Affordability is a primary reason why people buy
term. It is highly attractive to people on a budget who need high
coverage but have limited resources. Plus the earlier you get the
policy, the more you save. In fact, savings become exponential the younger you
are.
Young families or those with
dependents will
particularly benefit from this option. This group may find the option very
attractive especially since they usually work with limited funds – balancing
their financial resources for children’s education needs and retirement savings
among other financial commitments.
Let’s backtrack a little and define term insurance. This is a type of insurance policy that has a set duration limit for the coverage. Once it expires, the policy owner can decide to renew it or let the coverage end. It is the simplest and cheapest type of insurance policy.
WHY SOME PEOPLE
AVOID TERM
In three words – No cash value. Although
term insurance does not have any cash value and can be considered as pure protection,
there are ways to work around this limitation. One of the usual arguments
against a term policy is that you do not get your money back, however, if you modify
your term policy to lock in your prices until age 99, the chances of you getting
money back is extremely high.
Why? Think about it – How many people
you know, have lived past 99 years old? Probably none (or maybe just a
handful). Because most people don’t live to reach age 99, the
insurance payout is almost 100% certain.
The average life expectancy of males
and females born in 2012 is 65 and 72 years old respectively (World Health
Organization Philippine data - http://www.who.int/countries/phl/en/).
By simply extending the coverage of your term policy based on the average life
expectancy age by another 20-30 years, the probability of an individual
claiming back the premiums paid (and more) are very high.
To recap, if you get a term insurance
for the specific purpose of covering your family from risks in case of untimely
death, there is almost 100% chance that you
can claim (assuming the policy extends until age 99). Why? It is because no mortal being lives forever. As they say, “Nothing is
certain in our worldly life except for death and taxes”.
And you’d be surprised by the fact
that in many cases, you could probably double or triple the money (premiums) you
have paid in the worst case scenario especially if you are in your 20s and 30s. By getting adequate
protection early (using a level term insurance), you lock in the price until
the end of your coverage period chosen. Note that this is different from a
yearly renewable term policy where the price changes every year.
HOW
MUCH COVERAGE IS ENOUGH?
So the next question is, how
do we know how much we actually need to cover for uncertain events in life?
As for the coverage size, most
Filipino’s insurance needs are usually higher than what they anticipate. A
proper financial needs analysis
is highly recommended to understand how much an individual actually needs.
Generally speaking, the ideal life insurance sum assured for
a breadwinner
will typically be somewhere between 10M-20M
PHP (300K-600K SGD / 250K-500K USD). This is calculated with inflation,
education costs for children, living expenses, medical expenses, legacy, debt
cancellation, estate taxes and other key factors in mind. Another way to
calculate death coverage is to multiply your annual income by ten (10).
These are just guidelines, estimates and references which may or may not be
applicable to you so I highly recommend that a proper financial needs analysis
be done to determine your real need based on your personal circumstances.
On the other hand, if you want to get
additional cover for Critical Illness
(CI), the rough guideline to
determine the sum assured is to set aside the ideal contingency fund required
factoring in medical needs plus 3-5
years of income replacement. In the Singapore context, this is usually 100K to 150K SGD plus 3 to 5 years of annual income.
Of course, you may modify this to suit your situation.
There are
also some insurance companies that do not require medical checkups for
applicants who are fully healthy without any illnesses and the sum assured is
equivalent to 1,500,000 SGD (~50M PHP or
~1M USD) and below. Age eligibility for this exception are for those
who are 50 years old and below on their next birthday.
Term Policies in Singapore
To put these things in perspective, here
are some figures calculated as an illustration for Filipinos who may want to avail
of policies in Singapore (even if they are based elsewhere like
Philippines, Middle East and other countries). Coverage is global with a few
exceptions.
There are now a lot of enhancements for insurance policies such as guaranteed renewability and convertibility options. For choosing coverage length, in case budget is an issue, I would recommend the guaranteed renewable term policies (renewable regardless of health condition), which is generally the lowest in cost.
However, if you can afford the other
durations and/or have specific temporary needs to address (Eg.
education funding, debt repayment, retirement fund accumulation etc.), go for the longer
coverage (Eg. 15 years, 30 years, until 99 years, etc) to lock-in the rates as
the guaranteed renewable policies increase rates every time the policy is set
for renewal due to policyholder's age.
Before you buy any policy, speak to a
trusted, reputable and knowledgeable adviser to assess your needs. It is
important to buy something that are based on your needs and preferences in
accordance with your financial situation instead of just blindly following
information shared for the general public.
Just remember – protecting yourself
or your family from catastrophic events is just as crucial if not even more so,
than accumulating wealth!
To learn more about Wealth Protection, join Jess at his upcoming seminars in Singapore and the Philippines.
To learn more about Wealth Protection, join Jess at his upcoming seminars in Singapore and the Philippines.
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