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- What is a Term Insurance Policy<\/a><\/li>\n\n\n\n
- Affordable Rate of Insurance Premium<\/a><\/li>\n\n\n\n
- Low Cost to Benefit Ratio<\/a><\/li>\n\n\n\n
- Temporary Insurance Coverage<\/a><\/li>\n\n\n\n
- Conversion Privilege<\/a><\/li>\n\n\n\n
- Pure Protection only<\/a><\/li>\n\n\n\n
- Zero Cash Value<\/a><\/li>\n\n\n\n
- Plain Vanilla<\/a><\/li>\n<\/ol>\n\n\n\n
One Minute Summary:<\/h2>\n\n\n\n
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- Summing up, a term insurance policy is one of the most affordable type of life insurance policy available on the market.<\/li>\n\n\n\n
- Despite that low price point, a term insurance policy is able to provide you with a large amount of insurance protection.<\/li>\n\n\n\n
- Given that fixed period of insurance coverage, a term insurance policy is commonly used as a mortgage insurance policy.<\/li>\n\n\n\n
- At this time, there are many term insurance policies that allow you to convert itself into a whole life insurance policy.<\/li>\n\n\n\n
- If you do not want cash value for your life insurance policy, then you should consider a term insurance policy.<\/li>\n<\/ul>\n\n\n\n
Part 1: What is a Term Insurance Policy<\/h2>\n\n\n\n
To begin with, let’s understand the basics of a term insurance policy<\/a>. In essence, most term insurance policies are designed to provide you with financial protection for a fixed period of time. At the same time, they are non-participating plans. As a result, a term insurance policy does not acquire a policy cash value over time. Summing up, the insurance premium that you pay is used to pay for the insurance charges and the insurance policy’s distribution cost<\/a>.<\/p>\n\n\n\n
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What is a Term Insurance Policy<\/figcaption><\/figure>\n\n\n\n Part 2: Affordable Rate of Insurance Premium<\/h2>\n\n\n\n
As a matter of fact, a term insurance policy is known for its affordability. Evidently, we can prove this point when we compare it against the other life types of life insurance policy on the market, e.g. a participating whole life insurance policy<\/a>, or an investment-linked policy. This is because most of the insurance premium is used to pay for the insurance policy’s insurance charges. In addition, a part of the insurance premium is also used to pay for the insurance policy’s distribution cost<\/a>, albeit a smaller component.<\/p>\n\n\n\n
Accordingly, you may consider to purchase a term insurance policy when you prefer to limit the amount of money that you pay for your life insurance policy. After all, insurance premium tends to be a fixed expense. As a result, the lesser the amount of money that you spend on insurance, the more the amount of money that you have to meet your other priorities in life. For the same reason, you may also consider to purchase a term insurance policy when you are working with a tight budget.<\/p>\n\n\n\n
Moreover, buying a life insurance policy is usually a long-term commitment. Consequently, it is not just about being able to afford to pay for the insurance premium today. In addition, you will also want to ensure that you are able to afford to pay the insurance premium for the entire period that you need the financial protection. Therefore, by choosing an affordable type of life insurance policy, this makes it easier to plan out your finances in the long run.<\/p>\n\n\n\n
Part 3: Low Cost to Benefit Ratio<\/h2>\n\n\n\n
All things considered, a term insurance policy tends to have a low Cost to Benefit Ratio. This is because the majority of the insurance premium is used to pay for the insurance charges. Accordingly, a low Cost to Benefit Ratio suggests that the insurance claim benefit is much higher than the insurance premium that you pay. To this end, you are able to spend the least amount of money to enjoy a large amount of financial protection.<\/p>\n\n\n\n
Part 4: Temporary Insurance Coverage<\/h2>\n\n\n\n
At the present time, a life insurance policy is a popular financial instrument that is used for income protection. In general, it provides an insurance coverage against life’s three major events; that is, pre-mature death, total & permanent disability, and critical illness<\/a>. Under those circumstances, the life insurance policy will issue a payout to help you to cope with your financial distress. At this time, this is the general guideline from Life Insurance Association Singapore (“LIA”),<\/p>\n\n\n\n
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- Basic Life Cover: About 10 times of your Annual Income<\/li>\n\n\n\n
- Critical Illness Protection: About 5 times of your Annual Income<\/li>\n<\/ul>\n\n\n\n
As an income protection tool, it is no surprise to note that LIA calculates the protection gap based on your income. In summary,<\/p>\n\n\n\n
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- When you are working: Income is greater than zero. Hence, LIA’s guideline suggests that there is a potential protection gap.<\/li>\n\n\n\n
- When you are not working: Income is equals to zero. In this case, LIA’s guideline implies that there is no protection gap.<\/li>\n<\/ul>\n\n\n\n
Eventually, you will stop working and retire one day. In Singapore, the common retirement age is between 55 and 65 years old. Accordingly, LIA suggests that you may not have a protection gap beyond this period. In other words, you may not need any life insurance coverage after you retire.<\/p>\n\n\n\n
To illustrate this concept from another perspective, let’s consider a mortgage insurance policy, e.g. Home Protection Scheme (HPS)<\/a>. Generally, if you choose to take up a loan from HDB to finance your apartment, then HDB requires you to purchase the HPS. Thereafter, during the mortgage paying period, in the event of your death or total permanent disability, the insurance payout will be used to repay your mortgage. Summing up, the mortgage insurance policy’s coverage period is usually the same as your loan tenure – which is a temporary situation.<\/p>\n\n\n\n
Part 5: Conversion Privilege<\/h2>\n\n\n\n
Although most term insurance policies provide financial protection for a temporary period of time, this time period is not cast in stone yet. To point out, your term insurance policy may offer an option to convert itself into a whole life insurance policy<\/a>. In time to come, if you change your mind and wish to be covered for life, you may exercise this option to convert your term insurance policy into a whole life insurance policy.<\/p>\n\n\n\n
To explain, this option will appeal to consumers who are working with a limited budget. By using a term insurance policy first, you are able to purchase insurance coverage at an affordable insurance premium. Additionally, you will also be able to enjoy the life insurance coverage without any further delay. Thereafter, when your cash flow improves later on, you may convert the term insurance policy into a whole life insurance policy without going through the medical underwriting process again.<\/p>\n\n\n\n
Part 6: Pure Protection only<\/h2>\n\n\n\n
As a non-participating plan, a term insurance policy does not accumulate a policy cash value over time. With this in mind, let’s take the case where you intend to purchase a life insurance policy for the primary purpose of financial protection. In this case, you shouldn’t be paying an additional cost for the policy features that you do not need; that is, to pay for the wealth accumulation component of a life insurance policy. After all, these policy benefits and features don’t exist “for free”. Instead, they are either priced into your insurance premium or the insurance policy’s distribution cost<\/a>.<\/p>\n\n\n\n
Part 7: Zero Cash Value<\/h2>\n\n\n\n
Besides the earlier point, we also need to scrutinise a life insurance policy’s cash value. This is with the intention to determine whether it is an efficient wealth accumulation instrument. At this time, there are two other types of life insurance policy that are commonly used for financial protection; that is, a participating whole life insurance policy, and an investment-linked policy.<\/p>\n\n\n\n
Firstly, let’s look at a participating whole life insurance policy<\/a>. For this purpose, your insurance premium is invested into the insurer’s participating fund<\/a>. In time to come, you will receive a cash value that is based on the insurance policy’s illustrated investment rate of return<\/a>. However, there may be situations when the insurer reduces the bonuses<\/a> or change the illustrated investment rate of return<\/a>. With this in mind, you may wish to consider whether you should rely on the insurer’s participating fund to accumulate a policy cash value.<\/p>\n\n\n\n
Secondly, let’s consider an investment-linked policy (“ILP”). For this purpose, your insurance premium is invested into one or more investment-linked funds. Since this is an investment, your capital is not guaranteed to be safe. Similarly, there is also no guarantee that your investment will always generate a positive return. Moreover, you should also take into account the policy fees and charges, as well as those that the ILP funds charge. To sum up, you should consider whether an ILP is an efficient tool to meet both your life insurance and wealth accumulation needs at the same time.<\/p>\n\n\n\n
Part 8: Plain Vanilla<\/h2>\n\n\n\n
All in all, a term insurance policy is meant to be simple and straightforward – to pay an insurance premium and to receive the insurance coverage; nothing else. Therefore, if you wish to keep your insurance portfolio simple, then this is probably one of the first few choices to consider. This is so long as you can accept its shortcomings.<\/p>\n\n\n\n
First Published: 3 July 2019
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- Affordable Rate of Insurance Premium<\/a><\/li>\n\n\n\n