Term life insurance – why you should start here when figuring out what coverage you need
When it comes to life insurance, there are plenty of options out there to choose from. However, what might be the best policy for one person might not be the best for another.
That’s why it’s important to seek the assistance of a financial advisor or insurance agent before choosing a life insurance policy.
One of the most popular life insurance options among Singaporeans today is the term life policy. That’s because term life insurance offers more flexibility and much lower premiums than whole life policies. Of course, term life insurance policies do have limitations as you’ll find out. Here’s more information on term life insurance:
What is term life insurance?
As the name suggests, term life insurance offers just that – coverage over a specified term determined by term (ex. 5, 10, 20 years) or age (ex. up to age 65, 75, 99). So if anything happens to you during the term period, you and/or your dependents will receive a financial payout for whatever amount you’re assured for.
If something happens to you after your term policy expires and you haven’t renewed your policy – you and/or your family won’t receive the financial protection that a whole life policy would have provided. However, there are plenty of other things to consider before making a choice on what kind of life insurance policy fits your needs.
Here are a few questions to consider before choosing a term life policy:
Do You Plan on Supporting Your Children?
If you’re positive that your children will become self-reliant and won’t require your financial support, then it makes sense to go with a term life policy so you can protect them during your “wealth building” years.
Do You Want a Flexible Life Insurance Policy?
Whole life policies are much more expensive than term life because your premiums go towards your assured sum and towards building up your policy’s “cash value” through investment. But with term insurance, you aren’t locked-in by high payments over 20 years to life (sounds like a prison sentence). You can switch insurers, compare premiums and set the term from 5 to 40 years.
Do You Want Your Policy to Protect or Build Wealth?
Your term life premiums are low because you’re only paying for financial protection in the event you pass away or become permanently disabled (assuming your policy has this protection). Whole life policies (participating) on the other hand give you the option to grow “cash value” of your policy through investment while offering financial protection.
Do You Want to Fund Your Retirement Nest Egg on Your Own?
Some people like the idea of having a whole life policy that builds up retirement wealth and provides financial protection. However, the returns offered by a whole life insurance policy might not be as high as having a diversified investment portfolio that earns 8%+ interest. So if you think that you can use the savings from purchasing a term life policy to build up a great investment portfolio, it’s probably a better move in the long run.
You should carefully consider the term length of your life insurance policy and prepare for the possibility that you might outlive your policy term and have to renew your policy at a considerably higher rate.
What are some common insurance options that come with term life insurance?
As coverage options vary from insurer to insurer, it’s wise to check your policy documents to see what your term insurance will actually cover.
Always check your policy documents to see what protections a policy includes AND doesn’t include. The last thing you want is to have a term life policy that covers you for death, but doesn’t offer total and permanent disability or critical illness coverage.
Here are some common insurance options that are often offered as “riders” on your term life policy:
Critical Illness Coverage
Critical illness coverage will provide a lump sum payout in the event that you pass away or are diagnosed with a major illness covered by the rider. Although the illnesses covered by critical illness coverage varies by insurer, the most common include stroke, kidney failure, heart attack, coronary bypass, cancer (varies), major organ transplants and paralysis.
Total and Permanent Disability Coverage
Total and permanent disability coverage will provide either a single lump sum or annual instalments (depending on your insurer/sum assured) in the event you become completely and permanently disabled and are incapable of working to earn income. For example, if you lose sight in both of your eyes, two limbs (above the wrist or ankle) or a combination of both, you can claim the assured amount.
Personal Accident Coverage
Personal accident coverage will provide a lump sum in the event that you perish in an accident due to accidental, violent or visible means. Most insurers double (or more) the payout if death occurs while travelling in a public/private capacity such as a bus or airplane (varies by insurer). This rider is especially important if you’re working in a high-risk profession. However, some insurers will reduce your assured sum, depending on how risky your profession is.
Ensuring any coverage “gaps” in your policy are covered, even if you have to purchase a policy “rider” to do it is essential to making sure you’re protected against not just death, but disability as well!
This article was first published on http://www.moneysmart.sg in October 2014
