Insurance is a necessity in every human’s life. Insurance was so important that even the late Dr Goh Keng Swee pushed for the setup of NTUC Income to provide every Singaporean with affordable insurance. Yet, despite its importance, few people really truly understand the essence of insurance. This is partly because there are so many types of insurance that one can find.
At Moneyline.sg, we feel that we have an obligation to help our readers truly understand insurance. Thus, in this article, we will focus on understanding the essence of each type of life insurance as well as the purpose each of them serves.
Why Should You Get And What To Look Out For?
Term insurance is a type of insurance that offers pure protection. Under a term insurance, the insurer agrees to pay you a fixed sum (i.e. sum assured) if you die or become total and permanently disabled (TPD) during the period of protection.
Term insurance has a limited coverage period that you can decide when buying a term insurance plan. For example, you can choose to be covered up to a specific age (usually 65) or be covered for a specific number of period (e.g. 10 or 20 years).
Why You Should Get Term Insurance?
The purpose of getting insurance is to transfer the financial risk of your death to an insurer. Term insurance is the most basic kind of protection you can get and at the lowest cost, some insurer allow you to customize your plan to a one size fit all solution to include disability, early and late stage critical illness lump sum payout to your term insurance plan as a rider. If you are only looking for pure protection, term insurance should be your first choice.
What To Look Out For In Term Insurance?
When buying term insurance, you will be given an option to enhance your protection with riders. While it comes with additional cost, it is usually cheaper to add on a rider than to buy a completely new insurance for the same protection. Premium waiver riders and critical illness riders are common for term insurance. Term insurance has no cash value, hence there will be no surrender penalty should you decide to terminate your plan anytime during the period of the contract.
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Endowment is a type of life insurance that focuses on savings. An endowment can provide a very minimal protection plan built on top of a savings structure. Similar to any life insurance product, you will be paid a fixed sum upon Death or Total Permanent Disability during the contractual period. Endowment should be constituted as more of a savings than a protection plan. Most modern endowment plans currently provides 105% of premium plus additional bonuses paid out over the years as Death and Disability coverage.
The savings portion will be invested through the insurer’s investment fund to earn interest. During the coverage period of your endowment, you may be able to sell your endowment policy for cash, aka cashing out. But if you hold on to your endowment till maturity (i.e. till end of coverage period), you will get a Maturity bonus payout from the insurer.
Why You Should Get Endowment?
Policyholders typically buy endowment to save for a medium to long-term savings goal like child’s education, retirement, down payment for home or wedding. An endowment plan allows you to not only save, but it also helps you to invest your savings with a portion or all of your principal and interest guaranteed upon maturity.
The advantage for getting an endowment plan is that generally, your returns should potentially be able to best inflation as opposed to just parking your funds aside in the bank account. Due to the product nature, by nominating a beneficiary, your family members will not have to go through any complex legal process in order for you to pass on your savings to them should you pass on.
What To Look Out For In Endowment?
Since there are some investments involved, the benefits of endowment are generally quoted in terms of guaranteed and non-guaranteed return. As an industry norm, the investment return is projected at 3.25% and 4.75% in a benefit illustration brochure. But this doesn’t mean that the insurer is promising you at least 3.25% p.a. or a maximum of 4.75% p.a. in investment return. You need to look at the insurer’s past record of investment returns (e.g. past 5-10 years) in order to have an accurate gauge of the expected investment return. If you are planning to get an endowment, ask your financial planner to show you the insurer’s past record of investment returns instead of relying on the benefit illustration.
Also, its important to note while an endowment plan act as a ideal plan for people to force save, early surrendering and making full withdrawal before maturity will most likely result in you being penalized heavily with its surrender fees. Some endowment plans provide cash back option should the policy holders decide to dip into a part of their endowment savings for any emergency needs.
Planning to save for your first home or your child’s tertiary education? Check out what kind of endowment plans you can get right here.
Whole life insurance is a combination of both an endowment and a term insurance. If you got the gist of how an endowment works, you won’t have much trouble understanding whole life insurance. The investment fund most insurers partake in is the same for both whole life and in an endowment plan, albeit with whole life, there are no maturity period. As the name suggests, for whole life insurance, coverage is for life, which means a death benefit is guaranteed to be payable should the policy holders keep the plan till his/her death bed.
Why You Should Get Whole Life Insurance?
Whole life insurance is a good financial asset to own, especially if you have dependents (e.g. children, parents). One feature of a whole insurance plan is that you can choose the premium term, unlike traditional whole life policies where you need to make premium payment for life, the modern whole life plan are typically limited payment plans. Policyholders have the option to select a Single Premium/5/10/12/15/20/25 years or even a lifetime payment term to provide themselves or their dependents coverage for the whole of life. Another recent feature of a whole life insurance plan is its multiplier benefit, the multiplier benefit is actually a rider that allows the policy holder to enhance their coverage by a multiplier of 1 – 10 times before a certain age (eg. 65 or 70) by paying extra.
Additional benefits can be added onto the whole life plan as well such as critical illness or child protection rider, such riders will also enjoy limited payment term and multiplier benefit feature should the policyholder decide to opt for them.
What To Look Out For In Whole Life Insurance?
As with an endowment plan, a whole life investment return are typically projected within the industry standard of 3.25% p.a to 4.75% p.a. Policyholders are advised to treat a whole life insurance plan as a form of protection rather than a form of savings in their early years and to only consider withdrawing in the later part of their life when protection is no longer prioritized.
Early surrendering of a whole life plan will most likely result in a huge loss of principal.
Insurance Allows Your Dependents To Not Worry About Getting Probate
A Fundamental reason for getting life insurance is because it can help your dependents avoid the troublesome legal process of getting a probate.
Under normal circumstances, your estate (i.e. assets) cannot be distributed to your dependent until you get a probate from the court. It usually takes around six to nine months and thousands of dollars, depending on the scope of inheritance and procedures in order for the probate to be grantedt. This means that your assets will be legally tied up until your dependents get the probate to execute your will from the court.
However, under a life insurance, the named beneficiary(ies) do not have to wait for the court to grant probate. Your named beneficiary (e.g. children) can receive the pay out based on beneficiary nomination within a life insurance policy.
Check out what kind of whole life insurance you can get right here on Moneyline.sg.