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Term insurance

Buying insurance can’t change your life but it prevents your lifestyle from being changed.


Surface:

Term insurance is characterised by its ability to ensure high coverage with lower upfront cost where individuals are protected by a sum of money for a specified period of time or till their children can financially support themselves.


This sum of money is usually used to provide a legacy where it creates income to support their family members who are dependent on his/her income to survive.


However, most Term plans requires the individual to continue payment till they pass on and for many this might be a concern during their retirement years.


That being said, Term plans are widely used in the industry as there are its Pros in structuring ones financial portfolio to maximize their protection coverage while maintaining within their budget.


Strengths:


Potential benefits:

  1. Generally more affordable - no cash value as there isn't a investment component.

  2. Complete financial stability - quickly achieve sizable protection for your loved ones.

  3. Covers till 100 years old.

  4. Riders - option to equip income replacements in the event of early, intermediate and critical illness.


Plan:


By focusing on the potential benefits of the TERM plan and customising in conjunction with a WHOLE LIFE plan, would enable the best protection for yourself and your family.

Buying insurance can’t change your life but it prevents your lifestyle from being changed. - Jack Ma

Riders can be added on to the TERM plans and greatly enhances the benefits by providing income replacement for the life insured. But all these comes in as added cost and as discussed, these addition would have to be taken into account when ones retires and has no active income.

The general rule of thumb is 3-5 times your annual incomes where if you think about it, it usually takes a person who has suffered an illness 3-5 years to fully recover and work her/his way back to their pre-illness income levels.

During these period of no income it would be very difficult to sustain one's lifestyle as overall expenses continues. Individuals with families are especially vulnerable in times like this and hence, it is critical for them to get their financial portfolio curated timely.


Which of the two is best? WHOLE LIFE vs TERM.


In short, WHOLE LIFE. But again, depends on the individual financial abilities and goals. Each has its own practical functions in achieving the income protection and legacy needs we have.

WHOLE LIFE as mentioned is able to shield us for our whole life but then again in recent times, TERM is able to cover us till 100 too. TERM plans are more affordable but then most of them have to continue to be paid till it ends.

Below chart shows how the income replacement coverage (Whole Life) grows over time as some of the value is invested it participating funds to guarantee coverage as you age.

One could see a clear advantage of the WHOLE LIFE. Do note, as it is limited pay plan and premiums an individual can choose for this case to stop paying at age 55.



ILLUSTRATED POSSIBLE INCOME REPLACEMENT COVERAGE OF A 30 YEAR OLD IN SINGAPORE ($) BASED ON $4K SALARY


Then it begs the questions. Why do people still want WHOLE LIFE plans when they cost more?


You see even though WHOLE LIFE, do cost slightly more than the TERM but people don’t realise that a portion of the premiums are used to invest and grow the cash value in the plan itself. This is how insurance companies are able to ensure coverage.

This has fundamentally improved your coverage during the latter years of your life and also ensure that you have a decent amount at maturity/surrender.

Furthermore, WHOLE LIFE plans are limited payment plans where you can decide when to stop paying premiums. This comes very useful for individuals who treasure the protection at retirement (no income) even when they have stopped paying premiums.

Benefits includes:

  1. Increased cover over time - Staying ahead of improved lifestyle.

  2. Cash Value - Availability for instant cash in times of need.

  3. Limited payment periods.

  4. Automatic premium loan - Layer of protection in case of miss payments.

  5. Income replacement till 100 years old.

  6. Maturity/surrender bonus - Used to offset & level out the cost difference vs TERM plan.


Summary:


TERM plan is great is providing comprehensive cover at a affordable price. While WHOLE LIFE cost slightly more, it saving/investment feature have the potential to offset the cost of itself, virtually making it inexpensive as compared to TERM.

The Key is to employ a combination of the two and produce a joint effect greater than the sum of their separate effects, provide the highest lifelong protections portfolio.

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