DECODING CASH VALUE: WHAT YOU DIDN’T KNOW ABOUT LIFE INSURANCE

 One of the current fears for many people participating in life insurance is the concern about inflation, the depreciation of money over an extended period. Many people think, ‘If you have money, it’s better to deposit it in the bank to earn interest, withdraw it for flexibility. Keeping money in life insurance for 10-20 years, and withdrawing it later might not be worth it.

So, is that perspective accurate? What is inflation, and how does it affect life insurance?

1. What is Inflation?

Inflation or currency depreciation is the phenomenon where money loses its value over time. Specifically, if today a bowl of pho costs 30,000 dong, after a few years, it might increase to 50,000 dong. Although the quality of the pho remains the same, you have to spend more money to buy it, leading to currency depreciation or inflation.

High inflation often occurs in developing economies like Vietnam, China, India. In contrast, developed countries in Western Europe, North America, Japan may experience very low inflation, and at times even deflation, meaning the currency gains value over time.

2. Causes of Currency Depreciation

There are various reasons leading to currency depreciation. In this article, to provide the most realistic view, we’ll explore the issue through a few examples:

• Recently, when the government imposed increased environmental taxes on fuels like petrol, oil, the taxed prices of these fuels increased, raising the input costs for operating machinery and transportation. As a result, the cost of goods also increased, leading to currency depreciation.
• Some cases of unusual scarcity of goods without timely replacement sources also contribute to currency depreciation. Food shortages due to drought, crop failures, or unusual scarcity of goods after long holidays due to limited supply during an extended break are factors leading to the rising prices of goods.
• Additionally, the government’s economic management policies significantly influence the currency’s value. Controlling money printing, taxation, adjusting prices of essential goods, especially energy, all contribute to inflation or deflation.

It can be concluded that inflation or currency depreciation is influenced by various factors, but overall, they cause an increase in commodity prices and currency devaluation over time.

3. Is Inflation Good or Bad?

For the Economy:

Moderate and stable inflation signals a healthy economy for a country. In such cases, people and businesses won’t hold too much cash, necessitating investment in production, boosting the country’s development. In advanced countries, they may even stimulate inflation to encourage investment and consumption.

However, in some countries, due to various reasons, inflation can reach extreme levels, as seen in Venezuela or Zimbabwe. In such cases, the currency held by the people loses its value, impacting their ability to purchase basic necessities like food and medicine. This significantly affects people’s quality of life and economic activities.

For Individuals:

For individuals, currency depreciation is a concern because investing money in business entails the risk of significant losses, while holding onto money risks losing value. People often seek various financial investment methods such as savings accounts, stock investments, gold purchases, or real estate. These are common practices nowadays to mitigate the depreciation of currency.

Concerns about currency depreciation also play a significant role in the mindset of individuals considering life insurance. Leaving money in life insurance for 10-20 years, and questioning the returns at the time of withdrawal, is a common worry. Stable inflation at a reasonable level is positive for the economy but remains a concern for individuals in accumulating money.

4. Impact of Currency Depreciation on Life Insurance

In reality, if currency depreciation occurs, it will affect all economic activities in a country, including business, investment, savings accounts, or even life insurance participation. However, the extent of impact varies for each type of financial activity:

• To buy a property, you must pay the full amount to the developer before receiving the handover. For savings accounts, you earn interest only on the deposited amount. However, with life insurance, the customer enjoys full protection from the beginning, with premiums gradually paid over many years. Dividing the premium amount helps reduce the impact of currency depreciation on life insurance.

For example: If depositing money in a bank is 100 million dong, the immediate impact of currency depreciation affects the full 100 million. However, if participating in life insurance, paying 10 million dong each year for 10 years, the impact of inflation on the insurance premium in the first year is only 10 million, the second year is 20 million, and so on, reaching the full amount in the tenth year. Thus, dividing the premium amount helps limit the impact of inflation on life insurance compared to other financial methods.

5. How to Limit Currency Depreciation?

It is evident that currency depreciation is inevitable, so we need to learn how to live with it and find solutions to control and minimize its adverse effects. Ways to limit currency depreciation in life insurance:

What Insurance Companies Do:

1. Financial Investment: Investing is the best way to limit inflation. Idle funds in life insurance funds are used to buy bonds, deposit in reputable banks, invest in stocks, etc., aiming to limit the impact of currency depreciation. Annually, investment results are shared with customers according to the initial commitments of the insurance company.According to statistics released by the General Statistics Office, the inflation rate in 2018 in Vietnam was controlled at 3.54%, while the investment interest rates from the common funds of various life insurance companies fluctuated from 5-6.5%. Thus, the investments made by life insurance companies help the fund avoid depreciation and even generate profits.
2. Unit-linked Products (UL), Regular Premium Unit-linked (RPUL): The introduction of these products allows customers to choose more risky investment forms to create more profits and limit depreciation. These products are highly flexible, allowing customers to withdraw money, temporarily suspend premium payments, increase or decrease life insurance amounts, etc. The flexibility of these products enables customers to proactively handle situations like withdrawing money when needed, minimizing the impact of currency depreciation.

What Customers Can Do:

1. Choose Unit-linked and Regular Premium Unit-linked Products: Opting for these products with higher interest rates and flexible withdrawal options will help push back against currency depreciation. Additionally, customers don’t necessarily have to buy life insurance to accumulate and save money. Choosing pure protection products for health and life coverage means the buyer doesn’t have to worry much about inflation.
2. Pay Premiums for 15-20 Years without Withdrawal: Paying insurance premiums for 15-20 years without withdrawing ensures lifelong protection until the age of 99. When the funds in the insurance fund are exhausted, the customer’s protection benefits automatically cease. At this point, life insurance fulfills its humanitarian purpose of providing lifelong financial protection for customers.

Conclusion:

It can be seen that currency depreciation in life insurance is a risk that can be controlled through various methods from both insurance companies and participants. The risk of currency depreciation only affects the amount of money you participate in insurance, while the risks in life impact your entire family’s assets. The uncertainties of life events like accidents, critical illnesses, and premature death are increasing daily.

The risk of currency depreciation affects only the amount you participate in insurance, whereas life risks impact your entire family’s assets. Bank deposits need to be withdrawn, and properties need to be gradually sold to cover medical expenses for critical illnesses. If, unfortunately, the main breadwinners lose their income-earning ability, who will take care of the family and the future of the children?

The effort of the government in recent years to manage and operate the economy has resulted in controlled and stable inflation rates in the country. The risk of currency depreciation is no longer a concern for those participating in insurance. Instead, readers should pay more attention to life risks, unpredictable events that can significantly affect our finances and lives. Therefore, don’t hesitate and doubt anymore; participate in life insurance now.