Everyone in Singapore knows something about life insurance. Some know a little, others know a lot.
Whether or not you know a little or a lot, I believe that what I share here will still be useful. It will either validate or, add on to what you already know about life insurance.
I shall focus on the four main types of life insurance.
Using an example, a brush can be used for different purposes like painting a wall or an art piece etc. At the same time, the brush can be made of different materials like plastic, metal, wood etc. Similarly, life insurance can be used for different purposes like protection, retirement etc. Life insurance itself can be either of four different types – Whole Life, Term, Investment-Linked, and Endowment.
Whole Life
This type of life insurance is as its name suggests. It protects the person for whole life. It also has a monetary value. This means that if you were to surrender it, or what people commonly say “cancel it”, you will receive a lump sum of money back. Depending on how many years you have kept the policy, this lump sum can be the same, or more than what you have put in.
A common misconception with this type of insurance now is that because it is a Whole Life type, you have to be paying premiums every year for your entire life. Whole Life type products have evolved. Now, you can choose to only pay for 15 years, and yet enjoy whole life coverage. The key thing to remember is that there are more options.
Another common misconception with this type of insurance now is that it should not be purchased because it gives a low rate of return when you surrender it. Does this type give a low return rate upon surrender? Yes, it does. However, there is an error here that I want to highlight.
First, imagine someone who has just used the toilet saying this “I don’t want to wash my hands because the water is too cold”. Yes, there is something not right with what this person is saying. You wash your hands to keep it clean. The temperature of the water should be of a lesser concern.
Similarly, the reasons to purchase Whole Life type insurance should be for the coverage whilst the person is living and for the guaranteed lump sum payout upon death. The surrender value should be of a lesser concern. Endowment policies, stocks, ETFs, and other investment products should be considered if the rate of return is your priority.
Term
This type of life insurance is as its name suggests. It protects the person for a limited term of time. Past that term, coverage ceases. This type of life insurance does not have any value. You will not get any lump sum of money back when you choose to surrender it. You can choose to surrender it at any point of time.
This type of life insurance is very good for getting high coverage with low premiums paid. Term type life insurance should always be considered to beef up the life insurance portfolio especially when you have many commitments (e.g. House) and dependents (e.g. Children) to look after. Unless you have tons of money and can afford to rely solely on Whole Life type insurance, it is my suggestion for you to consider having a mixture of Whole Life type and Term type insurance in your portfolio.
It is common for there to be a debate on which is better – Term type versus Whole Life type. Ultimately, Term type and Whole Life type insurance are merely tools used for managing risk. There is more value in understanding the benefits each bring about, and knowing the amount of risks you are managing. If you really want to satisfy your curiosity, look for your financial planner and ask for a table comparison of the two types.
Investment-Linked
Some people refer to this type of life insurance as a Whole Life type. I want to say that it is different from the Whole Life type I have described above.
For this type, you are buying into a fund by either paying premiums annually or monthly. This amount that you are paying either annually or monthly is fixed at a certain amount. You are allowed to choose the funds that you buy. There are management fees and distribution costs involved.
Where does the protection come about? From the fund units that you have purchased some will be sold every year to be used to pay for insurance charges. The insurance charges are not fixed. The insurance charges increases and gets more expensive according to your age.
Come a point of time (usually when a person is in his mid-fifties), the annual insurance charges would probably be more that the annual premiums put in.
There is often a debate yet again on the returns of this type of life insurance. Insurance should be purchased for the protection element. The returns of an insurance purchase should mostly be secondary.
This type is good in my opinion up till when a person is in his fifties. That’s when the insurance charges are still manageable, and could even be considered cheap for the amount of protection coverage. It is also good because it allows you to take premium holidays. It means that as long as there is enough value in the fund units, even if you don’t pay premiums sometimes, your protection coverage will still be there. This is good for people with cash-flow problems.
For people who don’t understand what I just described, stick to a mixture of Whole Life type and Term type of life insurance.
Endowment (Savings)
This is a type of life insurance in which emphasis is placed on the returns more that the coverage. This means that the returns are higher, and the protection coverage is much lower. Endowment plans usually give you an annual yield of between 2% – 3.9%.
This means that at minimum you should let your money accumulate at a rate of 2% because this is much higher than leaving your money in the savings account with the bank!
If your concerns are returns, consider these types.
The savings plans being sold at banks are essential endowment type life insurance created by insurance companies. The banks are merely a distribution platform.
There is more value in purchasing endowment policies from insurance agents because they can advise you how to bundle and purchase other necessary life insurance products at a cheaper price.
The common argument with savings plans is that the policy term is too long and there is lack of liquidity, or that the returns are too low compared with other investment instruments etc.
There are so many instruments out there. A savings plan is one of the many. There is never a ‘best’ one. It all depends on your risk propensity, needs, and time frame.
Everyone wants the safest investment with the highest return with the most liquidity. There is no such thing.
Distribute your money across the range of instruments. Ensure that your money is growing at a minimum of 2%. Understand the different investment products’ characteristics, and how it helps you.