At the MRT station, on the way home from school, from afar you see a megawatt smile flashing from a smartly-dressed person. Clipboard in hand, he/she approaches you and requests a minute of your time to fill in a survey. You kindly oblige and when the proposition of a personal finance planning session is brought up, you readily accept. The person seats you down, breaks the ice, enquires about your income and then enthusiastically introduces to you on a life insurance product. You begin to hesitate, but why so on a plan seemingly full of benefits? Apart from not making a rash decision, there are good reasons why it is vital to weigh our options carefully before settling on one.
Term Insurance
Term Insurance is a temporary insurance and it only provides coverage for only a specified period of time, usually 5, 10 or 20 years. If the insured dies during the term, the death benefit will be paid to the beneficiary, nothing is paid if the insured survives the term. This is a low-cost insurance in which you only pay for the amount of coverage you require, providing maximum protection at minimum costs outlay.
Whole Life Insurance
Whole Life Insurance is a form of permanent insurance policy. It provides insurance coverage for the entire life of the insured. Although this policy emphasises protection, it also has some form of savings element (cash value) in addition to the death benefit, meaning that the insured can withdraw this cash value by surrendering the policy after a period of time hence its premium monthly (amount to pay to sustain the policy) is much higher as compared to term insurance for the same amount of
coverage.
Endowment Insurance
Endowment Insurance has a fixed maturity date, usually 10, 15, 20 years or up to a certain age limit (eg. at age 65) and combines insurance protection with a savings element for the policy owner as well. The cash value builds up quickly and its premium is higher than Term and Whole Life Insurance policies in view of its high savings/investment element.
Removing the Stickiness
The “Break-even point” is widely referred to in Whole Life and Endowment Insurance plans as to the point of time in future (Eg. 20 years) when the total amount of premiums paid is equal to the cash value which can be obtained if the policy is surrendered. While this may seem that we are getting “free” insurance coverage, it is vital to note that the same amount of money now will differ significantly in value in 20 years due to inflation. Hence, we have not “broken-even” and are in fact paying for the insurance coverage and savings element in the plan.
Next, we have to consider our financial objectives together with the kind of insurance we require. A vital question is to ask ourselves, “Will I be better off placing this sum of money into another investment vehicle in which I will obtain better returns as compared to the returns which I will obtain from this saving plan?”
It is also important to learn that most insurance representatives are remunerated on a commission basis which is dependent on the type of product they sell and the amount of premiums they receive. It is perfectly okay to ask the advisor on how he/she is being remunerated. The premium paid goes to paying for the company’s operating costs which include their marketing efforts as well. You may want to approach a few agents to compare their advice, source and determine your own plans which best fit your needs or approach a fee-based financial advisor.
A Life Insurance is most essential for us to have when we have dependents like our spouse and children who are dependent on our income. Thus, an ideal time for us to purchase life insurance is when we have our first child, by purchasing a Term Insurance for 25 years and then investing the rest of our money in a low-cost well-diversified Exchange Traded Fund (ETF) can be a method for you to go about to obtain better returns. There is no need in getting insurance for any longer than that period as our dependents will be able to provide for their own by that time.
Insurance as exactly as what it is defined, it is used to transfer risk to another party and it should be used solely for that purpose and I hope that when the next well-groomed person approaches you on the street, you will have a clearer picture on the factors you need to consider before you put down your pen to paper and parting with your hard-earned.
Original photo by Benjamin Lim. Used with permission.
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