As a financial advisory firm with a social mandate, we have many clients coming to us with suggestions from their personal financial adviser or overheard from their family and friends to get our unbiased view on whether those proposals are fit-for-purpose.
Recently, I met with a client in his late 30s, married with two children. He has a stable job and income in the healthcare industry and came to us with an idea to purchase term insurance until age 99 to bequeath a sizeable sum to his children upon his passing. He said that he had a close friend who was a young parent who passed on suddenly, which really shook him up.
Is this a feasible solution for him and the rest of us? Let’s delve deeper into it.
Purpose of Insurance
When we ask people around us what insurance is, most people understand that insurance serves as a financial safety net to protect us and our loved ones from unforeseen events such as accidents, illnesses, and deaths.
However, the role of insurance has increasingly expanded to cover more types of risk, including investment risks (resulting in endowment plans which give lower but steady returns) and even for specific illnesses such as cancer plans or to cover recurrent illnesses multiple times.
In recent years, some have proposed that by using insurance as a legacy tool, you can have a lasting impact on your loved ones and community.
This can be done by purchasing a life insurance policy and using the payout as a means of transferring wealth to future generations by nominating their children or grandchildren as beneficiaries.
With greater awareness of legacy planning, including overcoming the myth that legacy planning is only for the rich, coupled with increasing expectations for parents to help their children get a head start, more Singaporeans are starting to consider this option.
Using insurance as a legacy plan was often thought to be only for the wealthy because the majority of such insurance plans are typically whole life plans which require a significant amount of premium.
We take a look at two examples of such policies for a 55-year-old male that will pay out $1 million upon death – one is a single premium option, while the other requires payment over 20 years:
Single Premium Whole Life Insurance Plan for Male, Age 55
| Age | Death Benefit | Premium term | Total premium | |
|---|---|---|---|---|
| Projected at par fund’s 4.25% p.a return | Projected at par fund’s 3% p.a return | |||
| 85 | $794,989 | $750,000 | Single | $297,000 |
| 99 | $1,063,265 | $599,623 | ||
(Source: Income)
20-Pay Premium Whole Life Insurance Plan for Male, Age 55
| Age | Death Benefit | Premium term | Total premium | |
|---|---|---|---|---|
| Projected at par fund’s 4.25% p.a return | Projected at par fund’s 3% p.a return | |||
| 85 | $818,973 | $661,756 | 20 | $$21,754.43 p.a x 20 = $435,088.60 |
| 99 | $1,034,370 | $741,341 | ||
(Source: Etiqa)
Both options are not inexpensive. The single premium option requires a hefty initial premium of $297,000. In contrast, the policy which allows us to pay over 20 years will require a smaller annual payment of about $22,000 but a higher overall amount of $435,000.
However, some proponents now suggest using term insurance as a form of legacy tool. This rising trend is also the result of falling term insurance premiums which we wrote about in our earlier article.
To recap, term insurance is typically considered basic, affordable and flexible and does not have cash surrender value – this means that should you decide to give up your coverage, you will not receive anything in return.
For term insurance to function as a legacy tool, it would have to be structured such that it covers way into our older years (until age 99 in the table below).
Below is a table which shows the annual premiums that are needed to be paid for a $1 million death benefit:
| $1,000,000 Death Benefit | ||||||||
|---|---|---|---|---|---|---|---|---|
| Annual Premium | Total Premium Paid | |||||||
| Male | Female | |||||||
| Age | Male | Female | Age 75 | Age 85 | Age 99 | Age 75 | Age 85 | Age 99 |
| 40 | 4,406 | 3,849 | 149,804 | 193,864 | 255,548 | 130,866 | 169,356 | 223,242 |
| 45 | 5,855 | 5,049 | 169,795 | 228,345 | 310,315 | 146,421 | 196,911 | 267,597 |
| 50 | 8,081 | 6,623 | 193,944 | 274,754 | 387,888 | 158,952 | 225,182 | 317,904 |
| 55 | 10,364 | 8,506 | 196,916 | 300,556 | 445,652 | 161,614 | 246,674 | 365,758 |
| 60 | 13,250 | 11,205 | 185,500 | 318,000 | 503,500 | 156,870 | 268,920 | 425,790 |
| 65 | 17,096 | 14,473 | 153,864 | 324,824 | 564,168 | 130,257 | 274,987 | 477,609 |
(Source: Singlife with Aviva)
This table means that for a 55-year-old male, the annual premiums needed will drop by half to slightly over $10,000. With the average life expectancy of Singaporean males standing at about 81 years, there is a good chance that his children will be able to receive the death payout of $1,000,000 should he pass away before age 99.
Real-World Considerations and Trade-offs
We understand that such plans may appeal to those who wish to bequeath a significant sum to their loved ones but cannot afford the high premiums under a whole life plan. However, there are trade-offs to consider, especially over the long term, as your family’s financial circumstances change.
In the example cited at the start of the article, after going through MoneyOwl’s Comprehensive Financial Planning session, he decided that such a plan was not ideal as he had other more pressing commitments and, with a limited budget, he realised he needed to provide insurance for his family first. His children needed hospital insurance, and he had already committed to a whole life insurance policy for them since birth. In addition, he realised that he needed to set aside more funds for his children’s tertiary education.
He also considered that the annual premiums of about $10,000 had to continue well into his retirement years, and he did not want to set aside almost $1,000 a month from his retirement income to fund this plan as this meant he would have a smaller retirement income to live comfortably on.
Talk to us!
MoneyOwl has assisted thousands of clients with comprehensive financial planning, providing guidance on structuring policies and beneficiaries to ensure alignment with their goals and intentions.
It’s essential to work with a financial professional when considering insurance as a legacy tool to ensure your loved ones are well looked after upon your passing. Financial and legacy planning may be complex, but a comprehensive plan can bring peace of mind and security to you and your loved ones.
Rest assured that as an NTUC Social Enterprise, we continue to focus on insurance plans that make sense for most Singaporeans. We can help take a holistic look at your circumstances before recommending suitable financial solutions. You can also trust that our team of fully-salaried Client Advisers will provide conflict-free advice that will serve you well into retirement. By carefully considering goals and working with professionals, individuals can use insurance to build a meaningful legacy for future generations.
Disclaimer:
• The term insurance comparison figures are estimated only and do not reflect the actual premiums. The information may be obtained from third-party sources such as CompareFIRST or insurers. While every reasonable care is taken to ensure the accuracy of the information provided, no responsibility can be accepted for any loss or inconvenience caused by any error or omission.
• Prices for specific products are not reflected due to individual product specification limitations.
• An insurance company’s credit rating is the opinion of an independent agency regarding the financial strength of an insurance company. An insurance company’s credit rating indicates its ability to pay policyholders’ claims.
The information contained herein does not regard the specific investment objective(s), financial situation, or the particular needs of any person. Buying insurance is a long-term commitment and should be purchased according to your needs and the products’ suitability. You may wish to seek advice from our fully-salaried Client Adviser before making any financial decision.
