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Term life insurance: Why buy term? How big a sum should I buy? How long a term should it be? How much does it cost?

Saturday, September 6, 2014

A reader shares his wisdom:

Before we discuss about how much insurance to get, we must first understand what insurance is all about. Insurance is 

(1) a risk management tool 

(2) to transfer the financial risk of catastrophic events to the insurer 

(3) in exchange for a small sum of premiums.

In light of the above definition, I usually recommend people to stay away from whole life insurance and go for term-life instead. Insurance, after all, is an excellent risk management tool but a poor investment vehicle, IMHO.

How much life insurance should one get? 

There's many factors to consider. One of that will be your financial commitments. Say, you are a fresh graduate and no dependants at all. Technically, you only need sufficient life insurance to cover for TPD and CI. 

The required sum assured will still be high (up to S$500,000) because a young disabled man in his 20s will need lots of $$$ for care and support until he passes on. Take note that expected longevity in SG is about 82 for male and 85 for females.

An additional point to note is that when buying term-life insurance, I would suggest my friends to cap the term up to retirement age (currently 62 years old).

The reason is simple: Insurance loses it cost effectiveness after a person is in his 60s and
70s. The cost of life insurance will rise exponentially because the probability of dying also rises exponentially.

This is one of the main reasons why the Dependent Protection Scheme (DPS) caps at age 60. Getting life insurance beyond that age is no longer value for money.

When you are in your 60s, life insurance should no longer be needed because your financial commitments should be at a minimum. This means no debt, no dependants and no major financial expenditures.

People in this life-stage should be focusing on retirement adequacy.

Btw disclaimer ah, I am just talking out loud to myself in the above posts. Please visit a professional planner (not insurance agent) if you want sound and constructive $$$ advice.

I bought my insurances when I was 26 years old.

I paid $100/month for $1M term life and $250K major CI. You can use this a base for comparison.

For fresh graduate earning a market rate of $3K/month. $50/month can "smelly-smelly" get them $500K insurance coverage if they go for term-life insurance.

Friends, not everything in life needs insurance one. Ponder and chew on this point.

Get adequate insurance where it matters. Don't overpay for insurance and we do not need insurance for everything under the sun. Words of wisdom.

Note: Author would like to remain unnamed.

Related posts:
1. How much term life insurance should fresh grad have?
2. In my 40s, married with kids? What would I do?
3. Achieving level 1 financial security for Singaporeans.


AK71 said...

"It could be due to complacency and a false sense of security that misfortune would not befall the individual. Or it could also be a general lack of awareness of how much coverage would be considered adequate," said SM Goh, who is also chairman of the Monetary Authority of Singapore (MAS).

"But the more likely reason is the perception that getting the recommended amount of insurance protection is costly and beyond their means. Hence, it is given lower priority amidst other more pressing financial commitments like housing, children's education and other day-to-day needs," he added.

He said the insurance industry needs to place more emphasis on protection plans like term assurance which is a more cost-effective way of addressing the protection needs of Singaporeans.


AK71 said...

Hi Capricon,

I recently got my dad to terminate his whole life policy when he told me he is tired of paying every 3 months for it. I told him he has no dependents anymore and he doesn't need to maintain the policy. His eyes lit up and he terminated it the next day and got back a 5 figure sum too. :)

I cannot speak for everyone but my term life policy premium is the same year after year. No increases as I age.

I have whole life policies bought in my younger days too. These days, I am a big advocate of buying insurance for the sake of insurance. :)

Just a value investor said...

AK, thanks for the timely post, I was about to re-look at my insurance policies.

JK Holdings said...

Figure hot from the oven . Age 34 , S$272.55 per month . Coverage 26 years until age 60 , term insurance S$1 million . Total cost by age 60 , S$85K .

AK71 said...

Hi JK,

NTUC Income's term life insurance, iTerm, could offer a better deal, perhaps.

NTUC Income iTerm brochure.

I have a blog post ready to be published on this topic, actually. Look out for it. :)

AK71 said...

From FB:

"Hi AK, I frequently read your blog. May I ask you an question on insurance? I have enhanced NTUC incomeshield. I also have Aviva SAF Group Term Life insurance of $100K coverage. Recently, Aviva changes SAF Group Insurance into Mindef and MHA Group Insurance. This results in a reduction in premium. I am thinking of getting a DPI of term insurance with CI of $400K. Then $100K of Group Term Life Insurance and $500K Group Personal Accident Insurance from Aviva. Will I be sufficiently covered? Or do some of the insurance overlap?"

Assi AK:
"What I share are principles. I make general observations and comments. Readers have to decide for themselves when it comes to specifics like whether the coverage is sufficient as all of us have different circumstances."

AK71 said...

David Poh:
AK, have you heard about the Mindef/SAF group insurance offered by Aviva?

Of course. ;) Although a large group insurance plan is usually cheaper, remember that the premium is not guaranteed and the insurance can also be terminated without any prior notice and terms can be changed without your consent. So, it is prudent to have a personal plan too. :)

Wendy said...

Hi AK,

This is really a late comment. Not sure if you will see it. I read that you will release your term insurance at age 62 (retirement age) but what happens if you get CI (choy choy) from 62-82 (current male life expectancy). I know that you have a substantial war chest and dividends pay out but a CI could easily wipe those out. Any thoughts?

AK71 said...

Hi Wendy,

I have CI coverage till age 75 and I have blogged about the importance of having CI insurance before.

For example:
Is early critical illness insurance necessary?

Ultimately, we want to be less reliant on such products over time and I published the following blog:
The best insurance to have in life.

AK71 said...

From my YouTube channel.

Reader asks AK:
Hi Ak, understand from one of yr blog that we shouldn’t buy life insurance for the kids(as they have no dependents). But should we at least buy at term plan to cover death, tpd and CI?

AK says to reader:
I am pretty consistent when it comes to the subject of insurance. For kids, the most important would be medical insurance. Hospitalization & Surgery. So, they should at least have Medishield Life tagged to their parents', I believe. Critical illness coverage for kids? Hmm. If we are super kiasu, maybe.😅 They don't have dependents and don't need death benefits and benefits in case they are temporarily disabled. They don't have earned income to replace. 🙂
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