DollarsAndSense.sg shares on everything you need to know about buying a term insurance.
Term insurance is probably the easiest type of insurance to understand. There is nothing difficult about it. In fact, there is so little to know that some agents may even try to complicate it, just so it doesn’t appear too easy.
Forget about those. What we will do today is explain everything you need to know about this type of insurance.
What is term insurance?
Term insurance is a policy that would cover you for a fixed period. The policy will pay out an insured sum of money in the event of death or terminal illness of the policyholder.
Do I need it?
This is a question with a simple answer. You need it if you have dependants who are reliant on your income. If the money you have today is all spent on yourself, then no, you do not need it.
How much do I need?
Assuming you have dependants, term insurance is probably a good way to get cheap coverage as compared to the more expensive whole life policy. There is no point in over-insuring yourself, as the premium you pay for term coverage is non-recoverable (i.e. you don’t get it back).
Ask yourself how much your dependants would need in the event of a tragedy to continue leaving their lives normally. If this works out to be about $30,000 a year, and you will need it for 20 years, then coverage will be $600,000. We are assuming here that your dependants do not intend to invest the money for additional returns. You should also add on the cost of any liability you currently have such as a home mortgage.
How A Term Illustration Plan Will Look Like
The benefit illustration plan for term insurance is so easy that even a primary school kid will understand it. Here is an example:
|End Of Year||The duration of this term plan is 30 years|
|Premium||The premium for the plan is $398 annually ($33 monthly)|
|Total Distribution Cost||How much the insurance company is paying for the distribution expenses of this product|
|Death Benefit Guaranteed||The payout in the event of death or terminal illness, which in this case is $300,000|
What is “Total Distribution Cost”?
For those of you (like us) who enjoy finding out just how much our insurance agent is earning from each policy they sell us, you can look at the “Total Distribution Cost” column.
You will notice that the total distribution cost increases over the first 6 years. That is because the commission paid out to agents are usually spread out over a period of 5 to 6 years. Agents usually get about 50% of annual premium in the 1st year.
Something worth noting is that the total distribution cost for this policy is slightly above 2 times the annual premium ($398 vs $867). This is generally quite common. From what we know, an insurance agent usually receive a premium equivalent to about one year’s worth of premium over a 5-year period for each sale. The remaining amount goes to the agency.
Is the amount too high? Perhaps. One way to see it is that the distribution expense represents 7% of the total transaction value. That means taking out the middle person would potentially provide for a 7% discount, assuming the insurance company gives you back the savings. That’s a lot, $867 is basically 2 years of free coverage.
On the other hand, that means purchasing and understanding everything yourself, including the completion of the form and ensuring that all declarations are accurate. It also means having to ensure you understand your needs holistically and that you are being covered for the right amount.
Will Singaporeans be buying term insurance direct in the future?
We think so. We said previously that having a direct sales platform would give “consumers the incentive to educate themselves on the basic of insurance, and purchase policies directly without requiring the “advice” of FAs”.
The new generation of Singaporean is increasingly more IT savvy and will want to compare the prices of everything they buy. First, it was plane tickets and hotels; next it was cars and then, it was property. There is no reason why insurance won’t be next in line.
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