Should You Buy Life Insurance in Singapore?
With a range of policies available, from term to whole life and investment-linked options, life insurance ensures financial security in the face of unexpected events, retirement planning, or critical illness protection. While it’s certainly important, is it truly crucial to own a life insurance plan in Singapore? And how worthwhile is it in the long run?
Disclaimer: This article is meant for educational purposes only and is not intended to be taken financial advice. Please consult a licensed professional for guidance.
Understanding Life Insurance: What is it?
Life insurance is an insurance plan offering life-long financial coverage against specific events like death, total and permanent disablement (TPD), terminal illness, and even selected critical illnesses (through optional riders).
Life insurance plans are meant to last until one of three circumstances occur: the policyholder prematurely surrenders the policy, the insured event occurs, or the policy expires. Depending on the type of plan, life insurance coverage can extend anywhere between five years to the end of the policyholder’s assumed lifespan.
While life insurance is important, its purpose varies depending on individual needs. Some use it to provide financial protection against life’s uncertainties, while others may seek it for wealth transfer, estate planning, or as a financial tool to complement broader financial strategies.
Types of Life Insurance Plans
In general, there are four types of life insurance plans: term, whole life, endowment plans, and investment-linked policies. Each type differs in the extent of coverage offered, with some even including savings or investing benefits.
Here’s a quick overview of the four life insurance types:
| Feature | Term | Whole Life | Endowment | Investment-linked |
|---|---|---|---|---|
| Purpose | Death, TPD, and some critical illness protection | Lifetime protection with savings | Protection and savings (for specific goals e.g. education, buying a house) | Protection and potential returns on investments |
| Coverage duration | Fixed term (e.g. 10, 20, 30, 40 years) | Lifetime | Fixed term (e.g. 10, 20, 30 years) or lifetime | Lifetime (depending on policy) |
| Sum assured (Death payout) | Yes (if death occurs during policy term) | Yes, guaranteed during any point in your life | Yes (if death occurs during policy term) | Yes (depends on policy terms and investments) |
| Cash value | No | Yes, increases over time | Yes, increases over time | Yes, depends on investments |
| Investment component | No | Depends if participating or non-participating plan | Depends if participating or non-participating plan | Yes |
| Survival benefit | No payout if policyholder survives the term | Paid out upon policyholder’s death or upon surrender | Lump sum payout if policyholder survives the term | Payout available depending on investments and returns |
| Premiums affordability & flexibility | $ Fixed premiums throughout term |
$$ Fixed premiums, but may be adjusted |
$$$ Fixed premiums |
$$$$ Can be adjusted based on investments |
| Eligibility | For short-term protection, budget-friendly | For lifelong protection with savings element | For long-term savings for a specific financial goal like child’s education | For combined protection and investment growth |
What is Term Insurance?
Term insurance is a life insurance policy that offers shorter-term financial protection over a fixed tenure between 5 to 40 years. It does not provide any cash value, only offering a payout upon death or total permanent disablement during policy term. In terms of affordability, it tends to be cheaper than other types of life insurance.
Term insurance plans also offer fixed or decreasing coverage options. With fixed coverage, the sum assured remains constant throughout, whereas the decreasing coverage gradually reduces the sum assured to zero by the end of the policy’s term. Some plans may be renewable or convertible, and optional riders can be added to enhance the policy’s benefit.
One example of term insurance is the Dependents’ Protection Scheme.
What is Whole Life Insurance?
Whole life insurance is a life insurance policy that offers lifelong financial protection. They come in two types: participating versus non-participating plans. The former share profits from the insurer’s participating funds in the form of (non-guaranteed) bonuses or dividends on top of sum assured while the latter offers sum assured and cash values.
For clarity, sum assured is a guaranteed sum paid out upon the policyholder’s death, as long as premiums are paid and policy remains active. On the other hand, cash value accumulates over time, through premiums paid and/or dividends and bonuses. Cash value can be accessed through loans or withdrawals when needed.
What is an Endowment Plan?
Endowment plans are savings insurance plans with a life insurance component included. The difference between endowment and term/whole life insurance is that they provide a cash payout at the end of policy term or upon the policyholder’s death, whichever comes first.
Similar to whole life insurance, they come in the form of participating or non-participating plans too. Non-guaranteed benefits could include: reversionary bonus (declared bonus), terminal bonus (final bonus), cash dividends, and accumulation bonus. For more elaboration, refer to our guide here.
What is an Investment-Linked Policy (ILP)?
Investment-linked policies (ILPs) function similarly to whole life insurance but include an investment element. Essentially, a portion of your premiums are directed into funds of your choice, allowing you to potentially benefit from market growth. Like whole life insurance, they also accumulate a cash value, which can be withdrawn during the policy term or cashed out upon maturity. Again, this cash value will depend on the performance of the underlying funds.
Don't Leave Health Up to Chance!
Besides life insurance, here’s how health insurance and MediSave (through CPF) can help improve and protect your quality of life.
Comparing Life Insurance Types: Term vs. Whole Life
But now it begs the question: should you get term insurance or whole life insurance? Each has its fair share of pros and cons, so let’s zoom in on their differences:
| Term insurance | Whole Life insurance | |
|---|---|---|
| Premiums | More affordable | More expensive |
| Coverage | Limited duration | Lifetime |
| Cash value | None | Accumulates over time |
| Scope of protection | Pure protection (Death and/or TPD only) | Protection + savings/investments |
| Cash payout | Upon death and/or TPD | Upon death and/or TPD plus possible cash value accumulation |
| Investments | None | For participating plans |
| Loan facility | No loan against policy | Can be taken against cash value |
| Riders | Can be added for additional coverage (e.g. critical illness, disability) | |
As seen here, they differ in affordability, scope of coverage, and policy term. However, how do you determine which is more suitable for you?
Examine Budget/Cost of Premiums
Reflect on you (and your family’s) current financial situation. If you’re operating on a limited budget but still want significant coverage, a term insurance plan would be more cost-effective given its cheaper premiums. Whole life insurance would be costlier due to the cash value component and lifetime coverage.Extent of Coverage
How long do you need coverage? If you’re looking to protect your income while raising kids, paying off a mortgage, or saving for retirement, a term insurance plan makes sense. However, if you prefer lifelong protection and aim to leave a financial legacy for your beneficiaries (by receiving your death benefit payout), a whole life insurance plan is better suited for long-term planning and wealth transfer.Health Status and Age
Term insurance is cheaper and more worthwhile when you’re still young and healthy, but whole life insurance locks you into more stable coverage without needing to worry about medical issues incurred from existing conditions.Savings and Investing Elements
At its core, term insurance is the most basic form of insurance where it offers a death benefit payout. Hence, if you outlive your policy term, you won’t receive any returns on your premiums. Whereas whole life insurance offers an accumulative cash value component over time, and can be borrowed against or cashed out. This makes it suitable as both a financial protection tool and savings/investment tool.While this may not be an exhaustive list of reasoning, use these core criteria as a guideline to decide which life insurance plan is right for you.
The Impact of Age on Life Insurance Premiums
When you’re younger, premiums tend to be lower since the risk for the insurer to bear is statistically lower given that younger people are less likely to pass away. Consequently, they charge less for coverage. Thus, the converse is true where premiums get more expensive as you age, reflecting the higher risk the insurer assumes. Even when your policy expires and you choose to renew, you will bear higher premiums due to increased risk with older age.
Nonetheless, premiums are also usually fixed for the policy term (e.g. 10, 20, 30 years) where the premiums are kept low throughout the tenure.
When you’re younger, whole life insurance premiums are relatively lower and remain fixed throughout the policy. This is because as its name suggests, whole life insurance lasts a lifetime and hence premiums and coverage are locked in earlier on. It also possesses a cash value component that builds over time.
However, as you get older, premiums become significantly more expensive given that your lifespan is uncertain. Insurers will factor in the likelihood of death occurring sooner, leading them to price premiums higher. Additionally, for older policyholders, there’s less time to accumulate cash value and cover the cost of the death benefit. These factors together make whole life insurance considerably more expensive with age.
Cover Your Bases While You Still Have Time!
Don’t wait till terminal illnesses or death to come creeping at your door before purchasing a term life insurance plan. It pays off (literally) to stay protected and ready for any unexpected events.
Do You Need Life Insurance?
Everyone’s life circumstances are different and there’s no one-size-fits-all answer. While it isn’t necessary to buy life insurance, it acts as a valuable safety net and can certainly alleviate monetary concerns in the long run during unexpected events like death or TPD of you or a loved one.
If you’re still unsure if life insurance is right for you, here are some factors to consider:
If you’re intending to save toward a specific goal like children’s education or a mortgage, you can go one of two ways. A term life insurance plan protects your income while work towards your financial goals. Meanwhile, an endowment plan would also be appropriate since it incorporates both insurance and savings into one. Either way, both options accumulate cash value over time, which can be accessed through loans or withdrawals, often paid out in dividends or bonuses.
Typically, it’s always best to opt for a life insurance plan when you’re still young and fit, free of any pre-existing medical conditions. At this stage, premiums tend to be more affordable, allowing you to secure long-term coverage at a lower cost while still reaping the full policy benefits.
The death benefit (sum assured) from life insurance ensures that your beneficiaries are provided for in the event of your passing or TPD. These payouts can replace lost income and provide financial stability during the aftermath. This is especially pertinent if you have dependents like children, a spouse, or aging parents who may have relied on you as one of the primary breadwinners.
Frequently Asked Questions
Can life insurance be transferred to another company?
- Yes, you can. Under the Insurance Act, Chapter 142, Singapore permits an insurance company (or re-insurer) to transfer all or part of its insurance business to another insurer without obtaining the content of the policyholder.
Does term life insurance cover accidental death?
- Yes, they can cover accidental death. Beneficiaries will receive the full death benefit in the event the policyholder passes away due to an accident.
Furthermore, this payout can also be increased if the policyholder purchased an accidental death rider. How much insurance coverage do I need?
- A general rule of thumb recommended by the Life Insurance Association is to have 9 times one’s annual earnings in death coverage under life insurance.
How do I determine an appropriate life insurance coverage amount?
- You can consult your financial advisor or use an online calculator to figure out if you have sufficient coverage in your life insurance plan.
But for reference, based on a Protection Gap Study (PGS) 2022, Singaporeans and PRs were found to have a Mortality Protection Gap of around S$170,352. Are there additional riders or benefits to consider?
- Yes, you can add optional riders to your life insurance plans to include or increase your coverage in certain components.