GoBear guide - the basics of life insurance in Singapore
What’s often too limited, unappealing, and mistaken for health insurance? The answer is poor old life insurance.
Despite being just as important, many Singaporeans are quick to brush it off; and for those who buy it, many don’t bother to learn the important details (all those charts and numbers).
You should know better though, and here are the basics you absolutely need to grasp:
I already have MediShield, why do I need this?
MediShield is health insurance, not life insurance.
Your MediShield or IP provides a pay-out to cover hospitalisation costs, and some outpatient treatments. Health insurance doesn’t provide any payout to your loved ones, however, if you pass away.
How does life insurance work?
There are three main types of life insurance:
- Term insurance
- Whole Life insurance (Par and Non-Par)
- Investment Linked Policies (ILPs)
This is the simplest type of life insurance policy.
Term insurance covers you for a given period, usually between five to 40 years. If you die or are permanently disabled* during this time, you’ll receive a guaranteed payout known as the sum assured.
Because the sum assurance is fixed, you know exactly how much your beneficiaries will receive.
Don’t confuse term insurance with policies such as endowment – there is no payout at the end. The policy simply stops.
*Assuming the policy covers Total Permanent Disability. Most life insurance policies include this.
Why buy term insurance?
It’s easy to understand. There are no variable bonuses, or complicated features like investments in sub-funds.
It’s the most affordable type of insurance. Term insurance can be as low as $50 a month. Money that’s saved on insurance can be invested elsewhere (hence the saying “buy term and invest the rest”).
You can use it to provide for a specific time period. For example, you might buy term insurance until your child is 21 years old, and can provide for herself if you die unexpectedly. After that, you can stop paying for the policy.
Whole Life insurance (par and non-par)
Whole life insurance covers you for your entire life. Upon your death**, your beneficiaries will receive a payout known as the sum assured. This doesn’t mean you have to pay premiums for the entirety of your life; you only pay premiums for a certain number of years – say 20 or 25 years, after which you’re covered for life.
Whole life insurance can come in the form of participating (par) policies, or non-participating (non-par) policies.
When you pay premiums into a par policy, the insurer will also invest a portion of your premiums (you can’t control how they invest it).
You’ll receive a portion of the returns, in the form of non-guaranteed bonuses.
As the name implies, the bonus depends on how well the insurer’s investment performs. If the investment doesn’t perform well, for example, there may be no bonus at all.
For par policies, the payout upon your death is the sum assured, plus any non-guaranteed bonuses accrued.
For non-participating (non-par) life insurance policies, there are no bonuses. You’re covered for life, but the payout is just the sum assured.
**Some policies may also cover Total Permanent Disability and Critical Illness.
Wait, this lasts my whole life? What if I change my mind?
If you change your mind about a Whole Life policy, you can choose to surrender it. This applies to both par and non-par policies. This will give you a partial amount of money back, called the surrender value.
But be aware that the surrender value is always less than the death value (the payout you’d get if you die). The surrender value can also be less than the total premiums you’ve paid.
Many policies have no surrender value in the first one to three years.
Why buy Whole Life insurance?
Whole Life insurance can be used to provide for lifelong dependents. For example, if you have special needs children who cannot provide for themselves for life.
If you feel your own savings and investments are too limited for your loved ones, you may want to boost it through a Whole Life policy that pays bonuses.
Investment Linked Policy (ILP)
ILPs are a combination of insurance and investment. When you buy an ILP, your premiums are also used to invest in sub-funds.
Sub-funds are professionally managed funds, which trades assets such as equities, bonds, or commodities, to generate a return.
A Financial Adviser (FA) will usually walk you through the available sub-funds, and you get to choose the ones you want to invest in.
Different sub-funds specialise in different areas (e.g. some sub-funds focus on emerging market economics, while some may focus on Forex or bonds). The FA will usually help you pick a combination of sub-funds that match your needs and risk profile.
As with Whole Life insurance (see above), this type of policy covers you for life. However, the payout works differently. When you die, your beneficiaries will receive the sum assured, plus the value of your units in the various sub-funds.
As such, the performance of the funds determines the final death value of the policy.
It’s possible for the death value to be much higher or lower than estimated, depending on the volatility of the sub-funds you invest in.
Another interesting feature of ILPs is that you can take a break from paying premiums. The insurer can sell off some of your units in the funds to cover premium payments, if you find yourself in a tight spot.
Why buy an ILP?
The reasons are broadly similar to buying Whole Life insurance (see above). However, ILPs are also investments – they raise the possibility of getting much higher payouts than the premiums you put in.
This carries a commensurate amount of risk, in that you may also get a much lower payoutif the sub-funds don’t pan out.
ILPs give you a bit more control than par policies. While you can’t control what the funds buy or sell, you can control which funds you invest in.
How do you pick the right life insurance?
When in doubt, defer to term insurance as it’s the simplest type of policy to understand. For new parents, you should - at minimum - buy term insurance to provide for your children until they’re of working age.
Regardless of which type of life insurance you buy, the minimum acceptable payout (the sum assured) should cover five to seven years of your family’s expenses.
You should also ensure that premiums are affordable. If you buy a policy and later find you can’t afford it, you would have wasted the premiums paid to date. The surrender value probably won’t make up for the loss.
As a rule of thumb, the cost of monthly premiums plus any other obligations (e.g. mortgage repayments and car loan repayments) should not exceed 40 per cent of your monthly income. If it would cost more, you should look for a more affordable policy.
Finally, always compare between life insurance premiums before you buy. It’s possible for two policies to have almost the exact same benefits, but very different premiums. This is partly because each insurer has its own method of assessing risk – an insurer that considers you to be a lower risk will charge you lower premiums.