In this month’s edition of Ask Me Anything, we answer all your questions related to child insurance – from legacy planning to buying the right insurance for your kids.
Question: Can I buy term insurance as a legacy plan to pass my wealth to my children?
“The purpose of legacy planning is the act of passing your assets to the people you care about. It doesn’t have to be monetary per se, but it’s the value system that you live by and the memories that you leave behind. So yes, term insurance can be dedicated as a tool for legacy planning. In fact, it is the simplest and purest form of life insurance. Not only does it provide financial protection for your family at the most affordable rates, you can also get a large amount of life cover (i.e. sum assured) at a relatively low premium rate. The assurance will be guaranteeing the payout.
However, term insurance is not the only tool to pass on one’s wealth. As mentioned, legacy planning is about the impact you leave behind, not what you leave behind. You have other tools at your disposal like Universal Life, Whole Life or even a simple endowment plan. Universal Life offers long-term protection while leaving a substantial inheritance upon death. Whole Life caters to lifelong coverage and comes with a cash value component that grows over time. Endowment insurance is designed to accumulate and pay a lump sum after a specific term. Ultimately, there is no one tool that fits all. Each tool has its designated purpose. It is how we utilise these tools that best fits our objective, legacy planning.”
– Client Adviser Chee Ping
Question: Often, we are told to buy life insurance early on for our kids because it is cheap. Is that the right consideration when deciding to buy insurance for my children?
“While cost is an important consideration, we must be mindful that we buy insurance because it serves a need, not just because it is cheaper to do so when our children are young. Generally, parents are most concerned about incurring hefty medical bills if their children are down with a prolonged illness. Parents may have to give up their full-time jobs and suffer a loss of income to care for their children full time. An Integrated Shield Plan (IP) covers most hospitalisation expenses, while a critical illness plan complements the former by replacing the parents’ loss of income and any other medical expenses not covered by the IP. In the sequence of planning, it is also important to ensure that the parents themselves are fully insured before considering life insurance for their children.
Another consideration would be the case of insurability. It may be worthwhile to insure children when they are still young with a clean bill of health. In the unfortunate event the child develops a critical illness in the future, the parents need not worry about not being able to insure their child. The premiums for a child is cheaper because the probability of claims is lower as compared to an adult or an elderly person. With most whole life insurance plans in the market offering limited premium payment terms, parents can fully pay up the plan before the child starts working. This could potentially be one of the best gifts they inherit.”
– Client Adviser Chiam Sijin
Question: Besides a hospitalisation plan, what type of insurance do you advice getting for children ?
“Parents want to give their children the best possible. Other than providing them with a good education, it is also important to insure them adequately and protect them against unforeseen situations. Apart from a hospitalisation plan, parents can consider getting a whole life plan with riders that cover critical illnesses including juvenile-related illnesses. This will serve as a good complement for any medical expenses not covered by the hospitalisation plan.”
– Client Adviser Norris Wong
What are your thoughts on education endowment insurance for children?
“In general, endowment insurance is considered a low-risk investment. While you could lose money if the guaranteed returns are lower than the sum of premiums paid over the years, that also means that your losses are capped. It also provides basic insurance coverage, typically against death and total permanent disability. However, an endowment insurance policy is usually a long-term commitment. Early termination can cause policy owners to lose money. Therefore, it is important to review your cash flow to ensure affordability throughout the premium term.
Alternatively, for parents who can take more risks and have sufficient time horizon, investing can be an option for them too. Returns from investing in a low-cost globally diversified portfolio may outperform returns from an endowment insurance plan in the long run. There is also flexibility as there are no penalties for missed contributions in monthly RSP or regular savings plan investment, and you can withdraw your funds at any time. Regardless, both options can meet the objective of accumulating funds for children’s education. One can also incorporate both to have the best of both worlds.” – Client Adviser Axel Toh
I bought whole life insurance for my children. Now that they’ve turned 21, should they change to term insurance, or should they continue with their whole life insurance?
“The whole life insurance you bought for your children would likely be insufficient to cover their insurance protection needs once they start working. They will need to get their own insurance coverage. Whether they’ll need to surrender their existing whole life plan or not would depend on a few considerations. First, only consider surrendering the policy if you are certain that your child’s health condition is suitable for him/her to get new coverage without any unfavourable counter-offers by insurers such as loading (extra premiums), exclusions or even rejection on the entire coverage.
Second, after discussion with your child, you may want to consider using the surrender value to reduce your current liabilities i.e. outstanding mortgage loan or use it to fund your retirement nest egg. Finally, if you would like them to continue the plan, they may hold onto it and accumulate the cash value till the day they need a lump sum for big-ticket expenses like a wedding or mortgage down payment. At this point, the policy is more likely paid up or left with a few years to go if you have opted for a limited premium payment option, which is how most whole life plans are designed these days.
For the coverage that they may require as they enter the workforce, you may refer to the resources below to find out more.
- Video: I’m A Young Working Adult. What Kind Of Insurance Do I Buy?
- Article: Insurance you need at different stages of your life
– Senior Client Adviser Anton Tan
Have a question of your own? Write in to firstname.lastname@example.org and look out for our client advisers’ responses in upcoming months. We also have a live AMA session on Instagram – so follow us now for more updates!