Previously, this article was about how Medisave and CPF might not provide enough. But as of now, my insurance policy is to not blog about the government. I can’t even calculate how much not talking about the CPF might have saved me already. Instead, I’ll just say you should consider one of the different policy types, to supplement your reliance on CPF / Medisave:
The Basics of Picking Insurance
The problem with insurance is that, once you’ve bought a policy, it’s hard to exit without penalties. Get a bad one and 10 years later, your returns might resemble the profits from a seven year old’s lemonade stand. If you want to get out of it then, it will probably involve forfeiting a huge sum of money, and hence making even less.
On top of that, there are issues of coverage, affordability, and whether the returns from the policy meet your financial goals. So work out the following before shopping for insurance:
- Is your insurance strictly for protection and coverage, or do you want it to provide for retirement or other financial goals as well?
- How much will your beneficiaries need if you pass on? Will they have a mortgage to take over? Will your children have outstanding student loans?
- How much do you need to replace your income, if something makes you unable to work?
- Are there better alternatives to the insurance policy? For example, you may be able to find financial products with better returns than the available policies.
If you need help with the calculations, use the CPF board’s insurance estimator.
This is the cheapest type of insurance policy. Term insurance only covers you for a predefined period (e.g. 5 years, 10 years, 40 years). The longer you want the policy to last, the higher the premiums.
Term insurance pays out an assured sum in the event of death, or total and permanent disability. There is no payout otherwise. Once the term is over, the policy simply expires.
The advantage to term policies is that monthly premiums are low, often going below $50 a month. Some term insurance policies might also require front-loading – that is, you may have to put down a chunk of cash upfront. Even then though, the cost will be comparatively low compared to other policy types.
Get it Because:
You might want to buy coverage for only a specific period (e.g. insure your children until they are 20, after which they can work and insure themselves).
Alternatively, you might buy term insurance to keep premiums low. You can invest the rest of the money somewhere else (e.g. index funds), or just have a bit more spending power.
Endowment insurance combines a savings / investment plan with insurance coverage. An endowment policy lasts for a predefined period (e.g. 10 years, 20 years), after which it ends (matures). There are three kinds of endowment insurance:
- Non-Participating (Non-Par) Policies
- Participating (Par) Policies
- Investment-Linked Insurance Policies (ILPs)
Non-Participating (Non-Par) Policies
Non-par policies pay out an assured sum in the event of death, or when the policy matures. Some non-par policies pay out in the event of total and permanent disability – check with the agent on that.
If you surrender a non-par policy (you cancel it before its time is up), you might get back a small amount of the assured sum. This varies significantly from one insurer to the next; some insurers will give you nothing, so check before you buy.
Get it Because:
It’s a good way to save money for specific financial goals, while still getting coverage. Say you want to buy a car in five years: you could buy a non-par policy, and get insurance coverage while you save up.
Participating (Par) Policies
Par policies pay out an assured sum in the event of death, or when the policy matures (again, there may be more coverage, like total and permanent disability. Check with the agent).
Unlike non-par policies, par policies also pay out bonuses, on top of the assured sum. This comes from investing your premiums in the insurer’s various funds. Depending on the funds’ performances, par policies might pay out variable cash dividends. Some might also add a variable bonus to the assured sum every year.
Note that, while the assured sum is guaranteed, these bonuses are not. The amount of the bonus depends on how well the funds do, and there may even be situations in which no bonuses are given.
Get it Because:
If you don’t like to manage your own investments, a par policy can do it for you. It will grow your money faster than if you put it in a fixed deposit. You’ll also get insurance protection while your money grows.
Investment-Linked Policies (ILPs)
This is arguably the most complicated life insurance product. An ILP invests your premiums in a fund or sub-fund of your choice – these options will be presented to you by the insurance agent. Upon death, total permanent disability (if that coverage is included) or the policy’s maturity, you will be paid either:
- The higher of the assured sum or the value of the ILP units (the funds you bought into)
- A combination of the assured sum, and the value of the ILP units
Either way, the payout is variable. If the funds that you picked perform well, you will get a bigger payout. If the funds underperformed, you will get a crap payout. So it’s a bit of a gamble.
Get it Because:
You want to aggressively grow your wealth, and can stomach the possibility of a smaller payout.
What Else Is There?
A recent report showed that over 30% of Singaporeans don’t have proper critical illness coverage. In a developed country whose delicacies include a whole slew of deep fried dishes doused in oil and God knows what other unholy substance, this is clearly unacceptable.
Stay tuned with us on Facebook as we follow up with a run down of what critical illness and early critical illness coverage entails and why it’s so important.
What are your thoughts on life insurance coverage? Should the Government do more across the board to improve it? Or do you think it is enough? Share your thoughts here.