Your quick guide to life insurance in Singapore

Your quick guide to life insurance in Singapore

If you own something valuable that you want to protect - like your car or your home - you would know to buy car insurance or home insurance to guard against any loss or damage. But what if the things you value the most aren’t in fact, things? What if your most valuable possessions are the people in your life, like your spouse, your children, your parents and grandparents, and your siblings? Then you need to be protecting them with life insurance.

When you buy life insurance you are protecting yourself through savings and investments, while also protecting and preserving the livelihood and the lifestyle of your loved ones in the event that you contract a very serious illness, suffer total and permanent disability or pass away.

Learn more about what it takes to choose a good life insurance policy.

Types of life insurance available

What is Life Insurance and what do you need?

Life insurance is a contract between you and an insurance company, for you to receive financial benefits in exchange for paying a premium over an agreed period of time. The payments are triggered by specific events covered in the contract, such as death, total and permanent disability and terminal illness.

As such, a life insurance policy provides financial support during such emergencies.

You can also purchase riders that are tagged to life insurance plans, that protect you against critical illnesses. These riders may accelerate the benefit pay-outs.

Why do you need life insurance?

Why do you need life insurance?

The main reason why anyone buys life insurance is for the protection element. This refers to the financial payouts paid by the insurer when we pass on, or become totally and permanently disabled.

If you contract a terminal illness or become permanently disabled, the payouts from your life insurance policy can alleviate the cost of your treatment and long-term care needs, without burdening your family. If you pass away, then the payouts will go towards the living expenses of your loved ones and make up for the loss of your income.

Some life insurance products bundle insurance with a savings/investment component. These can be used in the future for your retirement income, or to accumulate savings as an inheritance for your loved ones. Such policies will cost more.

Types of Life Insurance

 

Term Life Plan

Whole Life Plan

Endowment Plan

Investment Linked Plan

Main Objective

Protection

Protection and Savings

Savings, with some Protection

Investment returns, with some Protection

Premium affordability

$

$$

$$$

$$$

Coverage

 

Death and total permanent disability (TPD)

Coverage period

A specific term period or up to a specific age

Up to end of life

What is paid out upon death or Total Permanent Disability (TPD)

Sum assured

Sum assured & accumulated bonuses (if any)

Sum assured & accumulated bonuses (if any)

Sum assured &/or value of units in fund

What is paid out if you surrender the policy early

Nothing

Cash surrender value (guaranteed and non-guaranteed bonuses if any)

Cash surrender value (guaranteed and non-guaranteed bonuses if any)

Cash value (Value of units in investment sub-fund)

Two ladies discussing whole life insurance vs term insurance

Whole Life Insurance vs Term Insurance

There are two main types of life insurance policies: term life and bundled products such as whole life, endowment policies, and investment-linked policies (ILPs).

In this section, we will look at term life and whole life insurance, which have a main objective of 'Protection'.

Both term life and whole life insurance help to provide for your loved ones should you pass away or no longer be able to work. The differences between term life and whole life can be boiled down to: period of protection, premium payment structure, cost, cash value, option to convert to a paid-up policy.

Let's understand each a little better.

What is Term Insurance?

Term life insurance is the most straightforward form of life insurance. It only provides protection coverage over a fixed period of time (or term) – ranging from 5 years to 40 years.

A term policy is also known as an unbundled product as it does not have any investment or savings component. That also translates to much lower premiums, compared with whole life insurance plans.

Typically, you would choose to be insured up to the age of 65, when most of your big-ticket financial commitments have been fulfilled, and your dependents have become financially self-reliant. However, you can also choose to be covered for a shorter period of time.

What is Whole Life Insurance?

Whole life insurance provides life-long coverage. It is available in two main forms, which are known as participating and non-participating policies.

(Wondering how to decide between a participating and non-participating whole life policies? Read this article to understand the key differences.)

All whole life policies provide you with an option to do a full or partial withdrawal of the cash value of the life insurance policy. However, you should note that the cash values would not be as favourable when you do so. At the same time, the early surrender or termination of such policies can result in a surrender value that is less than the total premiums paid.

Young man researching on his laptop on endowment plans and investment-linked plans

Endowment plans vs Investment-Linked Plans (ILPs)

What are endowment plans?

An endowment plan is an insurance policy that helps to build up your savings over a period of time, usually up to 20 years. It can come in the form of a participating or non-participating policy.

A participating policy means that your premiums will be invested in the insurer’s participating fund, and you stand to gain non-guaranteed bonuses, on top of the guaranteed bonuses that were declared when you purchased the policy. The non-guaranteed bonuses you stand to receive will depend on the performance of your insurer’s participating fund.

A non-participating endowment policy will only pay out the guaranteed bonuses that were declared at the point of sign-up, if any.

What are Investment Linked insurance policies (ILP)?

Investment-linked plans, or ILPs, are life insurance policies that have an investment component. With ILPs, your premiums are invested in one or more sub-funds of your choosing, and a portion of those units will be sold to cover your insurance premiums and other charges.

The payout from an ILP may be the higher amount between the sum assured or the value of the units in the sub funds, or a combination of the two.

ILPs can be in the form of single premium plans, or regular premium plans. They also provide the flexibility for you to switch the sub funds the policy is invested in, and vary your required insurance coverage.

On the other hand, the cash value of investment linked plans is not guaranteed, and is entirely based on the performance of the sub funds.

Participating whole life endowment vs investment-linked insurance policies (ILPs)

While both participating endowment plans and investment-linked plans have investment components, they have some key differences.

 

Participating whole life and endowment plans

Investment linked plans

What are premiums invested in?

Insurer's participating fund.

One or more sub-funds of insured's choice.

Any bonuses?

Guaranteed bonuses & non-guaranteed bonuses (latter depends on the performance of the fund.)

No bonuses.

Are returns based on performance of the overall investment market?

No. Insurers often smoothen bonuses to avoid large fluctuations in bonus declared year on year.

Yes. Returns are directly linked to the value of the sub-funds.

Are cash values guaranteed?

Partially. Only the bonuses declared by the insurer are guaranteed.

No. The ILP's cash values depend entirely on the performance of the sub-funds.

Can I withdraw full or partial cash value from my policy?

Yes, but take note that cash values take a few years to build.

Yes, but charges may apply.

Who bears the investment risks?

For the guaranteed benefits, the insurer does.
For the non-guaranteed benefits, you do.

You do.

Who would best benefit from each type of insurance policy?

Who should buy term insurance?

Term insurance policies offer more affordable premiums, which make them suitable for young people who have just started working and do not have a lot of disposable income.

It can be suitable for homeowners who are paying off their mortgage, and business owners who invest most of their money in their own business and still want to have maximum protection coverage for their dependents.

If you are comfortable investing your own money and are confident about getting a good return over the longer term, you may choose to buy term insurance purely for protection over the years when you have dependents.

Who should buy whole life insurance?

Whole life insurance policies command higher premiums than term insurance due to the additional savings and investment components. However, they also tend to be limited pay plans, so you only need to pay your premiums for a number of years to enjoy a lifetime protection coverage.

Whole life insurance policies may be more suitable for people who can comfortably afford the premiums, and wish to leave behind an inheritance for their family.

Who should buy an endowment?

Endowment plans are a hybrid of a life insurance policy and a savings plan. Such hybrid plans are commonly used to save money for specific savings goals, which could range from your children’s education, to your own retirement. As an added benefit, these plans also provide basic life insurance protection for as long as the policy is in force.

Understanding the different types of endowment plans, their working, features, and benefits can help you determine which endowment plan is the best for you.

Who should buy an ILP?

Investment-linked policies are suitable for savvy investors who already have protection coverage from other types of plans, or have minimal protection needs.

Why? Each sub fund has a different investment mandate, risk profile and time horizon, and it is important to know where the better investment opportunities lie.

At the same time, there are costs associated with the investment component, such as fund management fees, and switching costs. That said, some ILP providers like DBS/POSB offer the flexibility to switch between sub-funds for free.

Young woman considering the type of insurance she needs

Understand your needs

While there are many choices to choose from, each type of life insurance policy serves a different need, from financial protection to savings to investment. It is important to make an honest assessment about your protection needs, financial and life goals and select the right amount and type of life insurance for yourself.

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Disclaimers and Important Notice

This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.

All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.

Disclaimer for Investment and Life Insurance Products

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