Consider terminating whole life insurance policies.

An exchange with a reader inspired this short blog post.

My dad who is almost 70 recently told me that he was trying to reduce his expenses and he asked if he should still pay almost $500 every quarter for his one and only whole life insurance policy. It amounted to almost $2,000 a year as a recurring expense.

Unnecessary recurring expenses are like financial chains.

I explained to him that he has no dependents anymore and that it is OK for him to terminate the policy. He said that we would get more money from the insurance company if he should pass away while the policy was still in force.

My dad is right, of course, but I told him our family don't need the money. We are no longer dependent on him financially.

I think he might already have thought of terminating the policy but was unsure because he would have liked to leave more money for his family when he leaves this world. I persuaded him that the product had already done its job and that it had become a luxury, a "nice to have" item but not a "must have" item.

My dad terminated the policy shortly after and got back a 5 figure sum as well. However, the most important thing to note is that my dad's cash flow improved by quite a bit after this. His financial burden is now lighter.

Need or want?

For many years now, I am a big advocate of buying insurance for the sake of insurance. Buy when there is a need. It is like buying anything on a need to have basis in life.

We might want something but we should think if there is a need for it. This is premised on the fact that money is a scarce resource for many of us. Some of us realise this while some of us don't.

Beware of marketing efforts to create an impression that something is a need for us when it could really be a want. To be fair, however, something could be a need for a person but a want for another.

Related posts:
1. Matt terminated his whole life insurance policies.
2. Term life insurance: Why buy term?
3. Money management: Needs and wants.
4. Eldershield: Is it really necessary?
5. Enhanced Incomeshield for my mother.

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?

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.