Pros and Cons of Buying Term Insurance

The Life Insurance Association (LIA) Singapore regularly releases industry performance reports, providing valuable insights into the state of the insurance market. However, these reports often lack detailed breakdowns by specific product types, such as term insurance. Instead, they typically categorize premiums into broader classifications like “whole life and endowment.”

For instance, in the third quarter of 2022, the LIA reported a total of S$1.4 billion in premiums for the whole life and endowment category, compared to S$1.2 billion for the combined premiums of term and universal life insurance products. While these figures offer a glimpse into the overall trends within the industry, the absence of explicit data for term insurance makes it challenging to assess its performance within the market accurately. Despite this limitation, analyzing broader trends can still provide valuable insights for industry stakeholders and policymakers.

Buying a term insurance policy can be a crucial decision for securing financial stability and protecting loved ones in the event of unexpected circumstances. However, like any financial product, it comes with its own set of pros and cons. Let’s delve into both sides:

Pros and Cons of Term Life Insurance

Buying a term insurance policy can be a crucial decision for securing financial stability and protecting loved ones in the event of unexpected circumstances. However, like any financial product, it comes with its own set of pros and cons. Let’s delve into both sides:

Pros of Buying Term Insurance

1. Affordability: Term insurance policies generally offer significant coverage at a relatively low premium compared to other types of life insurance. This makes it accessible for individuals with varying financial capacities.
2. Pure Protection: Term insurance provides pure life coverage without any investment component or cash value accumulation. This simplicity ensures that the focus remains on providing financial protection for dependents in case of the policyholder’s demise.
3. Customizable Coverage: Policyholders can tailor the coverage amount and duration according to their specific needs. This flexibility allows for alignment with individual financial goals, such as covering outstanding debts, providing for children’s education, or replacing lost income for dependents.
4. Income Tax Benefits: Premiums paid towards term insurance policies are eligible for tax deductions under Section 80C of the Income Tax Act. Additionally, the death benefit received by nominees is usually tax-free under Section 10(10D).
5. Peace of Mind: Knowing that loved ones are financially secure in the event of the policyholder’s death can provide peace of mind. Term insurance ensures that beneficiaries receive a lump sum amount, helping them maintain their standard of living and meet financial obligations.

Cons of Buying Term Insurance

1. No Cash Value: Unlike whole life or universal life insurance policies, term insurance does not accumulate cash value over time. This means that if the policyholder outlives the term, they will not receive any maturity benefits.
2. Limited Term: Term insurance provides coverage for a specific period, typically ranging from 5 to 30 years. Once the term expires, the policyholder may need to renew at a higher premium, which can be costly, especially as they age or if health conditions develop.
3. No Investment Component: Some individuals prefer life insurance policies with an investment or savings component to build cash value over time. Term insurance, however, solely focuses on providing death benefits and does not offer any returns on premiums paid.
4. Premium Increases with Age: Term insurance premiums are usually lower when the policyholder is young and healthy. However, as they age, premiums may increase significantly, especially upon policy renewal or when purchasing a new term policy.
5. Potential Health Restrictions: Insurance companies may require medical underwriting before issuing a term policy. Pre-existing health conditions or lifestyle habits like smoking can lead to higher premiums or even denial of coverage.

Popular Term Life Insurance in Singapore

Several term life insurance policies are popular among individuals in Singapore, each offering unique features and benefits tailored to different needs.

FWD Term Life Plus

One such option is the FWD Term Life Plus policy, which stands out for its customizable coverage lengths, affordable premiums, and additional riders such as critical illness cover. However, it’s important to note that this policy excludes death by suicide within the first year.
https://www.fwd.com.sg/life-insurance/term-life-plus/

AIA Secure Flexi Term

The AIA Secure Flexi Term policy is favored for its flexibility, providing level or increasing coverage amounts, optional critical illness and disability riders, and Vitality program discounts for healthy living. While this policy offers comprehensive coverage, it may come with higher premiums compared to some alternatives.
https://www.aia.com.sg/en/our-products/life-insurance/term-insurance/aia-secure-flexi-term

Manulife ManuProtect Term II

For those seeking reliability and flexibility, the Manulife ManuProtect Term II policy offers level or decreasing coverage amounts, various rider options, and guaranteed renewal options. Similar to other policies, it excludes death by suicide within the first year.
https://www.manulife.com.sg/en/solutions/life/term-life-insurance/manuprotect-term.html

Income Term Life Solitaire

The Income Term Life Solitaire policy provides level or increasing coverage amounts, various rider options, and a waiver of premium benefit for total and permanent disability. However, it’s important to consider that this policy may entail higher premiums compared to other plans.
https://www.income.com.sg/solitaire/termlifesolitaire

Singlife Elite Term

Lastly, the Singlife Elite Term policy appeals to individuals looking for convenience, with customizable coverage lengths and sum assured, affordable premiums, and an online application process. Nonetheless, it may offer limited rider options compared to some alternatives.
https://singlife.com/en/life-insurance/elite-term

When selecting a term life insurance policy in Singapore, it’s essential to carefully review each option’s features, exclusions, and premium rates to determine which best aligns with your financial goals and protection needs.

Who Should Purchase Term Life Insurance

Term insurance can be suitable for a wide range of individuals, but it may not be the best option for everyone. Let’s explore who might find term insurance beneficial and who might not:

Suitable Candidates for Term Insurance

1. Young Adults: Young adults who have dependents or financial obligations, such as student loans or mortgages, can benefit from term insurance. It provides affordable coverage during the years when financial responsibilities are typically high.
2. Parents: Parents with young children rely on their income to support their family’s needs. Term insurance ensures that if something were to happen to the parent, the family’s financial future is protected, including covering living expenses and education costs for the children.
3. Homeowners: Individuals with outstanding mortgages or other loans secured by assets may consider term insurance to ensure that their loved ones are not burdened with debt if they were to pass away prematurely.
4. Self-Employed Individuals: Self-employed individuals often do not have access to employer-sponsored life insurance policies. Term insurance can be a cost-effective way for them to protect their family’s financial security in case of death.
5. Business Owners: Business owners may use term insurance to fund buy-sell agreements, key person insurance, or to cover business debts, ensuring continuity and financial stability for their business in the event of their death.

Candidates who might not find Term Insurance Suitable

1. Those Seeking Investment Benefits: Individuals looking for a life insurance policy with an investment or savings component may not find term insurance suitable. Term insurance focuses solely on providing death benefits without any cash value accumulation.
2. Elderly Individuals: As individuals age, the cost of term insurance increases significantly. Elderly individuals may find it more challenging to afford premiums, and they might consider other options like permanent life insurance if they still require coverage.
3. Those with Significant Health Issues: Individuals with pre-existing health conditions may face challenges in obtaining affordable term insurance coverage. In such cases, guaranteed issue or simplified issue life insurance policies might be more suitable, although they typically come with higher premiums.
4. People with Stable Financial Situations: Individuals with substantial assets and no significant financial obligations may not require term insurance. They might have sufficient resources to provide for their family’s needs in the event of their death without relying on life insurance.
5. Short-Term Coverage Needs: If someone only needs coverage for a short period, such as to cover a loan or until their children are financially independent, they might find other insurance options or savings strategies more appropriate than a term policy.

Term vs. Whole Life Insurance

Term and whole life insurance are two fundamental types of life insurance, each with distinct features and benefits. Whole life insurance provides lifelong coverage, as long as premiums are paid, and includes a cash value component that grows over time, offering a source of tax-free funds for the policyholder. On the other hand, term life insurance offers coverage for a specified period, without any cash value accumulation.

While term insurance is generally more affordable, whole-life premiums can cost significantly more, making it less suitable for everyone. Term life insurance is ideal for those seeking basic coverage for a specific period, such as to protect minor children or pay off a mortgage. Its affordability makes it a popular choice, especially for single parents. However, whole life insurance offers added benefits like guaranteed premiums for life and the ability to borrow against the cash value. It can serve as a flexible financial tool, allowing policyholders to access funds for various needs during their lifetime.

Nevertheless, the complexity and higher costs associated with whole life insurance may not be suitable for everyone. Ultimately, the choice between term and whole life insurance depends on individual financial goals, needs, and preferences. While term insurance may be preferable for those seeking basic protection at a lower cost, whole life insurance offers lifelong coverage with additional financial benefits. Consulting with a financial advisor can help individuals determine the most suitable option based on their unique circumstances.

Ultimately, the suitability of term insurance depends on individual circumstances, financial goals, and the need for financial protection.

While term insurance offers cost-effective and customizable protection, individuals need to weigh its benefits against its limitations. Understanding one’s financial needs and long-term goals is crucial in determining whether term insurance aligns with their overall financial strategy.