What is Life Insurance?
A life insurance policy is constructed in such a way that if the insured passes on, the payout amount should be enough to provide for your dependents to live when you are gone.
Both term & life insurance provides protection in the event of total permanent disability (TPD) and death. They mainly differ in terms of the length of coverage and the amount of money you will get back if nothing happens to you.
Types of Life Insurance
There are 4 types of life insurance – Term Life Insurance, Whole Life Insurance, Whole Life Insurance (Investment-Linked), and Universal Life Insurance.
Term Life Insurance
Term life insurance provides you coverage for a specific period, (up till a lifetime) / until the plan expires. If (fortunately) nothing happens to you and no claims were made, you will not receive anything back unlike the other 2 life insurance plans.
Term life insurance, due to its zero cash value, may be a cost-effective way to provide you with coverage until a family member of yours passes a certain life stage and will no longer depend on you for income.
Read more about term life insurance here.
Whole Life Insurance
Unlike term life insurance, whole life insurance provides you with protection for your whole life, as long as premiums are paid.
There are generally 2 main types of whole life insurance policies – Whole life Insurance Policy & Investment-Linked Life Insurance Policy (ILP).
A whole life plan essentially provides you with coverage for a lifetime while accumulating wealth at the same time. It is known as cash value.
The cash value is divided into two portions – a guaranteed and non-guaranteed element.
The guaranteed portion represents a guaranteed capital and interest upon surrender.
Whereas, the non-guaranteed portion returns per annum is dependent on the performance of the insurer’s participating fund, upon surrender.
Read more about the whole life insurance here.
Whole Life Insurance (Investment-Linked Policy)
For ILPs, the savings component is replaced by an investment component where a portion of your premiums is used to purchase investment funds.
An ILP also provides you with coverage for a lifetime, just like a whole life plan. However, its cash value is completely non-guaranteed due to its investment element.
Part of the premiums paid actually goes into selected external investment funds instead. ILPs have a range of investments funds for you to choose from, allowing you to choose investment opportunities that suit your investment objectives and risk tolerance.
Therefore, it is important to communicate with your financial advisor to decide on which funds suit you the most in accordance with your risk appetite.
Many people in Singapore like the idea of ILPs as they are able to invest while getting financial protection within a single plan.
However, there are individuals who dislike ILPs because of this.
There are 2 different types of ILPs – the insurance-focused ILP and investment-focused ILP – that many still get confused about.
Therefore, read our guide to ILPs in Singapore so that you can make a better assessment of whether it’s for you.
Universal Life Insurance
A universal life insurance policy works similarly to a whole life insurance plan and an ILP combined.
It provides both cash value and the insurance coverage you need.
There are also 3 types of universal life insurance policies, all of them differ based on what you’d like to invest in.
Unlike a normal life insurance plan, you can adjust the premiums you pay and your sum assured.
Because of this, a universal life insurance policy is popular amongst the high net worth.
Click here to understand more about universal life insurance.
How Much Does Life Insurance Cost?
The cost of both term and whole life insurance depends on various important factors, such as your age, gender, health condition, occupation, lifestyle, and the amount of coverage desired.
Term insurance can be an option if you wish to opt for a cost-effective way to have coverage, due to its zero surrender value. In other words, should you decide to surrender a term plan, there will be no monetary gain.
It also gives you the option to provide you with coverage for a specific period until the plan expires.
Some financial advisors in Singapore even suggest buying term insurance and invest the rest of the premiums. By following this strategy, there is a large potential of growing your money if you know what you are doing.
Other people might prefer going for whole life insurance because of the cash guarantee it gives you in case you decide to give up the policy.
Assuming all important factors, such as your age, gender, health condition, occupation, lifestyle, length of coverage and the amount coverage desired are held constant, a term insurance policy would most definitely cost less due to its zero cash value, as compared to a whole life plan.
What you have to carefully consider before choosing a life insurance plan is what kind of coverage you need. Do you want to risk your coverage to expire at a time you might need (even more) protection?
Some companies might consider you uninsurable anymore after a certain age. Also, if you can find life insurance aged 60 or 70, the premiums you’ll have to pay would be considerably higher.
Should You Buy Term Insurance or Whole Life Insurance?
Term insurance does not provide any cash value and gives you the flexibility to decide the duration of your coverage. In other words, it is a plan for pure protection. It may potentially be an option for those who wish to invest as well.
The cost-effective nature of term insurance allows you to redirect some of your freed-up cash flow into investments.
On the other hand, a whole life plan provides cash value and gives you coverage for a lifetime.
For instance, if you are in your 40s, with family and children, as well as elderly parents to take care of, having whole life insurance may suit you better as it will provide you with lifetime protection for yourself, prevent yourself from being a burden to your family members, and may help you with your retirement planning.
One of the biggest motivations for buying whole life insurance is for taking care of your loved ones. You might also want to consider buying whole life insurance for your young child.
It would guarantee you not only complete insurability but also help you save for the future education of your child. Also, for younger customers, the premiums of whole life insurance are much lower.
Read our guide here to determine whether you should get a term or a whole life insurance plan.
Limited Pay vs Regular Pay Option in Life Insurance Policies
The limited pay option refers to the opportunity to pay premiums only for a limited period of time while receiving lifetime coverage in return.
Once you’re done paying for your whole life insurance policy within the agreed time period (5-30 years), it becomes a peace of mind for yourself, and you will continue to receive coverage for a lifetime or until the policy ends.
Moreover, the cash value continues to grow until you pass on, or, till you wish to surrender the plan.
A regular pay option means that you will regularly plan premiums until the policy ends.
Although a limited pay option sounds much more attractive, it usually comes with higher premiums as compared to a regular pay option.
What Is The Surrender Value in Life Insurance Policies?
Whenever you buy life insurance, you have the right to terminate your contract and get its cash value back. This right is called the surrender right.
When giving up your policy, you will not receive further coverage, but you will get the cash surrender value in return.
The surrender value is lower than the amount you could get in case of your death. It is generally not advisable to give up your insurance policy as the cash value is not as high and also because finding a good insurance policy at a later stage of life becomes increasingly difficult and expensive.
The surrender value is the amount you will get from the life insurance company if you decide to exit the policy before maturity. This applies to whole life plans and ILPs.
That’s why looking at the “breakeven” point of a life insurance policy is important.
The breakeven point is where your guaranteed cash value is equal to the total premiums you’ve paid for your policy.
With the breakeven point, you can see at which policy year you can safely surrender your plan that will guarantee your entire capital back.
The choice of life insurance ultimately depends on your objectives and how much you are ready to pay in premiums.
However, it’s important to note that term plans do not have surrender values, while ILPs do not have a guaranteed portion.
The topic of insurance can be overwhelming for many Singaporeans. With many types of insurance available, various insurance companies, and especially the outrageous amount of insurance agents out there, it’s understood why many in Singapore might be confused with the variety of choices they have.
Therefore, it is always recommended to seek financial advice from qualified financial advisors.