How can your existing insurance policies (life and term) be part of your retirement planning?
During your working years, it is important to set aside a sufficient amount of money for your retirement. One of the best ways to do this is to ensure that you have an adequate level of life insurance. There are several types of policies that you can buy.
Each category of life insurance policy provides a different type of benefit. The premium that you pay for different policies will also vary widely. Before deciding upon the category of insurance that suits your needs best, it is important to understand the features of each plan.
Understanding the different types of plans that are available
Term insurance – This cover pays the sum assured only when the insured person dies. It is for a fixed period of time and is used to provide a lump sum of money that can help the insured person’s family meet their needs. In some policies, a disability benefit is also provided.
Whole life insurance – As the name of the policy indicates, insurance protection is not limited to a certain number of years. Instead, a benefit is paid when the insured dies, regardless of the number of years that have elapsed. Part of the premium that you pay is invested on your behalf.
Endowment insurance – An endowment policy is usually for a fixed period of time, which could be 10, 15, or 20 years. A person who buys this type of policy normally has a target of accumulating a certain sum of money in a specific time period.
Investment-linked insurance policies – These policies try to maximise your returns by investing a portion of your premium in an investment-linked fund. Part of your money is used to purchase insurance.
Selecting a plan
The type of plan that you opt for should depend on your individual needs. One good option for a retired person who is looking for an additional source of income could be a whole life policy that provides an annual cash benefit for as long as you live. In most cases, the yearly payments would start from a pre-selected payout date.
How much will you receive every year? That depends on the policy that you buy, but you could target a guaranteed amount of 2% of the sum assured on an annual basis. In addition to this amount, a participating whole life plan will give you a non-guaranteed amount of another 2% to 4% every year. Of course, this additional sum would depend on the performance of the fund in which the insurance company has invested your money.
Who should opt for this type of policy? It is suitable for persons looking for an additional source of income after retirement. However, if your requirement is a high death cover or if you want a lump sum upon retirement, this plan is not for you.
How a term plan can help even after you retire
The chief advantage of a term plan is that it is highly economical. For example, a 40-year-old can buy term cover of S$1 million for as little as S$2,000 to S$2,500 on an annual basis. This premium will provide protection until the age of 70 and will also pay for “total permanent disability.”
Check out the details of the term plan before you purchase it. A good plan should be able to give you most of these benefits (this is in addition to the death benefit):
- Pay you a lump sum if you are diagnosed with a terminal illness.
- Allow you to convert to a whole life policy or an endowment policy if you decide to change the type of cover.
- Provide you with the option of renewing the term policy after it expires.
But why should you buy term insurance when you are no longer earning? Remember that this plan can give your loved ones a lump sum upon your death. It can help them to tide over the expenses involved with medical emergencies or provide the money for an enhanced standard of living.
Another advantage is that you can pay for additional riders that provide different types of protection. You buy riders for permanent disability, critical illness, and for the waiver of premium in certain circumstances.
Why life insurance should be part of your retirement planning
The primary purpose of a life insurance policy is, of course, to provide the family with a sum of money when the insured person dies. But with the wide range of products available in the market, you can select a plan that meets several needs.
A whole life policy can provide protection as well as invest a certain portion of the premium that you pay. These plans are available in two broad categories.
The first is a whole life participating policy. A part of the premium that you pay will be invested in a fund by the insurer. This will allow your money to grow and increase the amount that is available to you. You can even borrow against the cash value of your policy.
The second type of whole life policy is one that is investment-linked. In this plan, you get the option to select the fund into which a portion of your premium will be paid. Your selection will be based on your risk appetite. This gives you the ability to earn a higher return on your money.
Secure your retirement with life insurance
Life insurance should be an essential part of every person’s retirement plan. The major advantage that it offers is that the financial needs of the insured and the insured’s family will be met in the event of death or disability. But the additional returns that you can earn with a whole life policy can also provide a great benefit.
One reason that many people choose an insurance plan to help in their retirement planning is that it is a passive form of investment. The insurance company will take care of the entire process and you do not need to involve yourself in any manner. This forces you to invest in a disciplined way and can provide you with a significant amount of returns in the long run.