It used to be that the term plan is the neglected one at school that no one wants to talk to, but in recent years, he has risen up to become the popular kid.
What changed, then?
With medical advances, people tend to live longer now leading to a drastic reduction in mortality rates (death rates).
Because of this, term plans now reflect a lower cost of insurance compared to before, giving the allure of a high coverage at an even more affordable rate.
To add on, insurance companies are competing aggressively, which leads to competitive rates for the consumer.
In this guide, you’ll get EVERYTHING you need to know about term insurance (it can be lengthy!), but this would be the only resource you’ll ever need to read.
So grab a cup of coffee and read on!
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- What is Term Life Insurance?
- What can it Cover?
- Types of Term Insurance
- How a Level-Term Plan Can Help (Case Study of John)
- Can John’s Portfolio (or Yours) Withstand The Undesirable?
- “How Much Life Insurance Do I Need?”
- Term Insurance Vs Whole Life Insurance
- Why Term Insurance Can Be A Great Strategy For You
What is Term Life Insurance?
A simple definition of a term life insurance plan is that it provides coverage for a fixed duration (policy term) and at a fixed premium. Once the policy term is over, the coverage usually stops, and the plan terminates.
There’s no cash value in the plan, but to compensate, it provides a much higher sum assured at a cheap rate.
During the policy term, if an undesirable strikes, a lump sum will be paid out which will help relieve the financial burden on the insured or the family.
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What can it Cover?
In most term plans, death coverage forms the foundation. And you can add on different types of coverage (riders) into that plan to make it more comprehensive.
Here are some of the coverage that you can include:
The basic of all cover and pretty self-explanatory.
Of course, exclusions still apply.
For example, most policies contain the suicide clause: “if death is caused by suicide within 1 year from the policy issue date or reinstatement date, whichever is later, there won’t be a payout. “
2. Terminal Illness
Terminal Illness coverage usually goes hand in hand with Death.
By definition, it’s the conclusive diagnosis of an illness that will lead the patient to death within 12 months.
The Ministry of Health says that 3 doctors, including the patient’s hospital doctor will need to agree that the patient is terminally ill.
If there’s a disagreement, the doctor-in-charge would review his diagnosis, and if he still agrees that the patient is terminally ill, then the case will be referred to another panel of 3 specialists appointed by the MOH.
Because of this, in my opinion, terminal illness may be less likely to be diagnosed in Singapore.
Food For Thought
What if a patient is diagnosed to be terminally ill, and after 12 months, the patient still lives on?
3. Total and Permanent Disability (TPD)
Depending on the insurance company, TPD coverage can be either embedded in the main plan, or as a rider.
Insurance companies can have different definitions for their TPD coverage (see the policy contract).
But as a broad definition, the name suggest what it covers: TOTAL AND PERMANENT disability.
Here’s an example of a clause you may have seen before. It’s not conclusive and most contracts usually contain multiple definitions.
If the Life Assured has suffered total and irrecoverable:
a. Loss of the sight of both eyes; or
b. Loss of sight of one (1) eye and loss by severance or loss of use of one (1) limb at or above the ankle or
c. Loss by severance or loss of use of:
i. Both hands at or above the wrists; or
ii. Both feet at or above the ankles; or
iii. One (1) hand at or above the wrist and one (1) foot at or above the ankle.
So if you lose just 1 hand, does it pay out?
No. It’s meant to cover severe disabilities that take away the ability to work.
4. Critical Illness (CI)
CI claims can be higher than Death.
Because of this, the costs of CI are higher.
To make CI coverage consistent and transparent, the insurance industry standardised the definitions across 12 life insurance companies.
If you want to view the full list of the 37 CIs and their definitions, see here.
But you may want to narrow down your focus…
Of all critical illness claims, almost 95% result from these 5 illnesses:
- Major Cancers
- Heart Attack
- Coronary Artery By-pass Surgery
- Kidney Failure
5. Early Critical Illness (ECI)
If critical illness is the “father”, then early critical illness would be the “son”.
CI will only pay out if the patient meets one of the 30+ CI definitions. If one has a “less aggressive” illness, he doesn’t qualify for any payout. That’s when early critical illness can bridge the gap.
That’s why most people see CIs as “intermediate” and “late stage”, and ECIs as “early”. Although this may not be entirely wrong, it all lies in the definitions.
Technically, ECIs are easier to claim, but are the high costs (one of the most expensive forms of insurance) justified?
To answer, you may want to consider this: if you’re down with an early critical illness, are you still able to work?
The main purpose of an ECI cover is to make a full recovery via 2 ways:
- to cover additional medical costs
- to take a break from work
But if you can cover the medical costs with a hospitalisation plan or think you can still work, then it may not be essential.
Therefore if you have the budget, early CI is good to have, but not critical.
(Read more on critical illness (and early) insurance in Singapore.)
Types of Term Insurance
Like how there are different types of apples (fuji, green, red, etc), same goes with term insurance.
Here’s a short overview of the ones you should’ve heard before:
1) Level-Term Insurance
This would be the plan where most people like you are familiar and are interested in, and would form the core focus of this article.
Basically, the coverage stays the same throughout the term and only ends when the term is up. You can decide on how long the tenure would be, and most Singaporeans would choose a term of at least till their retirement age.
More on level-term later on…
2) Group Insurance
Group insurance is common if you’re an employee or have been through National Service (NS).
Employee Welfare Benefits
Employers usually offer group insurance as a form of welfare benefit for their employees and if needed, these coverage can be enhanced (of course, you paying more).
It’s great because it’s usually free but why do people still get their own private insurance?
It’s because when something happens, be it minor or major, and if you leave the company (or forced to leave), you wouldn’t be able to continue this coverage.
When you do decide to apply for your own personal insurance after, it’ll most likely get excluded or declined, leaving you in a state of “no man’s land”. That’s why most people would still get their own personal insurance even though they’re covered under the company.
Aviva’s MINDEF/SAF Group Insurance
As an NSF, you were given an option (or not) to get the group term life offered by Aviva, which is partnered with SAF/Mindef.
Even after you’ve ORDed, you can retain this policy if you want to or get a higher coverage. The premiums are generally affordable but the critical illness premiums are not levelled – the premiums increase with age group.
Generally, the group term life benefits the older folks more because they’ll be paying the same premium as someone who’s much younger.
So if you’re younger, private insurance could be cheaper (only way is to get quotes and compare private term plans).
3) CPF Dependent Protection Scheme (DPS)
What is DPS?
That’s the question people have when they receive a letter from CPF. And one that is commonly neglected for obvious reasons.
DPS pays out a maximum sum assured of $46,000 if Death, Terminal Illness or Total and Permanent Disability happens, and its cover is only till 60 years old.
It’s administered by Great Eastern and NTUC, so if there’s a claim, you’ll need to approach the company that you’re allocated to.
You would be automatically enrolled in if you’re a Singaporean/PR between 21 and 60 years old, and received your first CPF working contribution. The good thing about DPS is that you can use your CPF OA or SA balance to pay for the premiums.
However, the coverage is usually insufficient.
4) Mortgage Reducing Term Insurance
Also known as mortgage insurance or mortgage reducing term assurance (mrta).
As the name suggests, the coverage decreases year by year and ends up at 0 when the term is over.
The rationale of this is because as you’re paying off your loan, your liabilities decreases as well, which corresponds to how much you should cover yourself.
In the market right now, level term rates are very competitive.
Depending on your age, level term could be cheaper than mortgage insurance for the same sum assured and tenure. It doesn’t make sense, but that’s how competitive it is now.
Check out our guide on mortgage insurance in Singapore if you want to know more.
5) Early Critical Illness Plans (ECI)
This is pretty straightforward.
You can purchase a standalone early critical illness plan or add it as a rider to the main term plan.
The advantages of adding it as a rider is that if there are any discounts on the main plan, the riders will inherit it too, making it more economical than purchasing it as a standalone.
The only time you would consider a standalone plan is if you wish to purchase just the early CI cover, nothing else.
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How a Level-Term Plan Can Help (Case Study of John)
To illustrate the use of a term plan, it’s best to use a case study (information is fictitious).
John is 35 years old and has been a Project Manager for close to 4 years.
He’s married to Tiffany who is 33 years old and is working as an Accountant for more than 7 years.
They both have 2 kids, Eden (3 years old) and Sally (5 years old).
John’s parents are financially independent, and don’t require any financial support.
“The most precious things in my life are my wife and kids. When I see them play together in the living room during the weekends, it warms my heart and melts away any worries,” said John.
He added on to mention: “I know my parents are financially independent. But they were the ones who raised me up from young, and I need… and want to give back.” John paused for a moment as if reminiscing of the past, and said, “The least I can do is to give them allowances.”
“I’m lucky to be at the age where most of my major expenses have been catered for. The main goals I have now are saving towards my kid’s university education and retirement,” John said in closing.
Income and Expenses:
John earns a gross income of $4,500 per month, taking home an amount of $3,500 after CPF contribution. His monthly expenses is at $2,000 which allows him to have a monthly surplus of $1,500.
- Cash Savings – $50,000
- Investments – $30,000
- HDB – $450,000 (Bought 3 years back with a current outstanding loan of $380,000 split 50/50 between him and Tiffany. Applied with the HDB Home Protection Scheme (HPS)
Insurance (on his life):
- 1 Whole Life Insurance with a cover of $100,000 for Death, Total & Permanent Disability and Critical Illness
- 1 Hospitalisation plan with rider (paid by cash)
Can John’s Portfolio (or Yours) Withstand The Undesirable?
Let’s play out this scenario…
While on the way to have lunch at Lau Pa Sat, John received a call from an unknown number.
“Hello?” he answered. No reply. “Hello??” he repeated. Still no response…
Slightly irritated, John hanged up the phone.
He took a step forward, not realising there was a faint red light in front of him.
Long story short, he suffered Total and Permanent Disability.
In this situation, John will not being able to earn an income any more, but existing expenses (and more) still continue on. He has to rely on whatever he’s left with to live on.
What can help him?
– 1st line of defence: Insurance Payouts
His whole life insurance will pay out $100,000. How long would this be able to last?
Payout/Annual Gross Income = $100,000/$54,000 = 2 years.
After 2 years, this payout will run out.
(calculation is used with annual gross income because his income is also meant for future goals like kid’s education and retirement too)
– 2nd line of defence: Liquidable Assets
Next, when the insurance proceeds have run out after 2 years, John has to liquidate all his cash savings and investments (total of $80,000), which would give another 1.5 years ($80,000/$54,000) more.
With that being said, imagine having to dip into your hard earned money that you’ve saved over the years.
At this point of time, his insurance payouts and liquidable assets will only last a total of 3.5 years.
His youngest kid, Eden would then turn 6.5 years old (3 years old + 3.5 years).
What happens after? There’s still a long way to go until Eden and Sally becomes of independent age.
– 3rd line of defence: Spouse, Family, Friends
After all finances have run out, the last line of help will be firstly, from his wife, Tiffany.
She would’ve to take on the full burden of John’s loss of income and the family’s expenses.
In Singapore where dual income becomes a necessity, would she be able to cope?
She’ll need to work doubly hard, thus spending less time with her family, and wouldn’t be able to see her kids as much as before.
As John, would you want to see this happen?
If Tiffany can’t cope, there’s a need to rely on family, relatives and lastly, friends.
This is a situation no one wants to experience, but may potentially face.
Good things is…
… you can eliminate the risk of this scenario happening and be self-sufficient.
How? First, you must to ask the golden question…
“How Much Life Insurance Do I Need?”
Your income is one of the most (if not the most) important aspect in your life.
It enables you to pay your bills, buy all the things you want, and save for your future goals. Without it, nothing can function.
Here are some goals, commitments and liabilities most people use their income for:
So then, you’ll always want your income to continue on, at least till your retirement age (that’s where liabilities drop off).
2 situations will cause you to lose this income:
1) You firing your employer, or your employer firing you
This is only temporary because you’ll likely find another job within 3-6 months in Singapore.
2) Death, Total & Permanent Disability or Critical Illness
With any of these 3 happening, your income will be permanently lost. That’s why it’s a BIGGER concern.
To counter that, most people want their insurance payouts to be able to replace their total potential income earned until their retirement age.
Going back to the case study, John just wants to cover his income till when Eden is of independent age (23 YO).
That’ll be another 20 years.
Formula: Annual Gross Income * 20 Years = Total Income Replacement needed. (not factoring in inflation)
$54,000 * 20 years = $1,080,000
Now this may seem like a big number, and it is. But would you say it’s reasonable line of thought? Most would say so.
Insurance is never needed. If you have the assets to back up that number for “just in case” scenarios, you don’t need it. But how many of us have that?
If you don’t have the assets to back up this “shortfall”, you only have 2 financial instruments to replace your income.
- Whole Life Insurance
- Term Life Insurance (could be the only way to tackle that big number)
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Term Insurance Vs Whole Life Insurance
Although this article is about term insurance, there is a need to mention whole life insurance because it may be the only alternative.
A comparison of the two will also educate you on the benefits and disadvantages of term plans.
So here’s an overview of the pros and cons:
|Purpose||For pure protection and coverage for what you need||Provide some form of protection (usually inadequate) and towards accumulating some form of savings|
|Coverage Period||Have the option to select a cover period of 5-99 years.||Usually covers till 99 years old|
|Pay outs||Sum Assured||Sum Assured + accumulated Bonuses (if any)|
|Premiums||Premium is lower because every dollar goes into just protection||Premium is higher because every dollar is split between protection and savings|
|Cash Value||No cash value||Provides some form of cash value (guaranteed and non-guaranteed) after a period of time. |
Usually harder to access the cash value unless you take a policy loan with high interest or surrender the plan (losing the cover)
|Flexibility||You are free to stop the plan (just don’t enjoy the cover anymore) or replace it (if health allows it). Take note of pre-existing conditions and waiting periods. |
By separating protection needs and accumulation needs, you’ll be able to tailor how you want to accumulate your wealth, rather than to be dictated by a whole life plan
|As whole life insurance is a long term commitment, if you surrender early, the amount you receive back would generally be lower than what you’ve paid.|
It doesn’t provide a lot of flexibility to choose how you want to accumulate wealth. Basically, you’re stuck with it.
Why Term Insurance Can Be A Great Strategy For You
In John’s case, he’s also able to use a term plan to cover for his HDB loan and to repay partially if critical illness happens (HPS doesn’t cover CI).
And if he were to upgrade or buy another property in the future, he can still use the same term, and don’t need to worry about insurability.
With just a small percentage of your income, you’re able to eliminate a huge financial risk, which creates a greater peace of mind.
Because of this, most Singaporeans with a high coverage term plan don’t have to worry about the uncertainties, and just go about their lives doing what they love to do.
Wouldn’t you want that?
This is half of the picture though…
By having a term insurance, it solves only your protection needs – the “what ifs.”
What if, all goes well then?
If your goals are to save up for your kid’s education or retirement, you need to allocate resources to accumulate wealth which is when the phrase: “buy term, invest the rest” comes in, but let’s leave that for another day.
For now, think about your spouse, kids and family… how would you want your life to turn out?
What goals you have now? The liabilities and commitments you’ve undertaken?
Your income is vital to all you’ve just thought about, whether if all goes well, or not.
Take the first step and eliminate the uncertainties when things don’t go well. Start by comparing term insurance in Singapore and get yourself protected.