What is Insurance?
Investopedia defines insurance as:
“Insurance is a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium.
Insurance allows individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship at a reasonably affordable rate. ”
We all own insurance in one form or another, whether it’s medical, auto, life, or property insurance as it is extremely important to have.
But in this article, we’re going to focus on life insurance, and more specifically, Term and Whole Life insurance.
With life insurance, the insurance company will give the money to you or your benefactors in case calamity befalls and you’re left permanently disabled or dead. There are a few different types of life insurance which decide how much you pay in your premiums, or the level of protection you receive.
Note that most Singaporeans are already insured by the government healthcare scheme called Medishield life and usually any private insurance is just used to complement this.
Here are some types of insurance:
1. Term Insurance
This is the simplest type of insurance that only a pays out if the insured dies within the term. This can last anywhere from 5 to 40 years. It makes sense if you want to provide for your benefactors only for a certain period such as until they graduate from college or become financially independent.
In this type, the insurance only pays out if the insured gets injured or dies within this period. Once the term is over, all premiums are gone permanently as there are no investments in this type. And if the insurance term is terminated prematurely, then there will have to be underwriting in order to renew the policy.
Most Singaporeans believe firmly in using term insurance only, and prefer to grow their money using other means that they control themselves.
Advantages
– Costs less than the other types of insurance
Disadvantages
– You have to be very careful about what term you pick. If you pick a term too short, then it may expire before your benefactors can get to use it.
2. Whole life Insurance
Whole life insurance, just like the name states, will pay your death benefit to your dependants whenever you die, even if you’re lucky enough to become a centenarian! They are investment link policies which pay have higher premiums, which are sometimes invest to build up value.
In normal whole life policies, the premiums and the payouts are designed to stay the same level throughout the policy’s lifetime, and so the cost per $1,000 of benefit increases as the person gets older. In this case, the cost premiums would increase every year, and once the insured gets over retirement age, he or she will have to pay exorbitant rates and wouldn’t have a job to be able to pay it.
So the insurance companies charge higher premiums in the initial year than what’s require to pay claims. In a way, investing that money and using it to help pay the cost of older people’s life insurance.
If you’re worried about this, you shouldn’t. The law stipulates that once these over payments reach a certain amount or the policyholder decides not to continue the plan, they are to be made available as cash.
There are different types of whole life insurance: The ordinary life, universal life, and variable life.
Whole / Ordinary Life
This is the most common type of whole-life policy. Along with the death benefit, it also comes with a savings account.
With this type you agree to pay a fixed amount in premiums on a regular basis depending on which death benefit you choose, while the savings grow depending on the dividends you company pays you.
Universal / Adjustable life
This type gives you more flexibility than whole life by letting you increase your death benefit after undergoing a medical examination proving that you’re in (relatively) good health.
The savings vehicle (often referred to as a cash value account) earns interest at the market rate. After reaching a specific amount of money, then you have the option to change your premium payments. You can then change it to whatever your account can cover. This will be beneficial if you lose your income stream. But do remember that if your account dries up and you stop payments, your coverage will end.
Variable Life
This policy, in addition to your death protection, comes with a savings account that you can use to invest in stocks, mutual funds, and bonds. It has the potential to increase in value faster than the other types, but is also more risky as if your investments fail, then your death benefit and cash value will decrease. But some policies guarantee a minimum amount for your death benefit, making them safer.
3. Investment Linked Policies
Investment Linked Policies (ILPs) are insurance policies that also serve as investments for the insured. Like all other investment policies, they will give a pay out in case of death or injury, but the payout can vary in a few different ways.
- The amount may be higher than the assured sum because of the interest accrued.
- The payments may also be the value of the ILP units at the time of the payout.
Some insurance policies also combine both methods and it you should check with the agent.
With this type, you can also choose to pay your premiums upfront in one big lump sum. It is like the reverse of buying a house with cash instead of getting a mortgage. This will be cheaper in the long run than paying premiums. But there will also be a reduction in the overall protection.
When you get an ILP, your money is invested into the open market. Thus the amount that you get from payouts will fluctuate. However, as your money will be put under the responsibility of a fund manager, you can be assured that your money will be well managed by a professional.
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