Term Insurance – An Essential Requirement or a Waste of Money?
The vast majority of people who buy term insurance policies will not get even a single dollar back in return. Yet, this form of insurance is possibly the most important part of any individual financial plan.
What exactly is term insurance? A policy of this type results in the payment of the sum assured only if the policy holder dies or is permanently disabled during the period for which the term insurance is valid.
Say, you take a term policy for a sum assured of S$1 million when you are 30 years old and it is valid for a period of 40 years. Subject to meeting certain conditions, your annual premium will be in the region of S$1400. In the event of your death or “total permanent disability,” the insurer will pay your dependents/you a sum of S$1 million.
However, if you survive beyond the age of 70, the insurer will not pay any amount at all. Your entire payment of S$56,000 (S$1,400 X 40) will yield absolutely no return.
Does this mean that term insurance is a waste?
On the contrary, this form of insurance attracts a lot of interest from individuals who want to safeguard their families from financial difficulties. A term insurance policy is an attractive choice because of the following reasons:
- Premiums are relatively low. A 30-year-old can get a four-decade-long coverage of a million dollars for as little as about S$1,400 per year.
- The insurance premium remains fixed for the entire term.
- Buying a term insurance policy that will remain valid for your working years can give you the assurance that your dependents will be provided for in the event of your death or total disablement.
- This type of policy is very simple to understand. It allows for easy comparison between insurers.
What is the correct amount of insurance coverage?
Anybody who has dependents and does not have adequate savings requires insurance. But exactly how much? A person who has a salary of S$8,000 a month could take a term insurance policy for S$2 million. If your family can earn a return of about 5% per year on the S$2 million they receive, they could invest the insurance amount and use the returns they make to replace your salary.
However, the calculation could get a little more complicated if you consider other factors. You would want to provide for the education of your children and could also be contributing some amount every month for your parents’ expenses. In fact, every individual will have a different set of circumstances to address.
It is possible to get some idea of the amount of insurance coverage that you need by entering some basic data into this Protection Gap Calculator. This estimation tool has been developed by the Life Insurance Association Singapore, a trade body representing the country’s 22 life insurers and seven life reinsurers.
Cost of term insurance
While it is true that term insurance is very economical, it can get progressively more expensive as you age.
This table, developed by Do-It-Your-Way-Insurance, a licensed financial adviser, provides an idea of how much term insurance policies can cost.
Rates apply for coverage of S$1 million till the age of 70 years for a male non-smoker.
Yearly premiums become more than twice as expensive if you take coverage when you are 45 years old instead of 30. Take the example of HSBC Insurance. A 30-year-old would pay a yearly premium of S$1,560 while he would pay S$3,780, which is 142% more if he delayed his decision.
It is advisable to take term insurance coverage as early as possible and for the maximum period for which you think that you will need the financial protection.
Term or whole life policy?
Making a choice between term insurance and whole life insurance can be complicated. But it is useful to remember that these are two quite distinct insurance products.
A term life policy will provide only “pure protection.” Your family gets paid only if you die within the insurance term. A whole life policy, on the other hand, has two components. In this type of policy, a part of the premium that you pay goes towards insuring your life. The other portion is invested and will be returned to you at the end of the term. You or your family will definitely get this money.
A term policy will be valid till you are of a certain age, say, 65 or 75. Alternately, it could be for a fixed period of 10 or 20 years. But a whole life policy will be for your entire life (usually limited to the age of 99).
Term insurance is usually the best choice
Most individuals would benefit if they take term insurance coverage. For a limited insurance premium, they can get a relatively large safety net for their loved ones. But it is crucial that you buy the policy at an early age.
If you are not sure whether you should opt for a term insurance policy, bear in mind that life insurance is more of a risk management tool than a form of investment. Term insurance can be the perfect way to mitigate the financial risks that your dependents could face if you are no longer there to provide for them.