Insurance: Is It Worth It?

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I first heard this story when a friend of mine posted about it the other day: The All England Lawn Tennis Association, which organises the Wimbledon tennis tournament, has been paying pandemic insurance for the past 17 years at a cost of around £2 million per year. That’s a pretty hefty premium for what people are calling a “black swan event”. My friend wondered if there was a person in their annual budget meeting who had to fight to get that paid every year.

Many people face a similar dilemma. Paying for insurance every year to cover an unlikely event can seem like a waste of money. The Japanese even have a term for someone who buys more insurance than they need and ends up poor for it: 保険貧乏 (hoken binbou)

Of course there are some risks that really do need to be considered. You are not even allowed to drive your car without proper insurance. The types of insurance that are important from a financial planning perspective are:

  • Health insurance
  • Income protection insurance
  • Critical illness insurance
  • Life insurance

Health insurance – if you pay into the Japanese national health insurance system, you are covered for 70% of the cost of medical treatment in Japan. That’s enough for visits to the clinic for a sniffle, but may leave you with a larger bill if you are hospitalised for a long period. Private health insurance is a good way to cover the other 30%. It can also be useful when you travel overseas, and could even end up covering totally unforeseen treatment later in life – see here.

Income protection insurance – what if you were sick or injured and unable to work for a long period? Your company may look after you for a while, but after that you are on your own. With income protection, you can cover up to 75% of your current income up to age 65 if you are unable to work. This is especially valuable when you think that the loss of your income would also prevent you from saving and investing for your future, making life even tougher after retirement age.

Critical Illness Insurance – unlike income protection, which pays a regular income, CII pays out a lump sum on diagnosis of a critical illness (cancer, heart attack, stroke etc). This money allows you to take time off, get treatment and get well again. We are lucky to live in an age where we are likely to make a full recovery from a serious illness and be able to go back to work, but it’s important not to go broke in the process.

Life Insurance – do you have any loans / liabilities? Life insurance makes sure you don’t leave those behind for your family if something happens to you. It also means you can continue to provide income to your family after you are gone. Health and income protection come first, but once you have a family and a mortgage, life insurance becomes an important part of your protection strategy.

If you are a short-term expat, it’s best to look for insurance with companies in your home country, or via an offshore provider. If you are long term, it would make sense to get something local. My experience with insurance in Japan is that the products are all very similar, so finding a salesperson who you get along with who isn’t pushing you to buy cover you don’t need is the most important thing.

If you think you might be missing some important coverage, it may be time for a protection review.  You never know when something unexpected might happen.

And by the way, when they cancelled Wimbledon this year, the payout to the Lawn Tennis Association for £34 million in pandemic insurance premiums over 17 years?

£141 million!!! 

If you insure yourself smartly, it’s worth the money.

Death and Taxes in Japan

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Benjamin Franklin said that there are two things certain in life: death and taxes. Following a change in Japan inheritance tax law in April 2017, those two things may have come into sharper focus for some foreign residents. You may have come across this Bloomberg article on the “bizarre” death tax that deters expats. It certainly seems that Japan does not make it easy for people to come and live and work here long term.

So what do expats need to know about the recent changes to inheritance tax law Japan?

Short term residents: Foreigners staying temporarily in Japan have been excluded from gift and inheritance tax on overseas assets. Staying temporarily is defined as residing in Japan for not more than 10 of the last 15 years and holding a “table 1 visa”, such as a work visa. If you are in this category and you receive an inheritance from a family member overseas, for example, it is not subject to inheritance tax in Japan. This also applies if the transfer of overseas assets is between you and another “temporary resident”. However, if you die and transfer your overseas assets to a Japanese national there is no exclusion. The transfer of Japanese assets will be subject to Japan gift or inheritance tax.

To keep it simple, if a relative dies and leaves you a house overseas – no tax in Japan. If you die and leave another temporary resident heir a house overseas – no tax in Japan. If you die and leave another temporary resident heir a house in Japan – taxed in Japan. If you leave a house overseas or in Japan to a Japanese heir – taxed in Japan.

Long term residents: If you hold a “table 2 visa”, which is a spouse visa or permanent residence, and/or have lived in Japan for more than 10 of the last 15 years, you are a long term resident. You are therefore considered an unlimited taxpayer. This means that any transfer of assets, in Japan and worldwide, will be subject to Japan gift and inheritance tax. This also comes with the controversial “look back” rule, whereby even after leaving Japan, the tax on worldwide asset transfers continues for 10 years. So a situation could arise, for example, where a long term resident leaves Japan, dies within 10 years, and an heir who has never lived in Japan will be subject to Japanese inheritance tax on the donor’s worldwide assets.

So what can you do?

If Japan inheritance tax is a concern, and you are currently a short term resident, then the number one thing you can do is leave Japan before you reach the 10 year mark. (this is quite sad when you consider Japan’s long term demographic problems – you would think that encouraging productive foreign residents to stay and contribute to the economy would be a good idea, but there you go…)

If you are a short term resident with a table 2 visa, such as a spouse visa, you might consider changing to a table 1 visa if possible.

If you are a long term resident, you have some thinking to do, particularly if you have significant worldwide assets. Retiring in Japan may not be so attractive when it comes with up to a 55% tax bill on handing down everything you own. If you are going to leave, you will want to do it while you are still healthy and confident of surviving the 10 year lookback.

The April 2017 reform was essentially implemented to counter wealthy Japanese from moving abroad and passing on assets to heirs who were not born in Japan, or had given up Japanese nationality, but unfortunately the new rules will deter long term foreign residents from living out their life here.

Regardless of tax considerations, writing a will is something everyone should consider, particularly those with assets spread around the world. Most people would prefer to make clear “who gets what” after they are gone rather than it being dictated by local laws.

Further reading: this PWC report on the April 2017 reform is both clear and comprehensive.