The term life insurance plan used to be the neglected kid at school.
But, in recent years, he has risen up to become the popular one instead.
With medical and technological advances, the mortality rates (death rates) of Singaporeans have drastically been reduced over the years, which led to a longer life expectancy.
Because of this, term plans now reflect a lower cost of insurance compared to before, providing higher coverage at a lower cost.
To add on, insurance companies are competing aggressively in this space, which further leads even more affordable rates for the consumer.
In this guide, you’ll get everything you need to know about term life insurance plans in Singapore.
So, read on!
- The Purpose of Having Life Insurance
- Calculating How Much Life Insurance to Have
- The 2 Plans that Provide Life Insurance Cover
- What Is Term Life Insurance?
- What Can Be Covered In a Term Insurance?
- The Different 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 Long Should You Cover Till
- Finding the Best Term Insurance Plan in Singapore (2021)
The Purpose of Having Life Insurance
Many people have varied opinions on the purpose of having life insurance coverage.
But in most cases, it boils down to this: income protection.
Your income is one of the most, if not the most, important financial aspect in your life. That income enables you to pay the bills, buy all the things you want, save for your future goals, etc.
Without it, everything else can’t function well.
Here are some common goals, commitments, and liabilities most people use their income for:
Therefore, you’ll always want your income to continuously come in, hopefully, till your retirement age.
There are two situations where you could lose your income:
1) You firing your employer or your employer firing you
This is only temporary because you’re likely to find another job within a three to six months period in Singapore.
2) Death, Total & Permanent Disability, or Critical Illness happens
With any of these 3 happening, your ability to earn an income will be crippled.
Would you still be able to pay for all the ongoing expenses and commitments?
And that’s why it’s a bigger concern.
To eliminate this risk, most people rely on insurance payouts to replace this potential loss of income, usually till their retirement age or when their dependants turn independent.
Calculating How Much Life Insurance to Have
After knowing the importance of replacing your income, the next step would be to find out how much life insurance is enough for you.
If you’re earning $100,000 a year right now, and something happens that take away you this income for good, would it be right to say you would lose the potential income from now till your retirement age?
I would say so.
So if you’re 30 years old now and plan to retire at 65, a total of 35 years of income will be lost. And that total potential loss works out to be $3,500,000.
To estimate how much life insurance coverage you need, you can play around with our calculator.
Now this may seem like a big number, and it is.
There are many opinions on how to calculate life insurance coverage. Some may say to just cover your current expenses, but in my opinion, there are other financial goals to cater for such as kid’s education and retirement.
And so when you plan to cover your income, or a proportion of it, you’re considering all expenses, commitments, and goals as well.
Having said that, the coverage amount is adjustable to your budget, and it’s entirely up to you. You must be comfortable with it, after knowing the implications of under-insuring (or even over-insuring).
The 2 Plans that Provide Life Insurance Cover
After deciding on an amount to cover, the term and the whole life insurance are the most common plans that provide coverage.
While term insurance has gained appeal, it’s still important to mention whole life insurance because it may be the only alternative available.
I’ve written a more detailed article on the differences between term and whole life insurance but here’s an overview:
|Term Insurance||Whole Life Insurance|
|1.||Purpose||Pure insurance protection||Some insurance protection and a savings component|
|2.||Sum Assured||Usually much higher. Common to see $1,000,000 or more||Generally lower. But with a multiplier, it can be higher|
|3.||Claim Payouts||Sum Assured as per contract||Sum Assured + Accumulated Bonuses (if any)|
|4.||Cash Value||No cash value||Combination of guaranteed and non-guaranteed bonuses|
|5.||Coverage Period||Many options available||Lifetime or till 99/100 years old|
|7.||Premium Term||Same as policy term||Usually limited pay. Can be 20, 25 years, etc.|
|8.||Complexity||Very simple||Slightly more complex because of the non-guaranteed bonuses|
|9.||Flexibility||Able to cater specifically to individual needs well||Can be quite rigid. Once committed, have to stick with it|
You can learn more about whole life plans but as this article is on term life plans, I’ll only focus on the latter from now.
Furthermore, it’s likely that you’ll need a much bigger coverage amount and that’s why a term life insurance is usually more suitable.
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 cheaper rate.
During the policy term, if an undesirable event strikes, a lump sum will be paid out which will help relieve the financial burden on the insured or the family.
What Can Be Covered In a Term Insurance?
In most term plans, death coverage forms the basic foundation.
And you can add on different types of coverage (as riders) into that plan to make it more comprehensive.
Here are some common types of coverage in a term plan:
Almost all insurance plans have this cover and it’s 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.
Why? 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.
3) Total and Permanent Disability (TPD)
Depending on the plan, TPD coverage can be either embedded in the main plan or as a rider, usually the latter.
Insurance companies can have different definitions for their TPD coverage (check the policy documents).
But as a broad definition, the name suggests what it covers: total and permanent disability.
There may be several TPD definitions included but here’s an example:
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.
4) Critical Illness (CI)
Critical illness coverage is an important element in life insurance too.
Statistics have shown that critical illness claims exceed death claims.
Because of this, the cost for CI cover is usually high.
To make CI coverage consistent and transparent, the insurance industry standardised the definitions across life insurance companies.
There are only 37 standard CIs and they’re towards the later stages of an illness. If you want to view the list of the 37 CIs and their definitions, see here.
But in my view, only a few matter.
Of all critical illness claims, 90% of them are from these 5 illnesses:
- Major Cancers
- Heart Attack of Specified Severity
- Stroke with Permanent Neurological Deficit
- Coronary Artery By-pass Surgery
- End Stage Kidney Failure
5) Early Critical Illness (ECI)
If critical illness is the “father”, then early critical illness would be the “son”.
The standard critical illness coverage will only pay out if the insured meets one of the 37 CI definitions.
And that’s when early critical illness coverage can bridge the gap.
Early CIs cover early, intermediate, and late stages of an illness.
Technically, ECIs are easier to claim, but they tend to come with higher costs – even higher than the standard CI.
To help you decide between ECI or CI, ask yourself this question, “am I still able to work?”
To me, the main purpose of an ECI cover is to take a break from work to fully recover. It may take a year or two. But generally, it doesn’t completely strip away the ability to work.
This isn’t the same with the standard CI as that might not allow me to work anymore.
Therefore, if you have the budget, early CI can be good to have but not critical.
The Different Types of Term Insurance
Like how there are different types of apples (fuji, green, red, etc), the same goes with term insurance.
Here’s an overview of the ones you may have heard about:
1) Fixed/Level Term Insurance
This is likely the plan which most people are talking about, and is the core focus of this article.
Here’s how a level-term works:
Basically, the coverage stays the same throughout and only ends when the policy term is up. You can decide on how long the tenure would be, but it’s usually till 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).
Employers usually offer company insurance as a form of employee welfare benefit and if needed, the coverage can be enhanced.
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.
And at that point of time, if you decide to apply for your own personal insurance, it’ll most likely get excluded or declined, leaving you in “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 & MHA Group Insurance
As an NSF, you may have been exposed to the Aviva’s MINDEF/MHA/SAF group term insurance.
Even after ORDing, you can still retain the policy.
The premiums are generally affordable but there are downsides to it. Among other disadvantages, the critical illness premiums are not levelled and increase with age-band.
Generally, the group term life benefits the older folks more because they’ll be paying the same rate as someone who’s much younger.
3) CPF Dependants’ 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.
The Dependants’ Protection Scheme (DPS) only pays out a maximum sum assured of up to $70,000 if Death, Terminal Illness or Total and Permanent Disability happens, and its cover is only till 65 years old.
As from April 2021, it’s solely administered by Great Eastern, so if there’s a claim, you’ll need to approach the company.
You would be automatically enrolled in if you’re a Singaporean/PR between 21 and 65 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 for most.
4) Mortgage Reducing Term Insurance
Here’s how a mortgage-reducing term works:
As the name suggests, the coverage decreases every year and ends up at 0 when the policy term is over.
The rationale of this is because as you’re paying off your loan, your liabilities decreases too, reducing the coverage that’s needed.
So then, this should be cheaper than the level term?
As level term rates are very competitive now, they could be cheaper than their mortgage insurance counterparts. It’s also more economical because the coverage doesn’t decrease.
5) Standalone Early Critical Illness Plans
There are standalone early critical illness plans available which cover the early, intermediate and late stages.
However, such plans have negligible cover for death and TPD. Certain term plans do offer the ability to attach ECI cover as a rider.
The only time you should consider a standalone plan is if you wish to only purchase critical illness cover, and nothing else.
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 is a Project Manager.
He’s married to Tiffany who is 33 years old and is working as an Accountant.
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 playing together in the living room during the weekends, it warms my heart” – John.
“I know my parents are financially independent. But they were the ones who raised me up from young, and I want to give back. The least I can do is to give them an allowance” – John.
“I’m lucky to be at the age where most of my finances are taken care. The main goals I have now are to ensure ongoing expenses are paid for, and saving towards my kid’s university education and retirement” – John
Income and Expenses:
John earns a gross income of $4,500 per month, taking home an amount of $3,600 after CPF contribution. His monthly expenses is at $2,000 which allows him to have a monthly surplus of $1,600.
- Cash Savings – $50,000
- Investments – $30,000
- HDB apartment – $450,000 (bought 3 years back with a current outstanding loan of $380,000 split 50/50 between him and Tiffany.
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
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.
He got into a car accident and suffered Total and Permanent Disability.
In this situation, John is not likely to earn an income anymore.
But existing expenses (and more) still continue on. He has to rely on whatever he has left 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”, assuming his income is also meant for future goals such as kid’s education and retirement.
2nd Line of Defence: Liquidable Assets
Next, when the insurance proceeds have run out, John has to liquidate all his cash savings and investments (total of $80,000), which would give him another 1.5 years ($80,000/$54,000).
(With that being said, having to dip into your hard-earned money you’ve saved over the years can be painful.)
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, and 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.
Fortunately, you can eliminate the financial risk of this scenario happening and be self-sufficient.
With a term insurance, a much higher coverage amount can be paid out to John and/or his family.
The payout will then be able to pay for current and future expenses, commitments, and goals.
Want to find the best term plans? Get a term insurance comparison of the top providers in Singapore now.
How Long Should You Cover Till
Generally most would cover till their retirement age or retirement age plus 5 years.
But because the term plan doesn’t have any cash value, this question always comes up: “how long should I cover till?”
The plan will terminate after the coverage period. And if any of the insured events happen after that, there will not be any payouts, even if it’s 1 year after the expiry date.
So there will be difficulties in choosing when to cover.. till 65.. 70.. 75.. 80… there are even term plans that can cover till 99 years old, but that’s for leaving a legacy behind.
If we take a look at the average life expectancy in Singapore, it’s currently at 83.6 years and it’s expected to be 85.4 in 2040.
Does it mean that you should cover till 85?
In my opinion, covering till your retirement age will be the most important as those are your income-generating years. If you have the capacity to expand the length of cover, then it’s all up to you.
Finding the Best Term Insurance Plan in Singapore (2021)
Using a small percentage of your income, you’re able to eliminate a huge financial risk, which then creates a greater peace of mind.
With a term insurance, you don’t have to worry about uncertainties related to finances, and just go about your life doing what you love to do.
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’d 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, protecting your income is one of the most fundamental aspects of financial planning.
And there’s no better way to do that than by having a term insurance plan.
Take the first step and eliminate the uncertainties if things don’t go well. Start by comparing and getting the best term insurance in Singapore to get yourself and your family protected.