Guide to Understanding Term Insurance

Term insurance is a type of life insurance that provides a lump-sum payout to you or your beneficiaries in the event of death, or upon being diagnosed with a terminal illness.

Many term insurance policies also allow policyholders to buy add-on riders for additional coverage on early critical illness (ECI), critical illness (CI), total and permanent disability (TPD), disability benefits and personal accident (PA) benefits.

The primary purpose for the payout on your term insurance is to secure the financial future of your loved ones, especially if they depend on your income for their day-to-day living expenses. This sum of money will ensure minimal disruption to their standard of living.

We have Dependants’ Protection Scheme in Singapore

In Singapore, Citizens and Permanent Residents (PRs) may already be covered by the Dependants’ Protection Scheme (DPS), which is a term insurance that you can pay for with your CPF Ordinary Account savings.

This policy only covers insured members for a maximum of $46,000 and up to age 60. The sum assured and coverage period may not be sufficient to adequately provide for your loved ones. Annual premiums also increase over time as you become older. This is why you should think of it as a complementary policy to a life insurance plan that is able to cover you for a larger amount, and possibly up to an older age.

But before you buy a term insurance plan to protect yourself and your family, here are some features that you should first understand.

1. Coverage only for a specified term

As its name suggests, term life insurance typically covers you for a specified term period. In the past, many term life insurance plans only provided coverage until you turn 65. Today, with more competitive insurance products and increasing life expectancy, there are a variety of term insurance plans that provide coverage till an older age.

For example, with our AXA Term Protector or AXA Term Protector Prime, you have the flexibility to choose to be covered up to age 50, 55, 60, 65, 70, 75 or 99. You can also choose to be covered for a period of 5, 10, 15, 20, 25 or 30 years, which may be renewed without any medical underwriting.

2. No cash value

Unlike a Participating Whole Life plan, which is another option for life insurance coverage, Term Life Insurance plans do not provide any cash value upon the surrender or maturity of the policy.

This is because Term Insurance separates your need to provide financial security for your loved ones from your need to accumulate returns to leave a legacy to your beneficiaries.

As you are only trying to achieve the first objective, of providing financial security for your loved ones, there is typically no cash value once you decide to surrender the policy, or upon maturity of the plan, after you hit the age or time frame you want to be covered for.

At the same time, you have to take the second objective of building up a legacy for your loved ones, if that is something you want to do, into your own hands. You can do that either by investing on your own or via funds.

On AXA Term Protector or AXA Term Protector Prime, you can opt for the Guaranteed Survival Payout rider, which provides the prevailing sum assured in the event you outlive your policy (only available for term-to-age 99).

3. Term Insurance is lower cost

As Term Insurance is only meant to provide financial security for your loved ones for a certain period of time, as opposed to a Participating Whole Life plan which covers one for life, it will generally charge a lower premium for policies for a comparable sum assured.

While you are paying a more affordable premium, you need to understand that this is because you are only paying for protection, rather than building a cash value or potentially receiving an investment return over time.

How much coverage do you need?

As a general guide, the Life Insurance Association (LIA) commissioned the 2017 Protection Gap Study – Singapore and found that economically active Singaporeans and PRs required an average of 9.0x of their average annual income. While this may be a good guide, the study also noted that protection needs significantly varied for people in different households and income levels.

Here are several questions you need to answer for yourself in order to gauge how much coverage you should get.

Question 1: How much will your dependants need in your absence?

In LIA’s study, several types of expenses were taken into consideration for life insurance, including funeral costs, unpaid services such as a helper, your children’s needs, your elderly parents’ needs, future household expenses and rent.

You need to add these expenses up, to have a good estimate of what your dependants will require to ensure they get to continue a similar standard of living in your absence.

You should calculate relevant expenses, including day-to-day living expenses, education expenses and other types of support you want to provide for your children up to a point they are able to achieve financial independence. The same goes for your elderly parents, with the use of the current life expectancy being a good gauge for how long they may require financial support.

For your spouse, there are several other considerations. Do you expect him/her to continue working if you are no longer around? Getting sufficient coverage to also cater for your spouse leaving the workforce to care for your children may be something to consider.

You can also choose to protect your loved ones at estimated future costs, taking inflation and increasing costs of living into consideration when you calculate your coverage amount.

Question 2: How much loans do I have?

Another important area of expense you need to account for in your sum assured is the loans you are currently servicing.

If you are still paying a monthly installment for your home, your loved ones must be able to afford servicing the loan, or to pay down the loan in order to continue living in your home. This also applies to other loans such as a car loan, investment properties or even business loans that have been taken.

Question 3: How much do I want to leave behind?

Even if you don’t have loved ones relying on your income or loans that need to be paid off, you should consider how much you want to leave behind as a legacy. One way to ensure a legacy could be through a Term Insurance policy, where you leave behind the sum assured for your loved ones.

Question 4: How much premiums will I be paying?

If budget is not a constraint, everyone would naturally want to buy as much life insurance as possible to leave behind for their loved ones. However, you have to think about affordability, as well as be prudent in our decision in paying for insurance premiums.

As mentioned earlier, Term Insurance typically provides coverage at an affordable cost, since it only focuses on the sum assured rather than to accumulate a cash value.

Finally, you should only purchase an insurance policy that you can comfortably afford rather than to stretch our finances. This is because your coverage will cease if you are unable to keep up with premium payments, so overpaying for a term life insurance plan may not be ideal.

When should I buy Term Insurance?

Buying term insurance when you are younger will generally be more advantageous. This is because there is a lower chance you will have any exclusions or additional premium loading due to a pre-existing health condition.

When you buy a term insurance policy at a younger age, you also tend to pay a lower premium. This is mainly because younger people tend to be healthier. As you age, the chances of being diagnosed with an illness and passing on increases, which also means there is a higher probability that the insurer will have to make a payout on the policy within a shorter number of years.

Another reason to buy term insurance or increase your term insurance coverage is during major life milestones. This includes getting married, having a new-born child, buying an investment property or if your spouse decides to stop working.

Disclaimer:

This article is for general information only and does not take into account the specific investment objectives, financial situation or needs of any particular person. The views expressed herein do not necessarily reflect the views of AXA Insurance Pte Ltd and should not be construed as the provision of advice or making of any recommendation. There is no intention to distribute, or offer to sell, or solicit any offer to purchase any product. We recommend that you seek the advice of a qualified financial advisory professional before making any decision to purchase an insurance or investment product. Whilst we have taken reasonable care to ensure that all information provided was obtained from reliable sources and correct at time of publishing, information may become outdated and opinions may change. We are not liable for any loss that may result from the access or use of the information herein provided.