Is term insurance really a waste of money or is it actually a must-have for the financially savvy? Is term insurance for those with a tight budget, or for those who are smart enough to buy term and invest the rest, or for those who want to leave an inheritance for their children and grandchildren?
Term insurance used to be mostly off-the-shelf policies with little to no customization offered. But in recent years, it has caught up with its PAR (participating) and ILP (investment-linked policy) counterparts in terms of sophistication.
Types of Term Policies:
Pros of Term Policies:
1. Lower Premiums
Also known as ‘pure protection’ policies, term policies can be the most cost-effective way to get high coverages for relatively lower premiums.
2. Option to convert to a PAR policy
Term policies come with the option for policyholders (PH) to convert it into a PAR policy. This comes in handy for those who want protection at a lower cost initially, but also want the choice to convert their policy to one with cash value later in life when budget allows, or when their financial needs have evolved.
3. No cost for early termination of the policy
Since one is essentially paying for just the insurance coverage as the term policy runs,
there is no monetary loss even if the term policy is terminated prematurely.
4. “Cheapest” way to leave an inheritance
Majority of us hope to live long enough to enjoy retirement before passing on in our old age. And knowing that the cost of living in Singapore will be even higher in the future, we also hope to leave some money for our children (and grandchildren), so as to still be able to make a difference to their lives even after we have passed on. Term policies for death coverage are popular for this very reason. Securing a $500,000 death coverage means that even if we spend all our money by the end of our retirement (before we die), we will not leave our family with nothing. That is why term policies for death can be likened to a ‘sure-win investment’. It’s just a matter of how much you ‘win’.
Cons of Term Policies:
1. No payment = No coverage
Term policies lapse and stop providing coverage once the grace period(usually 60 days) for overdue premiums is exceeded. And in order to reinstate a lapsed policy, the PH will most likely be subject to health underwriting. Newly discovered/developed health conditions since the initial purchase of the policy (not from the time that the policy lapsed) must be declared. The PH can end up with a premium loading*, an exclusion, or in the worst case, a defer/decline of the reinstatement of the policy.
*Loading: An additional cost added to the policy for insuring an individual who is categorized to be comparatively more prone to a type of risk(s) than in ordinary circumstances.
2. No emergency fund
As premiums paid are only for the cost of the policy, term policies have no surrender/cash value. This means that the PH will also be unable to use the policy to ‘trade’ for urgent cash (e.g. take a policy loan or do a partial withdrawal).
3. Coverage term = Payment term
Unlike WOL policies with a limited premium payment term (PPT), the PPT is the same as the policy term for most term policies. Hence it is important for the PH to ensure that he/she has sufficient funds to continue the payment of the premiums even after retirement.
4. Trying to ‘time’ the policy term
Some of us fall into this trap based simply on our ‘gut feeling’. We might choose a term policy that covers only up to age 80 for death because we are certain we will die in our 70s. But if it so happens that death occurs at 81, then no claim can be made as the policy would have already ended. Instead of trying to guesstimate when we will fall sick or die, it is always better to err on the safe side, and cover ourselves for as long as possible. Fortunately, most term policies offer death and/or illness coverages up to age 100.
It should be apparent by now that deciding whether to add term policies to our financial portfolio, and what kinds, requires just as much consideration as that of a PAR or ILP. So be sure to consult a professional before you make your purchase.
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