Life insurance pays out a sum of money in the event of death or total and permanent disability. This sum of money will be disbursed to any beneficiaries you have chosen beforehand, such as your spouse, children and/or aged parents.
In the following sections, we will help you understand key life insurance concepts and walk you through the factors to consider when deciding how much life insurance coverage you require.
a) Whole life insurance vs Term life insurance
Whole life insurance policies cover you for a lifetime, or up to age 100 and typically have an investment component. This means a portion of your premiums are invested to help you accumulate cash value — an accrued amount in your policy which typically gains interest from the channels through which it is invested, such as funds or portfolios containing equities like stocks or fixed-income securities like bonds. Cash value may comprise guaranteed benefits and non-guaranteed bonuses, depending on whether the plan is a participating or non-participating whole life policy. The policy’s cash value may be used to pay the premiums or withdrawn in the case of an emergency.
On the other hand, term life insurance covers you only for a specific period of time . If you choose to reinstate your policy after expiry, it may be subject to underwriting. You may choose to protect yourself with a term life policy until your children grow up and have become fully independent, or until your elderly parents pass on. Generally, term life insurance policies do not invest any part of your premiums, and are suitable for those who only want protection coverage without cash value.
b) Level of protection
The level of protection offered by life insurance policies is determined by the sum assured, which is the amount that will be paid out in the event of death or total permanent disability.
You may opt for a higher sum assured if you are your family’s sole breadwinner. Conversely, if your family has other streams of income and does not rely heavily on yours, you may opt for a lower sum assured.
Life insurance coverage can be fixed or decreasing. Fixed coverage remains the same throughout the policy term, while decreasing coverage diminishes over time to zero by the term’s end. The latter is common in mortgage reducing term assurance which covers unpaid sums on home loans and ends when the loan is fully repaid.
Some policies allow you to enhance your protection with optional riders. For instance, you may opt for a critical illness rider which protects you if you are diagnosed with a serious illness.
c) Payouts
Life insurance payouts are commonly offered in a lump sum when the policy holder passes away or becomes permanently disabled. Some policies may offer you the option of receiving payouts in installments over a fixed period of time.
Receiving payouts in installments can be beneficial as any cash which has not been paid out can accrue interest. This eliminates the burden on your family to manage and invest the money themselves. However, you should only choose this option if you are sure your family will not require the cash in a lump sum.
d) Premiums
Some life insurance policies require fixed premium payments throughout the entire duration of an agreed policy term. Other plans may maintain a fixed payment period, after which you can continue to be protected without having to pay any more premiums.
Whole life insurance premiums usually stay the same throughout the duration of the policy, while term life insurance premiums typically stay fixed throughout the initial policy duration, albeit you may have to pay a higher premium when the policy is renewed. This means that subsequent premiums will be calculated based on your age at the time of renewal.
As life insurance premiums increase with age, it is a good idea to purchase a policy while you are still young and healthy as buying early enables you to enjoy significant cost savings in the long run due to a lower premium.
Age is not the only factor that can raise your premiums. When you apply for life insurance, you are typically required to sign a medical declaration form or to undergo a medical checkup; pre-existing health issues can affect your premiums or make you uninsurable. Hence, it is crucial to begin purchasing life insurance early on in life before any health issues arise.
When figuring out how much life insurance you need, you should do your best to estimate the amount your family would need in order to continue living a comfortable life. In doing so, you will need to think about the specific needs of your family in greater detail, and add your current assets, including cash and investments.
You will need to consider the following:
- Living expenses
- Care and additional expenses
- Unpaid loans and liabilities
- Assets and government support schemes
To give you a better idea of how to work out your life insurance needs, we will elaborate on the above four factors in the following sections.
Your life insurance payouts should cover your family’s living expenses currently being paid for by your income.
Consider the following when assessing your family’s needs:
- Necessities: Rent, utilities, phone bills, school fees, groceries and insurance premiums.
- Emergency costs: Home & vehicle repairs and medical emergencies.
- Discretionary spending: Non-essential or lifestyle spending for your spouse, elderly parents and children. For instance, any money set aside for entertainment, holidays, children’s toys and sports would fall under this category.
- Time frame: The estimated number of years your family will rely on your income. If you have children, your payouts should cover their expenses at least until they have completed their tertiary education, which may well go beyond $100,000 a year.
In the event of a total and permanent disability, your life insurance payouts should cover any nursing and/or health care costs and additional out-of-pocket expenses linked to your personal well-being, on top of avoiding any financial burden which may fall upon your family.
This may include:
- Medical bills: Hospitalisation, medication, doctor’s visits, rehabilitation and physiotherapy.
- Helper or professional caregiver: Live-in or part-time nurse, or domestic helper.
- Transportation fees: Purchase of a car, cost of taking taxis or private hire cars.
- Additional costs and equipment: Wheelchairs and modifications to your home.
- End of life care and funeral costs: Hospice, funeral arrangements, and more.
- Time frame: This depends on your current age and an estimation of the number of years you have left. For instance, since Singapore’s life expectancy at birth is 81.2 years for males, a 40-year-old man might opt for life insurance payouts that can take care of him for at least 41.2 years.
Your family may not be liable for debts that have been taken out in your name in the event of your demise, but joint debt such as a home loan taken out by you and your spouse could be passed on to your family. Hence, your life insurance payouts should be enough to cover any unpaid sums on all liabilities shared with your family members, including any compounding interest.
Liabilities include the following:
- Home loans
- Car loans
- Student loans
- Renovation loans
- Personal loans
- Unpaid credit card bills
While your family may not be held responsible for your personal debts, you should be aware that their inheritance may still be affected by unpaid debt as the assets in your estate will be used to repay creditors. This will affect the calculations of your assets, which we will cover in the next section.
Your assets can be put towards fulfilling your family’s financial needs or reducing liabilities. This, in turn, will reduce your life insurance requirements.
Primary asset pools to consider include:
- Savings and investments
- Properties
- CPF savings
- Surviving spouse’s pay
- Passive income streams that can continue in the event of your death or total permanent disability
In order for your assets to offset your life insurance needs, your family must be prepared to use them to pay for their expenses or to repay any debts and liabilities you have left behind, such as unpaid sums on your home loan.
For instance, an investment property that can be sold or rented out in order to generate income for your family could potentially be used to offset your life insurance needs. You would likely want to leave your family home out of the equation as your family may not be willing to sell and downgrade to a cheaper property in order to raise funds.
Do note that utilising your assets to offset your life insurance needs will affect your family’s inheritance. If you still wish to do so, having a written will in place ensures that the assets will be used as intended.
There are also government support schemes that can offer your family financial support in the event of death, terminal illness or total permanent disability:
- Dependants’ Protection Scheme – Singaporeans or Permanent Residents aged 21 to 60 who have made their first CPF working contribution are automatically enrolled in this scheme which offers a payout of up to $46,000.
- Home Protection Scheme – Those under the age of 65 who are using their CPF savings to repay a home loan for a HDB flat can be protected through this scheme which covers monthly housing loan installments.
The infographic below offers an overview of all the elements to consider when working out your life insurance needs:
When working out your life insurance needs, you should ensure that your sum assured will cover your family’s living expenses, any unpaid debt, as well as care expenses if you become disabled. This is the bare minimum needed to protect your family from financial hardship.
Adequate life insurance offers you the peace of mind in knowing that your family will be taken care of if something unfortunate happens to you.
To find out how to protect your loved ones, speak to an advisor from Standard Chartered Bank today to learn more about how we can help you.
When working out your life insurance needs, you should ensure that your sum assured will cover your family’s living expenses, any unpaid debt, as well as care expenses if you become disabled. This is the bare minimum needed to protect your family from financial hardship.
Adequate life insurance offers you the peace of mind in knowing that your family will be taken care of if something unfortunate happens to you.
To find out how to protect your loved ones, speak to an advisor from Standard Chartered Bank today to learn more about how we can help you.
