The Intricacies of Life Insurance in Singapore

Key Takeaways:

• 1. Life insurance, at its basic level, offers protection against financial losses in the event of total and permanent disability, or death, for your spouse and children.
• 2. Term life insurance pays out a lump sum to your nominees if you pass away within the period agreed in the terms of the policy. If you do not pass within the policy term, there will be no refund for the premiums paid.
• 3. Whole life insurance provides lifelong protection and may have a savings or investment element. The coverage provided by whole life insurance may be till the end of life or may terminate at 99 years old. Since the coverage provided by a whole life insurance is longer than a term life insurance, the premiums are higher. A portion of the premiums which are used for wealth accumulation in the form of policy cash value, may be withdrawn or surrendered should the need arise.
• 4. Aside from providing coverage for death and permanent disability, whole life insurance may also provide pay outs upon the diagnosis of critical illness, through the addition of riders to your plan.

What is life insurance?

For those starting to think about whether to buy life insurance, the complexity of the insurance solutions available can be overwhelming. Hopefully after reading this article, you’ll be in a better position to decide if life insurance suits your needs.

At its most basic level, insurance provides financial protection against unexpected and adverse events, and a financial loss is incurred as a result. Such events might include untimely demise, an accident or hospitalisation. Depending on the insurance solution you own, you will be compensated according to the sum insured.

Unlike other forms of insurance like health insurance, life insurance acts as a financial contingency against unexpected death, critical illnesses, or a total and permanent disability. In the event that you are no longer able to work, life insurance ensures some financial security for you and your nominees at least until they are able to take care of themselves, or you can return to work.

Why buy life insurance?

One of the main considerations for purchasing life insurance is peace of mind in the event of financial losses incurred from death, a critical illness, or total and permanent disability. If you have dependents, life insurance could be a valuable financial safeguard, especially if they are not yet financially self-reliant.

For example, if a sole breadwinner of a family were to unexpectedly pass away, his spouse will now have to shoulder the burden of any outstanding financial obligations like mortgage repayments, and daily expenses from looking after the children and herself. Having a contingency plan in the form of a life insurance policy could help keep the sole breadwinner’s family afloat before they find their feet again. With the pay-out from a life insurance policy, the sole breadwinner can have the peace of mind knowing that his dependents are protected and cared for in the event of a mishap.

Term life vs whole life insurance in Singapore

Before you decide on whether you would like to purchase a life insurance policy, take note of the types of insurance products available. We explore two popular types in Singapore: Term Life Insurance and Whole Life Insurance.

Term life insurance’s core function is to provide protection for a certain period. This is unlike whole life insurance which serves both a protection, and investment or saving functions for life.

Term Life Insurance

As the name suggests, term life insurance only offers coverage for a certain period. Depending on one’s insurance provider, the period could be 5, 10, 20, or 30 years. If any of the specified adverse circumstances happen within the policy period, the insured receives the pay-out.

Here is an illustration. A mother bought a term life insurance plan with a coverage of S$200,000 for a policy period of 20 years when she was 30 years old. Unfortunately, she contracts an illness at 49 years old which qualifies her for a death benefit. As she is still within her policy period, she will receive the full pay-out of S$200,000 to support her children after she passes away.

Term life insurance is the more affordable life insurance policy option as it provides coverage for a fixed period of time.

Whole Life Insurance

Conversely, whole life insurance covers one up to death or age 99, whichever is earlier. Nominees will receive the pay-out at any age the insured passes away. Due to the longer coverage period, the annual premium is expected to be higher than term life insurance.

Secondly, given the investment or saving function, and the longer coverage period, whole life insurance premiums are much higher than term life insurance. Additionally, the investment and saving components mean some form of investment risk is undertaken. Generally, participating whole life policies have a relatively lower risk than investment linked policies. Hence individuals need to carefully consider the costs and benefits of whole life insurance.

Regardless of the type of life insurance you choose, premiums are paid either monthly or annually for a determined period. Upon your passing or diagnosis, nominees receive a lump sum pay-out. Add-ons to most life insurance plans also include permanent disability as well as critical illness coverage.

What do I need to know before purchasing a term life insurance?

On the basis of affordability

It is generally recommended to buy term life insurance when you are younger. This is because insurance premiums increase with age. As one advances in age, death becomes more likely, and you may no longer draw a regular income after retirement. Moreover, some insurance providers do not offer term life insurance past a certain age.

A second point of consideration is determining the amount of coverage you may need. A general formula from the Life Insurance Association Singapore [1] to calculate term life insurance coverage is as follows:

Estimated Coverage Needed = Protection Needs – Existing Insurance and Assets

Protection needs might include foreseeable and on-going expenses. These might include the unpaid mortgage repayments and debts, tuition fees for children, and everyday living expenses of your dependents. Speak to a Citi insurance specialist or relationship manager to get a more accurate estimate.

Sole breadwinners and higher earning spouses should also factor in the cost of living for your spouse. Be sure to also include major costs such as mortgage, your spouse’s retirement, and medical costs. Finally, you may also want to consider adjusting for the effects of inflation.

Learn more about managing sudden medical emergencies in Singapore and how you can bridge the protection gap at different stages of life.

What do I need to know before purchasing whole life insurance?

On the basis of risk

Depending on your risk appetite, you may choose either a participating or non-participating insurance policy.

Participating simply means choosing to share in the profit and risks of the insurer’s participating fund. Premiums from all participating whole life policy owners are collectively invested into the participating fund with the aim of generating a return. Although the sum assured is guaranteed to be paid out when the policy matures, non-guaranteed benefits like bonuses or cash dividends may or may not be paid out. This is because a participating fund’s performance is heavily dependent on the market, and actual expenses and claims made. Moreover, any claims made and incurred expenses will also be deducted from the fund, therefore whittling the share of profits among the policy owners.

Individuals with a lower risk appetite might find a participating policy more suitable. Although there are no non-guaranteed benefits, the sum assured is guaranteed upon death.

On the basis of affordability

Under term life insurance, failure to pay premiums will render one ineligible for a pay-out. There are also consequences for exiting the policy prematurely. Upon early exit, there may be no policy value payable. Individuals may choose an early exit because they no longer need the insurance.

However, under whole-life insurance, you may be able to terminate your policy and you may receive a pay out upon termination. Take note that early termination of a whole life policy could cost you dearly and the surrender value, if any, that is payable to you may be zero or less than the total premiums paid. Before your purchase a whole life policy, an insurer will typically provide you a table of the amount you may receive if you were to fully surrender the policy at any particular year. This is referred to as the “Cash Value” of the policy.

Critical illness, partial and total disability cover

Life insurance in Singapore can also cover illnesses that life-threatening or will impact your income significantly while attempting to recover from such an illness. These are referred to as dread disease or critical illness.

Such coverage may be offered by insurers as riders. Riders are essentially add-ons that offer additional benefits to the basic term life or whole life policy.

Read more in detail about critical illness coverage.

Term or whole life insurance: which one is better for me?

In addition to the pointers above about intended coverage, affordability, and risk appetite, choosing a whole life insurance policy boils down to a matter of personal choice. Do you prefer to link your savings and retirement plan to your insurance provider or actively manage it yourself?

If you would like to manage your own savings plan and only purchase term life protection, then it might require considerable time and efforts to monitor and oversee your investment portfolios.

In the case of whole life insurance, the insurer’s actuaries do this work for you but charge you accordingly via the premiums. This may be a good option if you lack the discipline or time to manage your funds or prefer to leave it up to the professionals.

Start protecting your life and your loved ones today

Consider life insurance solutions today to start protecting you and your loved ones from life’s curveballs.

Sources

[1] Life Insurance Association Singapore. (2018, April 26). 2017 Lia Singapore Protection Gap Study - LIA.ORG.SG. Life Insurance Association Singapore. Retrieved March 8, 2023, from https://www.lia.org.sg/media/1526/2017_protection_gap_report_v20180426.pdf

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