Insurance is an essential component of financial planning, providing individuals and families with a safety net against life’s uncertainties. Among the various insurance options, term insurance stands out as a versatile and cost-effective choice. It is a straightforward yet highly effective form of coverage, offering invaluable protection at a critical time.
Let us explore the reasons why term insurance is a wise choice for those seeking financial security and peace of mind.
Benefits of Buying Term Insurance
Affordability
Term insurance is known for its affordability. Unlike permanent life insurance policies, which combine insurance with a savings or investment component, term insurance focuses solely on providing coverage for a predetermined period. As a result, the premiums are significantly lower, making it accessible to a broader range of individuals. This affordability ensures that more people can obtain the protection they need without straining their budgets.
Flexibility
Term insurance offers flexibility that many other insurance options do not. Policyholders can choose the coverage duration that aligns with their specific needs. This flexibility is particularly beneficial for those who anticipate a temporary need for insurance. For example, young parents may opt for term insurance to cover their children’s education expenses, a mortgage, or any other financial responsibilities until their children are self-sufficient or their mortgage is paid off.
Tailored Coverage
Term insurance can be tailored to meet individual needs. Policyholders can select the desired coverage amount, the policy duration, and any additional riders or benefits, such as critical illness or accidental death coverage. This customization allows individuals to create insurance plans that address their unique circumstances, ensuring that their loved ones are financially protected in the event of their absence.
Pure Protection
One of the primary reasons why term insurance is valuable is its simplicity and focus on providing pure protection. There are no cash value accumulations or investment elements involved, which can make permanent life insurance policies more complex and costly. Term insurance guarantees a payout to beneficiaries in case of the policyholder’s death within the coverage period. This straightforward approach ensures that the primary purpose of insurance – safeguarding financial security – remains the central focus.
Ideal for Specific Needs
Term insurance is ideally suited for addressing specific financial needs. It is particularly effective for covering temporary expenses, such as a mortgage or educational costs, during a predetermined period. In these situations, policyholders can ensure that their loved ones are protected without committing to lifelong premiums. Moreover, term insurance can be an excellent complement to existing financial plans, providing an extra layer of security.
The Concept Behind Buy Term and Invest the Rest
“Buy Term and Invest the Rest” (BTITR) is a financial strategy that suggests purchasing a term life insurance policy for a specified period, typically covering the years when financial responsibilities are most significant, such as raising a family or paying off a mortgage. The key principle of this strategy is to use term insurance, which is usually more affordable than permanent life insurance, to provide financial protection to your dependents in the event of your death.
Here’s how “Buy Term and Invest the Rest” works:
- Purchase Term Life Insurance: You buy a term life insurance policy that provides coverage for a specific term, such as 10, 20, or 30 years. The policy pays a death benefit to your beneficiaries if you pass away during the term.
- Invest the Difference: Since term insurance is less expensive than permanent life insurance, you invest the money you save by opting for a term policy. This investment can take various forms, such as contributing to retirement accounts (e.g., CPF), investing in stocks or bonds, or other investment vehicles.
- Wealth Accumulation: Over time, the investments you make accumulate, potentially growing your wealth. The idea is that this growth, along with your regular savings, can create a substantial financial cushion for your family.
- Reevaluate Coverage: As you invest and accumulate assets, your financial obligations may decrease, such as paying off a mortgage or putting children through college. Consequently, your need for life insurance may decrease as well.
- Adjust Insurance Coverage: You can periodically reevaluate your life insurance needs and may choose to reduce or even terminate your term life insurance coverage as your assets grow. The goal is to be self-insured, meaning your accumulated wealth is sufficient to provide financial security for your family without the need for life insurance.
This strategy is particularly appealing to individuals who are disciplined savers and investors and can maximize the returns on their investments. It leverages the lower cost of term insurance to allocate more funds toward investments that have growth potential. However, it’s important to carefully manage the investments and periodically reassess your life insurance needs to ensure the strategy remains effective as your financial situation evolves.
Examples of Term Insurance in Singapore
AIA Direct Term Cover
This insurance plan provides comprehensive coverage up to S$4 million and offers a range of optional riders, including critical illness and disability income. Policyholders can choose from flexible term lengths, ranging from 5, 10, or 20 years to coverage extending up to ages 65, 70, or 80, depending on their age at the time of application.
AIA Direct Term Cover brochure: https://www.aia.com.sg/content/dam/sg-wise/en/docs/our-products/life-insurance/aia-direct-term-cover.pdf
FWD Term Life Plus
FWD Term Life Plus is a comprehensive insurance plan offering coverage of up to S$3 million. What sets this plan apart is its unique feature that allows policyholders to increase their coverage amount without the need for medical underwriting at key life stages. With flexible term lengths ranging from 10, 15, 20, 25, or 30 years, or coverage extending up to ages 65, 70, 75, or 80, depending on the policyholder’s age at the time of application, individuals can tailor their coverage to their specific needs. The increase in coverage without medical underwriting enables policyholders to boost their coverage by 25% of the original sum assured, up to S$500,000 per insured person, at significant life milestones such as marriage, childbirth, or adoption, without undergoing additional medical checks. Additionally, the plan offers the convenience of renewal without medical underwriting at the end of the term, subject to certain conditions.
FWD Term Life Plus product summary: https://www.fwd.com.sg/uploads/sites/1/2020/06/tlp-summary.pdf
Income Term Life Solitaire
participating, regular premium term life insurance plan. It provides significant insurance coverage of up to S$5 million, with flexible term options. Policyholders can select terms of 10, 15, 20, 25, or 30 years, or opt for coverage extending up to ages 75, 80, 85, 90, or 100, depending on their age at the time of application. Additionally, policyholders enjoy the benefit of guaranteed policy renewal without the necessity for medical underwriting until the age of 75.
Prudential PRUProtect Term 5
Prudential PRUProtect Term 5 is a renewable term life insurance plan that provides coverage for a set 5-year period. Tailored to be budget-friendly and easy to understand, this plan offers temporary protection for policyholders. With coverage options of up to S$2 million, it ensures financial security for beneficiaries. Additionally, policyholders have the flexibility to renew their coverage at the end of each 5-year term, ensuring ongoing protection as their needs change over time.
Prudential Singapore website: https://www.prudential.com.sg/products/life-insurance/term-life-insurance/direct-pruprotect-term-5
Singlife Simple Term
Singlife Simple Term, provided by Singlife in Singapore, is a basic term life insurance plan tailored for individuals seeking straightforward protection without added complexities. This plan offers affordable death benefit coverage for a specified duration. Policyholders can secure coverage of up to S$500,000, ensuring financial security for their beneficiaries. With flexible term options ranging from 10 to 30 years, or coverage extending up to ages 65 to 80, depending on the policyholder’s age, individuals can choose the term that best suits their needs. Additionally, policyholders have the flexibility to renew their plan annually, albeit with potential premium adjustments as they age, ensuring continuous protection over time. Singlife Simple Term provides accessible and reliable life insurance coverage, offering peace of mind to policyholders and their loved ones.
Singlife Simple Term brochure: https://singlife.com/content/dam/public/sg/documents/life-insurance/singlife-simple-term/brochure.pdf
These are just a few of the many term insurance plans available in Singapore. It is important to compare plans carefully before making a decision, as the best plan for you will depend on your individual needs and budget.
Common Questions Regarding Buying Term Insurance
Question: Is term insurance offered by different insurance companies the same? What should we look out for when purchasing term insurance?
Term insurance is a non-participating pure insurance plan with no cash value. It offers protection against various detrimental situations like death, terminal illness, critical illness, and total permanent disability. While term insurance serves a common purpose, the policies offered by different insurance companies can vary significantly. Therefore, it’s crucial to assess your protection needs before choosing the one that best suits you.
When purchasing term insurance, there are several key considerations to keep in mind:
- Premium Paying Period: Determine the duration for which you’ll pay premiums, as this can vary among policies. Some policies have fixed premium payment periods, while others may offer flexibility in premium payment.
- Coverage Amount: Decide the amount of coverage you need. Consider your financial obligations, such as loans, mortgages, and your family’s living expenses, to determine an appropriate coverage amount.
- Coverage Period: Choose the length of the coverage period based on your protection needs. For example, you may want coverage until your children become financially independent or until your mortgage is paid off.
- Renewable Term Insurance: Be aware that some policies offer renewable term insurance, typically with policy terms of 5 or 10 years. The premiums for renewable term insurance are recalculated based on the life assured’s age at the time of renewal.
By carefully evaluating these factors and aligning them with your specific circumstances, you can make an informed decision about the most suitable term insurance policy for your needs.
Question: Are there different categories and considerations to be mindful of for term plans?
Term insurance policies can vary in categories and considerations based on their specific features and offerings. Here are some key aspects to be mindful of when selecting a term plan:
- Coverage Type: Term insurance can provide fixed or decreasing coverage. Additionally, some term policies focus on critical illness coverage or allow for multiple claims for critical illnesses. The type of coverage you choose should align with your protection needs.
- Policy Tenure: Different term insurance policies may offer various policy tenures. Consider how long you require coverage, and whether you prefer a shorter or longer policy duration.
- Optional Riders: Some term insurance policies allow you to add optional riders, such as a waiver of premium benefit in the event of a critical illness. Assess whether these riders align with your needs.
- Convertibility: Consider whether you have the intention to convert your term policy into a whole life plan in the future. Some policies offer convertibility options.
- Renewability: Term insurance policies can also vary in terms of renewability. If you’re unsure about the required policy tenure, some policies offer the option to renew, usually at higher premiums.
The specific type of term insurance, riders required, sum assured, policy tenure, and more should be selected based on your individual needs, objectives, and circumstances. It’s essential to compare different term insurance options to find the most cost-efficient solution tailored to your requirements.
Question: I have an existing medical condition. Am I eligible to purchase a term plan?
Yes, having a pre-existing medical condition does not necessarily disqualify you from purchasing a term insurance plan. When you apply for term insurance, the underwriter will evaluate your application and determine your eligibility based on your medical condition and overall health.
The underwriting process can lead to various outcomes, which may include:
- Acceptance: Your application is accepted without any exclusions or additional premium charges.
- Exclusion of Condition/s: The underwriter may exclude coverage for specific medical conditions from the policy.
- Premium Loading: You may be required to pay higher premiums to compensate for the increased risk associated with your medical condition.
- Postponement: The underwriter may delay your application and reevaluate it at a later date.
- Decline: In some cases, your application may be declined if the insurance company determines that the risk is too high.
Each insurance company may have its underwriting guidelines and policies, so it’s advisable to discuss your specific medical condition with a licensed insurance adviser. They can help you navigate the underwriting process and find an insurance policy that suits your needs and circumstances.
Question: Can I buy term insurance as a legacy plan to pass my wealth on to my children?
Legacy planning involves passing on your assets, values, and memories to the people you care about. While legacy planning is not limited to monetary assets, term insurance can indeed be a valuable tool for this purpose. Term insurance serves as a simple and pure form of life insurance, offering financial protection for your family even after you’re no longer around.
Key points to consider when using term insurance for legacy planning include:
- Financial Protection: Term insurance ensures that your family remains financially secure in the event of your passing. It provides a lump sum payout that can be used to cover living expenses, debts, and other financial obligations.
- Affordability: Term insurance typically offers a large amount of life cover (sum assured) at a relatively low premium rate, making it a cost-effective choice.
- Limited Policy Duration: It’s important to be aware that term insurance has a specific policy duration, and the coverage ends when the term expires. There is a risk of outliving the policy’s duration and not receiving a payout.
While term insurance can be a valuable tool for legacy planning, it’s not the only option. Other insurance tools like universal life, whole life, or endowment plans offer different benefits. Universal life provides long-term protection and inheritance, while whole life offers lifelong coverage and comes with a cash value component. Endowment insurance is designed to accumulate and pay a lump sum after a specific term.
The choice of insurance tool depends on your individual objectives, needs, and circumstances. By assessing these factors, you can determine which approach to legacy planning aligns best with your goals.
Term insurance, with its affordability, flexibility, tailored coverage, pure protection, and suitability for specific needs, is a valuable choice for individuals seeking to secure their financial future and protect their loved ones. By focusing on what insurance does best – providing financial security – term insurance offers an essential solution that complements a wide range of financial plans. It serves as a testament to the adage that insurance is not just a luxury but a necessity, ensuring that we can live our lives with the confidence that our families and financial security are protected.
