Most of us own whole life insurance plans. They are meant to protect us against death, disability or a major illness for our entire life. But do we really need insurance cover for our entire life?
|Event||Purpose of Insurance||Permanent / Temporary Need?||Type of Insurance|
|Death||Income for family||Temporary.
Not needed when you retire or have no dependants.
|(1) Term Life; or
(2) Decreasing Term
|Pay off obligations.
E.g. Mortgage, Children’s education etc.
These obligations don’t go on forever.
|(1) Mortgage Insurance, or
(2) Term Life; or
(3) Decreasing Term
|Key man of company||Temporary.
You don’t stay in the company forever.
|(1) Term Life|
|Medical Crisis||Hospitalisation costs||As long as possible||(1) Shield Plans with Hospitalisation & Surgical Policy|
|Alternative Medicine (In the event of Critical Illness)||As long as possible||(1) Critical Illness Plan – Term Plans up to age 90 or 99 available|
As insurance only covers till age 65.
|(1) Term Life; or
(2) Partial Disability Income Plans
Table 1: Permanent or temporary need?
From table 1, it becomes clear that most of our protection needs are temporary, with the exception of providing for hospitalisation costs and maybe say, alternative medicine. Insuring against high hospitalisation cost can be done effectively using Medishield Life or a private shield plan with a good Hospitalisation & Surgical plan that pays the first dollar that you incur. To provide for the need of alternative medicine such as Traditional Chinese Medicine in the event of a critical illness, you can buy a small term plan that covers critical illness till age 90 or 99. All insurance companies in Singapore sell Term plans covering death, disability, critical illnesses, long-term care and mortgage protection.
Thus, most of us do not really need whole life insurance. By purchasing one, you are paying huge premiums and most of the time not being fully insured. To illustrate, if you are a 35 years old male and need to provide your family with a monthly income of $3,000 for 20 years in the event of your unfortunate demise, you will need about $600,000 cover. If you intend to retire and have no dependant at age 55, Table 2 shows a comparison for the various types of plans:
|Annual Premium||Insurance Coverage||Insurance Payout
(In the event of claim)
|Surrender Value at the end of 20 years|
|S$10,986||S$600,000||S$600,000 + bonus||S$250,501|
(Till age 55)
Table 2: Types of Insurance Plans
The truth is, how many can afford to pay $10,000 per year, just to cover his individual death needs? In the above example, we haven’t even considered his medical, his spouse, and his children insurance needs yet. With term plans, we can afford to fully cover our needs. Of course, advocates of Whole Life plans will say that you get some returns on the premiums you pay from Whole Life insurance whereas, from term plans, you get nothing back at the end of say, 20 years. That is only half-truth! This is because; there is a portion of your premiums for whole life plans that will be expended. Only after that, the money will be invested. But what is the point of the cash values when you can’t even get your whole family covered properly?
In the above example, the difference in premiums is $9694 p.a. and in return, you get about $250,000 at the end of 20 years. That is just an annualised return of 2.38%. It is sad that Singaporeans are sold mostly whole life plans. In 2003, only 7.3% of the total insurance policies sold are Term plans. No wonder Singaporeans are generally underinsured. So, let’s use insurance for the right purpose, for protection. Even if savings are important, there are a lot of options (which is beyond the scope of this article) to better the 2.38% p.a. as in the above example. So, think twice before you pay your next insurance premium. Don’t just take what is being sold to you.
The writer, Christopher Tan, is Chief Executive Officer of Providend and Executive Director of MoneyOwl. The edited version was published in Today Newspaper on 16 August 2005 and updated in 2014. This article is used with permission from Providend Ltd.