Quick guide to life insurance
You may be thinking that it’s too early to think about insurance. Also, because it seems kind of complicated. But if you’ve learnt how to cook the perfect fried egg, or mastered the art of shopping on Taobao, you can do this. Fact is, life insurance is the cheapest to buy when you’re young and healthy.
What is life insurance?
Life insurance may be categorised into four major types: Term life, whole life, investment linked and endowment plan.
Term life policy is the most fundamental type among the four. The other three types of insurance build upon the concept of term life policy, i.e. Term insurance with a savings element or term insurance with savings and investment elements.
The common benefits that are paid out by life insurance policies include death, total and permanent disability (TPD). You can also purchase riders that protects you against terminal illnesses and critical illnesses. Riders that accelerate your benefit pay-out in the event of terminal illness or critical illness are also commonly available.
Term life policy: pure protection
The concept of term life policy is simple. You first decide on the number of years of protection against life events. This term of coverage ranges from 5 years to 40 years, once you have decided on your length of coverage, you start to make payment for your premium.
If any mishap takes place during the term of coverage, your insurer will be obliged to pay you an agreed lump sum stated in the contract. This contract is known as your term life policy.
If you are in your 20s to 30s, you may want to consider getting term insurance coverage up to age 65. This “magical” number is the age when most Singaporeans would have finished paying off their home loans. Your dependents are also less likely to be relying on you as the main breadwinner.
Endowment plan: protection + savings element
Think of the endowment plan as a blend of a term life policy and savings. Using the premium that you are paying, your insurer will allocate a part of it into protection. The rest of it will go into creating a savings element for you.
Protection element: just like a term life policy
Similar to a term life policy, you have to decide on the number of years of protection against life events. If you meet with any accident or mishap during the term of coverage, your beneficiaries will receive a lump sum payment from your insurer if it falls within the scope of protection. But there is more to an endowment plan.
There’s more – the savings element
Under a term life policy, if you live till the end of your term of coverage, you will not receive any returns from your insurer. However, under an endowment plan, there is a savings element which will be returned to you at the end of your term of coverage. Your two key considerations are thus, “How much do I need?” and “When do I need it by?”.
Participating vs non-participating
When purchasing a life insurance policy, you can choose between a participating and non-participating life insurance policy.
|Participating policy||Non-participating policy|
|Amount of savings/investment benefits||Flexible, as participating policies enable you to invest through your insurer’s investment mandate||Fixed amount of savings benefits that is agreed on when you sign up for the policy|
|Additional bonus?||If the investments do well, your insurer may declare additional bonus, i.e. you could get a higher-than-expected benefit||No. Benefits will not change throughout your term of coverage|
Option to withdraw the savings element
Endowment plans also give you the flexibility to withdraw the savings element before the policy matures. This is known as encashment, and can be useful in the event where you urgently need some cash, or no longer need the endowment plan. A note of caution: The cash value is usually less favourable if you choose to withdraw it early – and especially in the early years of your policy, because it takes some time for the savings element to grow. However, you will be justly compensated if you continue to hold on to your policy till its maturity, which is the norm for most policyholders.
Whole life policy: an endowment plan for life
A whole life policy is just like an endowment plan, except that it does not have a term of coverage. Just like the name suggests, a whole life policy plan covers you for your entire life. Since the benefits are only paid out upon death, such a policy is usually bought by those who want to pass on the money to their dependants.
Investment-linked policy: a whole life policy with the choice to make your own investments
Investment-linked policies (ILP) are similar to participating whole life policies in that your beneficiaries will receive a lump sum payment in the event of your death or TPD. Some ILPs also protect you against critical illness and early stage detection of illnesses.
However, the mechanics of an ILP is very different from a whole life policy.
How does an ILP work?
When you pay your ILP premium, the sum is split into two. You are effectively paying for both protection and investments.
Investments: option to choose your sub fund
For the investment portion, you have the choice of deciding which investment-linked sub fund to invest in. This is unlike a participating whole life policy or participating endowment plan where your insurer decides what to invest in.
Each sub fund has a different investment mandate, risk profile and time horizon. For example, some higher risk sub funds expose you to investments in the US while other less risky sub funds only invest in bonds. Throughout your lifetime, you can switch between different sub funds if you find better investment opportunities. However, note that there are costs associated with the investment component, such as fund management fees, and for switching between sub funds. However, some ILP providers like DBS offers the flexibility to switch between sub funds for free.
If your investments are performing well, your beneficiaries might be able to receive a higher benefit than your ILP’s initial death benefit. However, even if your investments do not perform, your ILP’s sum insured will still be guaranteed by your insurer but subjected to any top-ups or withdrawals made.
What do you need?
Be clear of your purpose. While there are many policies to choose from, each type of life insurance serves a different need.
It is thus important to think about what you want to achieve by buying this policy – and then buy it. If you are unsure about the right type of life insurance for your needs, we’re happy to help. Just book an appointment with us!