you die.( Bear in mind that a minority of
"unscrupulous" salesmen might attempt to disturb you by creating a life assurance need when there is none).

     Therefore, it is vitally important to analyze your needs carefully and buy the assurance that is right for you.

     For example , whether you buy or rent life assurance will depend on the family budget. Let us look at the
difference between what is termed permanent and temporary assurance.

     To buy: Permanent assurance has a savings element with an increasing cash value each year and promises
a guaranteed minimum pay out after x number of years; therefore it is ideal for saving for the future.

     To "rent": On the other hand, term assurance provides cheap cover for a certain period of time with no
payout at the end. Most modern policies are in effect a combination of permanent and temporary assurance 
and are so flexible that a special tailor-made plan can be packaged for every individual need. As a result,
there are infinite number of choices in savings amounts and life covers.

There are three basic types of life assurance policies:

     1. Those that provide assurance against death, disability, illness or hospitalization. Put simply, insurance
replaces income by providing cash at an unknown time in the future.

     Regular savings or investment contracts provide further capital ( a 'fancy' term for money) on retirement,
for children's education, starting your own business , a new car or an overseas holiday.

     Lump sum capital investments provide monthly income (also called annuities) or further capital growth. These
are called insurance bonds or single premium plans. In New Zealand and Australia the tax on the investment
earnings of all life assurance policies is paid by the company, so the growth is tax-free to the customer.

The following TEN GOLDEN RULES apply to all life assurance policies:

     1. Select your assurance company (or bank* offering the retirement plan) very carefully.

     These days more and more financial institutions are merging their operations and banks are increasingly
marketing life assurance products, which were once the exclusive preserve of assurance companies. Don't 
buy a policy from the first company to approach you. You may be committing 10% of your hard-earned
income for the next 30 years and this needs careful thought.

     Look closely at the projected investment returns provided by your adviser. Remember that they are
illustrations only and are not guaranteed. Ask yourself, are the assumptions ( the interest yield) realistic in 
the long term? One company's figures may be far higher than another; but they may be quoting at a far higher
interest rate than the competitor. Is one policy quoting a value assuming premiums are inflation linked - the
other not? This makes an immense difference to the final payout.

     For example: $100 a month paid in over 30 years with an average investment yield of 6% amounts to
$58293; while at 8% it will build up to $72485 - a substantial difference! Also ,if you started a year earlier
you will receive an extra $7200 + by paying in an extra $1,200 (value $79747 at 8.0 %).

     Besides your life assurance policy, ask yourself, what else does the company offer you? Some offer a 
full financial planning service, tax planning, wills and so on.

     And what of their service to you as customer?

     The initial commission paid to the agent is a payment for servicing that policy over the lifetime of the plan.
This payment is made up front; however bear in mind that life assurance policies normally last far longer than
agents do!

A word of advice...

     Select a salesman who you trust. This is of vital importance in buying insurance. Incidentally, the word
insurance generally refers to general or short-term insurance (like house, car, boat), whereas assurance 
denotes long-term or life assurance.

     There are two types of insurance salesman: agents and brokers: Agents can sell only for the company that
employs them, while brokers can sell for all companies with which they have a contract.

     My advice... It does not matter whether you choose an agent or a broker. The important thing is that you
must fully trust the person and feel completely at ease with him or her. You are giving this person complete
confidence as regards your personal finances, your hopes and dreams. In turn , this person should come up 
with an analysis of your most pressing financial needs. Then they must explain all the technical details of your
policy - the solution to your financial problem. Then in the future they should provide continuing service by 
sorting out any problems that may occur by regularly reviewing your assurance portfolio on an annual basis.

Another word of advice...
  NEVER BUY A POLICY YOU CANNOT AFFORD.

     The most common complaint about life assurance occurs when a policy "lapses", or goes 'off the books' (as
people in the industry call it). A lapse occurs when the policy holder stops paying the premiums and the policy
is cancelled by the life assurance company. Then the policy-holder loses everything that he or she has paid in 
to the plan. This usually occurs only in the first two or three years.

     Also in the event of a claim, no amount is payable because the policy is invalid.

     It is important to bear in mind that when you buy an insurance policy you are entering into a contract with
the assurance company. If you break the contract, you will lose money - all of it in the first two years if you 
stop paying and a portion thereafter. The longer the plan runs the less you lose.

     So check this out before buying.

     Most expenses occur when the policy is issued. These include the cost of setting up the policy 
contract ( approximately $200 ; but this figure varies from company to company ) , stamp duties and
commission. Usually these costs are taken out in advance (the technical term for it is 'front-end loading'). 
Many people believe that these charges are excessive; so it is important to look at the 'break-even point' on
your policy, should you decide later to cash it in.

     Peoples circumstances change - often drastically. This is far more frequent these days with downsizing and
redundancies ...and we mere mortal humans can't foresee the future. My advice: just be very careful when
taking out a new policy. Let the buyer BEWARE.

     This varies from policy to policy and company to company.

     The salesperson is usually paid the full amount of their commission in the first year; because he (or she) can
hardly be expected to wait 20 or 30 years to collect his commission. However, in recent years there has been
a trend towards spreading commissions over say five years as an incentive for better servicing after the two
year period.

     So the assuror pays all these expenses in advance and then deducts a small fee every month as a
policy charge as well as a percentage of each premium paid as a management fee. The entrance fee may
be anything from 1.5% to 6%, the annual management fee usually between 1% and 2%. The other charges
would probably be well under 0.5%. This figure varies from company to company and should be closely looked
at. The good news for consumers is that due to competition these fees have reduced drastically in recent years.

     If the policy is surrendered after 5 years , the outstanding expenses are deducted from the cash value. If you
surrender early, you could lose quite a bit of your hard earned money because of the initial set-up expenses.
However if you keep your policy to maturity the expenses are ,in fact, VERY SMALL in relation to the total
investment return.

If you need cash from your policy in the event of a financial emergency,
what can you do?
(assuming you have bought a permanent life policy, because temporary assurance has no cash value)

     * you can either make a withdrawal.

     * you can borrow from your policy ( but you pay interest on your loan), or

     * you can use the policy as security for a bank loan. Most policies are flexible enough so that if you cannot
maintain your premiums, the plan can be changed to reduce them (subject to a minimum premium requirement).

     Research shows that most policies lapse because the person bought a policy that he or she could not really
afford. To avoid this happening, only buy what you can afford now, and adjust your policy later as income
increases. Hopefully!

Whether you are looking for assurance against death, disability or illness , or you are saving for your
retirement, it always pays to start with your policy as early as possible.

     The younger you are the cheaper the cost of your life cover. In addition, young people have a wonderful
opportunity to start saving early. It's quite amazing to see the effect of compound interest on a few extra years...
a huge difference at payout time (as we saw in the example mentioned previously).

ENSURE THAT YOUR PREMIUMS INCREASE WITH INFLATION.

     Most life assurance companies offer the possibility of automatically increasing your premiums every year. 
If your company doesn't offer inflation indexing , make voluntary increases each year for as much as you can
reasonably afford.

     If your premiums are not increased in line with inflation, then you are effectively investing less each year 
(in real terms, i.e.. terms of the purchasing power of your money).

ALWAYS GIVE COMPLETE MEDICAL INFORMATION.

     All life assurors ask medical questions on the application form. If they foresee a certain health risk, they 
might request certain medical examinations. This is to ensure that very unhealthy people are not subsidized 
by the healthy. In insurance jargon, this administrative process is known as underwriting. When answering 
the medical questions, always be perfectly frank and totally honest. If you are unsure , give more information
than may be necessary.

     By doing this you can be sure that a future claim on the policy will not be jeopardized.
Incidentally, all this medical information is totally confidential.

NEVER SURRENDER YOUR POLICY.

     A "surrender" occurs when a person cashes in a policy before the original maturity date. Very often the cash
paid on early surrender is far less than the premiums paid .

     In addition if your financial circumstances are drastic (like mine!) , you can normally keep the policy in force
by paying just the cost of the life cover, plus the small monthly administration fee . This facility is normally
available only once the policy has a cash value, i.e.. after at least. two years. In technical terms, this is called a
bridging facility.

CHOOSE YOUR INVESTMENT FUND CAREFULLY.

     Very often people do not discuss the portfolio for investment of their hard-earned savings. However this is
of major importance if you are to realize your financial goals.

     There are two main options: You can choose an investment fund which is linked to the value of shares,
property or fixed interest investments like government bonds, or you can choose a combination of them 
(normally known as a balanced fund). In a balanced or 'managed fund' along with other investors you buy units
in a pooled fund which is also known as a market -valued fund. If the market goes up so does the value of 
your policy. The same happens when it goes down.

     A managed fund comprises a blend of investments, so you 'don't have all your eggs in one basket'- the
number one rule in investing.

     For the more conservative investors, the alternative is a portfolio that does not fluctuate when shares and
property rise and fall in value. These are commonly known as smoothed or stable bonus funds.

     Each year the company declares a bonus by averaging out the interest earned on its various investments.
It can keep some money in a reserve account if yields have been exceptionally good as a buffer for the bad
years. Hence ( funny word that 'hence') it is called a smoothed bonus investment.

     Some funds also offer a capital guarantee. This means that once interest is declared and has been 
allocated to your policy, it cannot be taken away and you cannot lose the growth declared to date.

A few words of comment...

     One investment strategy is not necessarily better than the other. But it is important that you know which fund
your policy is invested in and how bonuses are added to your investment. The fund you choose should match
your investment philosophy and your attitude to risk. Are you a cautious or speculative type of investor? It 
should also be compatible with your long term investment objectives, i.e.. providing adequate cash for the 
future on death, disablement or retirement.

     Always remember that Life Assurance is a long term investment. It is not designed to work like a bank
account - to draw out money whenever needed. Cancel early and you will lose money.

... And don't draw on your policy unless it is absolutely necessary.

REVIEW YOUR LIFE INSURANCE REGULARLY.

     People's personal circumstances and family life change constantly - as do the tax laws, inflation and interest
rates. A policy taken out 5 years ago for a particular reason will often need to be changed because of changed
personal circumstances. A review of your financial planning portfolio needs to be done regularly ( but at least
once a year with your consultant).

     P.S:  Always choose the AIDS test. All life assurance companies exclude Aids cover under their policies:
should the policy-holder die of Aids or an Aids-related illness, the company will not pay out the claim.

     However, you can have this exclusion clause removed by undergoing an HIV blood test. If the test is
negative, you will be given full cover - it's not sore. I'm a bit squeamish - fainting once when I went to give
blood (before my finger was pricked - what a "prick"!). Fear overcome ... and now I am a regular blood donor
with my rare blood group!

A few words to end off...

     A visit to your financial adviser is like having your car serviced ; it doesn't necessarily have to be like a 
visit to the dentist - Ouch!

We all know that we are going to die someday but we don't know when!

     The amount of life assurance depends on your need for protection and on the ability to pay for that cover. 
If you are a breadwinner with small children and a hefty bond commitment (like most 'men and women in the
street') , you will require relatively high cover (far more than the young single person) to ensure that you and 
your family are adequately provided for in the event of untimely tragedy.

One way to think how much cover you need is to say:
     "What would be the effect on my survivors if I were to die tomorrow? Could the household manage?
Consider what would happen if the spouse of the breadwinner had to "fall off their perch"? Would a child
 minder / housekeeper have to be brought in and could the breadwinner afford it? The value of a wife purely in
terms of housekeeping costs has been estimated at around $1000 per week. So value your spouse "hubbies"!

     Obviously, on death or permanent disability any income brought in by the spouse would be lost to the
household.

     Here are some requirements for one off capital sums:

     * funeral expenses

     * children's education

     * to pay off a mortgage so as to leave survivors with debt-free property.

THE NEEDS ANALYSIS:

     1. Calculate the required continuing expenses for the survivors on a work sheet.

     2. Calculate what capital sum is required to produce that income (annually). Assume an interest rate to
invest the capital. Your survivors will then be able to live off the capital leaving the sum intact .(As a bonus,
cashing in the money at a later stage will take care of the effects of inflation). Ensure that there is additional 
cover to pay off all your debts, eg. mortgage bond, bank overdraft and credit cards (anything else?).

     3. Calculate the amount of life assurance you already have in place. This could be your own policies, bond
cover, and group life cover under the company pension scheme.

     4. Subtract the amount of life assurance available (step 2-3 above). This gives the additional assurance
required.

     This exercise should be done at least once a year with your insurance consultant or broker . Otherwise at 
any significant change in your financial circumstances, such as the birth of a child, buying another home,
marriage, separation, and so on.

Disability Insurance:

P.S :  Don't forget about insuring your income...because your most valuable asset is not your home but your
earning power. This is often neglected and is especially important for self-employed people. The replacement
income policy pays out if you are unable to do your job as a result of sickness or accident. You have a choice
of waiting period before payments commence - the longer the period ,the cheaper are the premiums. So first
check how long your company would cover you under their plan. Premiums are cheaper for non-hazardous
sedentary (nice word that!) occupations, like clerks, than explosive experts or top dresser pilots. They are
unlikely to obtain disability cover.

     It is advisable to have your benefits linked to inflation for a small additional cost. Lastly, premiums are
generally tax deductible.

COMPANY PENSION FUNDS:

     Employer subsidized schemes are excellent retirement schemes. Their big advantage is that your employer
contributes to the fund on your behalf. Also the money is taken out of your pay check before you see it - 
very painless! In addition, there is usually group life cover (often 3x annual salary together with income
replacement cover). The employer pays for this as well as the administration costs of running the scheme.

     The only disadvantage to a company subsidized scheme is that if you leave before 10 years , you usually
lose the employer contributions and get a very low interest rate on your savings.

     If you are invited to join the company scheme, you can count your financial blessings". Jump at the chance
and shout "Eureka!" as you dance down the street!

A final word to sum up my thoughts on the value of life assurance...
THE FINAL WORD:

     Whatever you decide to do about your financial security, DO SOMETHING. PLAN for the future and let
financial services products like life assurance work for you. They don't have to be such a "drag" or a painful
nuisance to you and your family. One of the greatest human wants is a feeling of security and only life assurance
can give you that peace of mind.

INSURANCE IS LIKE ANY OTHER SERVICE ( it is like a power failure). YOU

ONLY SEE THE NEED AND APPRECIATE IT WHEN SOMETHING HAPPENS.

That is why it is LIKE A PARACHUTE...rather than an ambulance at the bottom of the cliff!

     Winston Churchill said so well (or words to this effect): "If I had my way I would write the words
INSURE, INSURE, INSURE on the door of every home ."
                                                                                               Great words from a great man!

* * *
AUTHOR'S Note:
This article has been based on current New Zealand legislation. In terms of this, the proceeds of all life 
assurance policies are tax free when paid out to the policy holder; because tax has already been paid 
by the company on the investment income on an ongoing basis.

P.S: I have written this article generally for all New Zealanders; but it could also apply just as well to
 Australians, Canadians, the English, South Africans or Americans.
 The principles are the same; only the tax laws are different.

I hope it is useful in "demystifying "the mysteries of life assurance which are not really so complicated after all!

About the writer:
The author has been involved in the life assurance field in New Zealand, Australia and South Africa for over
twenty years. Craig Lock has been writing books on various subjects full-time for the last four years as well as
numerous articles on life assurance and money management. He has written a long work on the principles of
money management, called the Mad Money Book (like the story of his life!).

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