By Lorna Tan
Some of us risk being financially unprepared to cope with a life crisis but we can easily avoid that scary outcome by getting protection with term insurance.
This is the most affordable way to be sufficiently covered, yet too many people have not bothered to explore this option.
A recent Prudential survey found that over the past five years, 70 per cent of Singaporeans have not increased their life insurance cover to keep pace with rising income levels. Budget constraints were cited as the key barrier to getting more cover.
It seems that most people are under-insured because they bought other policies, such as whole life participating insurance plans or endowment plans that come with a saving component, which would cost more than a term plan.
Perhaps they are unaware that a term plan can provide a large sum of life protection at a reasonable cost because a basic policy is limited to pure protection with no saving or investment element.
The premium for a whole life plan is typically much higher than that for a term plan.
Financial advisory firm Providend found that the annual premium of a term plan (running until age 70) for an assured sum of $500,000 for a 45-year-old male non-smoker is $1,922 compared to $14,320 for a whole life cover.
Mr Gregory Choy, OCBC Bank's head of wealth advisory, wealth management Singapore, says: "Term insurance can be used to protect mortgage loans, car loans, children's education or even outstanding personal loans.
"It is suitable for families or individuals with many financial commitments, or even young executives joining the workforce.
"The insurance ensures their savings are not wiped out from financial debt and prevents their families from becoming financially burdened should something unfortunate happen to them during the policy term."
On a positive note, more insurers have been introducing term insurance plans to try to close the protection gap.
Recently, OCBC launched MaxTerm Value and PremierTerm Plus which are regular-premium term plans, and on Thursday, AXA Life revamped its AXA Term Protector.
Why buy term insurance Providend chief executive Christopher Tan notes that most people mainly buy insurance to replace loss of income for the family and dependants when the main wage earner is no longer around or unable to work. He adds that such top priority needs are usually temporary.
There will come a time for this group of people when insurance will no longer be needed. Here are some scenarios:
WHEN WE HAVE NO DEPENDANTS:
- Our children have all grown up and are working. Our parents are no longer around as they have predeceased us.
- We are single and our parents, who were dependent on us, have predeceased us.
- Our children have all grown up and are working. Our spouse is working and can support himself/herself with his/her own income plus accumulated assets.
WHEN OUR EARNED INCOME IS NO LONGER NEEDED:
- We have retired. During this stage of our life, we will be living off our retirement nest egg and our children, if any, would be independent of us. If death occurs, there is no income to replace as we have already retired.
- We have sufficient assets to fund the family lifestyle, even upon our demise. Assets can come in the form of property investments, stocks and shares, businesses and so on.
Mr Tan says that if we are buying insurance that pays upon death/disability/critical illness to replace income loss, there is no need for coverage if we do not ha ve dependants and when our earned income is no longer needed.
"Our need for this kind of insurance is therefore temporary and not permanent. This is where term insurance becomes really practical and useful," he adds.
"In addition, most people will need quite a high coverage to cover the above needs. To buy a whole life plan is not only unnecessary, because you only need your insurance temporarily, but also highly unaffordable. For most people, term insurance is the only insurance that is able to afford you the coverage you need."
What to consider when buying term insurance
TENURE OF COVERAGE
One of the benefits of term insurance is the flexibility to choose the policy term.
Ms Michelle Ee, director of wealth management at Financial Alliance, says it is important to ensure that the policy term is sufficient to cover the period when the income is required by dependence or for a loan's outstanding period.
Mr Tan suggests that if you plan to retire at age 60, for example, plan a bit of a buffer. Buy a term plan that covers an additional five years.
Mr Choy says a person in her 20s who has just joined the workforce would probably want to consider insuring herself until retirement, that is, for 30 years or more, while a mother in her 60s may not need such a long policy term as her children may be financially independent.
Likewise, a couple can buy term insurance to "top up" their needs for their mortgage or vehicle loan, but do not have to pay premiums indefinitely as their loans will eventually be paid off. It is important for individuals to determine the length of time the insurance is required to avoid paying premiums unnecessarily for insurance they no longer need.
If you are unsure of the period of coverage required, it is important that the term plan has a renewability provision that allows the life insured to renew for another term of coverage without having to go through underwriting again.
However, note that the annual premium for a renewable term increases upon each renewal as it is determined based on attained age. For instance, a five-year renewable term is subject to a higher premium when it is renewed at the end of every five years.
So unless the desired protection needs are for a short term, it may be more cost-effective to consider a longer duration term where the premium payable does not change throughout the entire period of protection.
You can also consider staggering your term policies, which can come with varying sums assured, so you have higher protection in your earlier years when commitments are high and lower protection in your later years. Another way is to opt for a decreasing term plan that provides a diminishing amount of cover over the policy's duration as the death cover gradually reduces to zero at the end of the term.
If you buy a term plan for short-term coverage and intend to change it to a permanent plan, then pick one with a convertibility feature.
TIMELY PREMIUM PAYMENT
A distinctive feature of term policies is the absence of cash values. As such, term plans are exposed to the danger of lapsing unintentionally once premiums are unpaid beyond the grace period. This is not the case with other life plans that have cash values that can be drawn on to pay for the premiums as an interim measure under the so-called "non-forfeiture" provision.
When a policy lapses, the life insured has to furnish or sign a declaration of continued good health to reinstate his policy. This could be extremely disadvantageous to a policyholder if his health no longer allows him to buy a new insurance plan. So remember to pay the premiums for your term plans yearly.
When comparing term plans, Ms Ee says it is important to know what the "event" is that the plan covers you for.
"Never assume that all term plans cover the same events. These include death, terminal illness, total and permanent disability, early to advanced stage critical illness or critical illness only," she explains.
You can include riders in your term plans to waive premiums - perhaps upon contracting a critical illness, for example. Ms Ee advises that if the term plan covers only death and total and permanent disability, it is prudent to add a rider to waive premiums if the person insured gets a critical illness. This would mean he need not worry about the premiums for his plan.
This would also prevent the term plan from lapsing while the person is recuperating.
GROUP TERM INSURANCE
If you are eligible for group term insurance, it would be a more affordable option. For example, the Singapore Armed Forces (SAF) and NTUC Union offer such schemes.
In fact, the SAF Group Insurance will be replaced with the Mindef & MHA Group Insurance (Voluntary Scheme) next month, with reduced premiums and comprehensive coverage. For instance, the monthly premium for a term insurance cover of $100,000 will be reduced to $4.10 for those below age 65. This works out to a low monthly premium of $41 for $1 million term coverage.
COMPARE THE PREMIUMS
Insurance premiums for the same product type will vary for different genders, age groups and sums assured. So make sure you compare to get the best rates.
Mr Tan says: "It is also prudent to check out available promotions. Some insurers offer large sum assured (say $1 million) discounted premiums. So it may be more cost-efficient for you to buy a larger cover."
Providend provides the promotions that insurers are offering on its DIYInsurance website (diyinsurance.com.sg).
How much is enough? Finance experts weigh in
MR CHRISTOPHER TAN, CHIEF EXECUTIVE OFFICER AT PROVIDEND
We do not think it is right to use a general rule of thumb - such as 10 per cent of your income going into insurance or insure yourself up to 10 times of your annual income - when it comes to financial planning and in this case insurance planning.
We are convinced that a better way is to understand the needs of each individual, which differ from person to person.
Some of the factors that will affect how much insurance a person needs are:
- How much of my monthly income do I need to replace on my unfortunate demise?
- How many years do I need to replace this income for?
- Do I have any liabilities (such as mortgage) that need to be paid off?
- Do I need to fund my children's tertiary education?
- What is my current insurance situation and how much in assets do I have now?
And of course, there could be additional factors, depending on his situation.
MR GREGORY CHOY, HEAD OF WEALTH ADVISORY, WEALTH MANAGEMENT SINGAPORE, AT OCBC BANK
A good gauge for the insurance sum required would be about 10 times your annual income. However, some individuals may choose to insure themselves and their families for higher coverage to ensure they can continue with their current quality of life for a longer period of time.
The coverage required will also depend on the amount of liabilities you have - such as home loans, vehicle loans or savings for children's higher education. The higher the amount of liabilities, the higher the insurance coverage will need to be.
MS MICHELLE EE, DIRECTOR OF WEALTH MANAGEMENT AT FINANCIAL ALLIANCE
It depends on the objective of getting the insurance coverage.
For protection on dependants' financial need, it will be the amount of financial need per year multiplied by the dependency period. The protection amount can be made more accurate if you factor in the inflation-adjusted rate of returns on the yet-to-be consumed capital created to provide income for dependence.
For protection on mortgage or business loans, it would be the outstanding loan amount.
A less straightforward way is to purchase a term plan for protection on loss of business revenue due to the demise of a key person. There are no formal rules for determining the amount to be insured. Generally, the average profit for the last three years is used.
How they compare