Your Ultimate Guide to Life Insurance: Everything You Need to Know

A Matter of Life (Insurance) and Death

Life insurance is for those who want to protect their loved ones with financial support in the event of death or permanent disability.
There are many types of life insurance, and broadly they can either be term or whole life bundled products. Term products’ coverage lasts for a fixed amount of time and typically has lower premiums. Bundled products include insurance + an additional component (e.g. investment component) and generally are more expensive.
Financial experts will often say that the sum assured in your life policy should come to 10 to 12 times your annual income, but what you need will vary depending on many personal and financial factors, so speak with a trusted professional advisor.

Not everybody needs life insurance, but if you do not wish to leave the weight of your outstanding bills, mortgages and other financial liabilities on your family in the event of your death or permanent disability, then life insurance could be the answer for you. There are two main types of life insurance – term and whole life. The main differences between the two are:

1) How long your policy will cover you

2) The compensation you receive if you do not make a claim by the end of the policy life

3) Premium payment term. Term is always pay-as-you-go, whereas Whole Life has the option for a limited payment term, meaning that coverage may last for a period much longer than you were paying premiums for.

Term Life Insurance

Term life insurance is a protection-only insurance product. It’s the most straightforward and most affordable life insurance product, generally being more affordable than whole life insurance because you’re only insured for a fixed period (usually 5-40 years). The younger and healthier you are at the point of purchase, the lower your premium tends to be.

Coverage

Term life insurance will cover death and, through an added rider, total and permanent disability. In terms of what is defined as a disability, this will vary between products and insurers.

Typical Use Cases

Pay off a mortgage
Pay for your funeral
Protect your family’s level of income
Provide for your dependents until they come of age

Term Life Insurance Premiums

Your premium will remain constant during the term but may change when renewed, reinstated or converted. Note that if you haven’t made a claim at the end of the term, you won’t receive any of the money you paid in premiums back.

Not All Term Life Insurance Is the Same

Your term life insurance can either be fixed or decreasing coverage.

Fixed Term Life Insurance

This type of term life insurance will pay out if you die during the term of coverage (and will not pay out if you die outside the term). The payments are fixed (unless you alter your policy)! The payout is also fixed (unless you change your policy)!

Example

30-year-old Lee wants to protect his family in the unfortunate event of his early death, so he takes out a $500,000 10-year term life insurance policy with a $50 per month premium. If Lee were to die within the 10-year term, his beneficiaries would receive a policy payout of $500,000. However, they would receive nothing if Lee were to die after the 10-year term is up. Suppose Lee reaches 40 and decides to renew his term life policy. In that case, he should expect to pay higher premiums than when he was 30 (as he is now closer to the average life expectancy). Suppose Lee were to have been diagnosed with a terminal illness within that original 10-year term. In that case, he is unlikely to be eligible for renewal. If this is something that you wish to avoid in your term life policy, look out for a policy with guaranteed re-insurability (without proof required).

Decreasing Term Life Insurance

The significant difference between decreasing and fixed term life insurance is that the level of insurance decreases over time with the decreasing term life insurance. Its most popular use case is for a repayment mortgage, as insurance will decrease as the debt goes down. Your policy will aim to pay off your outstanding mortgage upon death, but it is not guaranteed. Your insurance policy should be adjusted in line with any changes to your mortgage. Like with fixed term life insurance, your payments will remain the same throughout your policy. It’s also typically cheaper than fixed term life insurance. Some suggest using it to compensate for lost career earnings if you pass away before retirement (a reducing figure as you approach that age, if you think about it).

Can I Attach Riders?

Definition of a rider = additional benefit added to an insurance policy (usually at a cost)

Yes, you can! As to which riders can be attached, this will vary from policy to policy.

Whole Life Insurance

The primary objective of whole life insurance is to provide an insurance plus investment policy. This policy type, which includes a cash-value component, offers life-long protection (as long as the premiums are paid) and is usually more expensive than term insurance. The primary advantage is that termination or surrender of your policy, even before the tenure is up, may still entitle you to compensation. Note that the surrender cash value will be lower than the death benefit payout (the money paid out to your beneficiaries upon death).

By choosing whole life insurance, you should be committing to a long-term decision, as early termination is still likely to result in financial loss.

Coverage

Whole life insurance will cover death and, with appropriate riders, total and permanent disability and selected major illnesses. Regarding what is defined as a disability, this will vary between products and insurers.

Typical Use Cases

Pay off a mortgage
Pay for your funeral
Protect your family’s level of income
Provide for your dependents until they come of age

Not All Whole Life Insurance Is the Same

Whole life insurance policies can be participating or non-participating:

Participating

Participating policies earn a share of the insurance company’s participating fund’s profits, which are paid to your policy in the form of bonuses or dividends. These benefits are declared each year and depend on the fund’s performance and are therefore not guaranteed.
When making a claim, any declared benefits will be paid on top of the guaranteed sum.
Cash value consists of both guaranteed and non-guaranteed bonuses.
You can take out a policy loan against your policy’s cash value. The loan will likely come with high-interest charges. The loan’s outstanding balance will be counterbalanced from any cash value or claim payout.
Non-guaranteed benefits mean that you will bear the investment risk.

Non-Participating

Unlike participating policies, you are not entitled to any bonuses or dividends.
The cash value consists of guaranteed benefits only.
You can take out a policy loan against your policy’s cash value. The loan will likely come with high-interest charges. The loans outstanding balance will be counterbalanced from any cash value or claim payout.
No investment risk, as the benefits are guaranteed.

Can I Attach Riders?

Yes, you can! As to which riders can be attached, this will vary from policy to policy.

Example (Using the Term Life Example)

“30-year-old Lee wants to protect his family in the unfortunate event of his early death, so he takes out a $500,000 10-year term life insurance policy with a premium of $50 per month.”

Under whole life, protection is lifelong
However, the premiums would usually be higher

“If Lee were to die within the 10-year term, his beneficiaries would receive a policy payout of $500,000. However, they would receive nothing if Lee were to die after the 10-year term is up.”

The whole life death benefit is paid out throughout the coverage

“If Lee reaches 40 and decides he wishes to renew his term life policy, he should expect to pay higher premiums than when he was 30 (as he is now closer to the average life expectancy).”

Your whole life insurance premiums can either be fixed at the point of purchase (and should not increase as you get older) or they may have stepped premiums, meaning they gradually increase per year

“It should be noted that if Lee were to have been diagnosed with, and survived, a terminal illness within that original 10-year term, then he is unlikely to be eligible for renewal. If this is something that you wish to avoid in your term life policy, look out for a policy with guaranteed re-insurability (without proof required).”

Whole life policies are intended for death coverage (or for surrender values at old age), so coverage will continue even after the diagnosis of a critical illness (or "dread disease") unless there is a specific clause in the policy that would lead to a payout and the termination of the policy. There may be critical illness "riders" alongside the policy as well. Everything is subject to terms and conditions, so speaking with an agent for specific details about individual policies is essential!

Am You Suited for Whole or Term Life Insurance?

If you’re younger, term life insurance could be more suitable. The lower premiums will make budgeting easier, plus you have more freedom over how you invest the rest instead of locking it in an investment-linked policy. On the other hand, the enhanced freedom of choosing how you invest comes with the responsibility to actually do it and not just put the money into a savings account, or worse, simply spend it!

Whether whole life insurance should be used as a form of investing is debatable. Although potential gains would be tax-deferred (mainly if you live where capital gains are taxed), there is an argument that you are better off with a cheaper term life insurance and reinvesting the savings elsewhere. Most policies come with sales and marketing commissions. As mentioned before, the surrender charge poses a potentially costly penalty for those who drop the policy early. On top of all that, there are annual management fees, which, combined with other charges, can cause a real dent in your returns. Ultimately, you could be paying a much higher rate for your investment product than you would with, say, an ETF or Unit Trust. Whole life insurance is no longer as popular as it once was.

However, it is still suited for some people. For young adults, purchasing whole life insurance enables you to lock in at lower premiums, as you are at an age where you are likely to be young and healthy. If you have dependents, then buying a whole life product implies that you are protecting your dependents for the rest of your life, instead of just protecting them against a loss of your income until they are financially self-reliant (or until the end of your working career).

What if I Die Right After Taking Out the Policy? Am I Still Covered?

Most likely, yes, but if you do die within two years (in many places, much less) of activating a policy, the insurance company may cite a contestability clause. It’s pretty reasonable for insurance companies to have this condition, even if it is very rough on those who genuinely are diagnosed with a dread disease (or pass away) before this period is up. The clause is there because those with pre-existing conditions may be tempted to buy a policy without declaring and then immediately and fraudulently make a claim. Or worse, for those with suicidal tendencies etc. For those, there is often a suicide clause, but more importantly, please seek help.

Beneficiaries should expect extra time to be taken to investigate a death claim when it’s shortly after taking out life insurance.

Other Types of Life Insurance

Endowment plans

Like whole life insurance, this type of insurance also aims to provide an insurance plus investment policy by receiving bonuses and dividends.

What Does It Cover?

The crucial difference between whole life and endowment policies lies in the end goal. Whole life insurance focuses on covering death, total/permanent disability and potentially major illnesses. On the other hand, endowment policies have a similar scope of coverage but are primarily for those saving towards significant financial goals, such as your child's education fund, with a life insurance element attached. Your coverage will typically come to an end after a fixed period that coincides with your financial goals, e.g. 20 years.

Watch Out for This 🚨

Endowment life insurance may be inaccurately presented as being as safe as fixed deposits. You are not guaranteed to get back what you invested, as part of your premiums are used to pay for the policy’s insurance coverage or early surrender.

Not All Endowment Life Insurance Is the Same

There are many types of endowment plans, so speak with a professional before deciding on the right one based on what you need. Just as with whole life insurance, endowment insurance comes in participating and non-participating forms. In addition, there are anticipated endowment plans. The difference between anticipated and regular endowment plans is that a chunk of the sum assured is paid at predefined intervals throughout the policy’s life. At maturity, the balance of the sum assured is paid with any accumulated bonuses.

Your endowment plan will likely be offered with leverage. Insurance agents working for agencies work with banks to secure leverage, though you may be able to access more if you go through a licensed bank employee to sell insurance (known as bancassurance).

Leverage is defined as using debt to top up the cash you use to purchase an asset (therefore buying more of it) with the hope that it will boost returns (hopefully more than offsetting the cost of borrowing). There is a higher potential return over the long term, albeit at a slightly higher risk as with all leveraged products. Speak to a professional to understand if this is appropriate for you.

Leverage ratio = the number of $ borrowed for every $ of cash you put up. For example, if $15,000 were borrowed for $10,000 of your own money, the leverage ratio would be 1.5x. It should go without saying that there is a risk involved in this. Suppose your returns are significantly lower than expected. In that case, you could make a net loss after you deduct interest charges over the period.

Premiums

Your endowment life insurance premiums are usually fixed at the point of purchase. They should not increase as you get older. Premiums are typically higher than term products for the same amount of sum assured.

Can I Attach Riders?

Yes, you can! As to which riders can be attached, this will vary from policy to policy.

Investment-Linked Policy (ILP)

These are pretty complex products. With all insurance choices, it's essential to understand what you need before exploring such an option. Here, the savings component found in endowment policies is replaced by an investment component with a higher risk and return profile. A chunk of the premiums will be used for purchasing units in investment funds. (Endowment policies tend to have a much lower risk profile and typically have guaranteed sums). For consumers who wonder whether their money is better spent on investments or insurance, ILPs can present a way of combining the two into one financial product.

With an ILP, your investment returns depend on the performance of the funds and are not guaranteed. The mortality charges for the ILP are funded from your investment returns. These charges increase as you get older. The policy’s non-guaranteed returns feature means that your units may not earn enough to pay them. It's important to review such plans in the context of your overall protection needs as you get older.

Why Choose an ILP?

In short, flexibility.

Your investments can be altered, topped up or partially withdrawn by changing sub-funds for when your lifestyle needs change
If you have regular premium ILP coverage, you’re likely to be able to modify your coverage levels as your lifestyle needs change

There are two types of ILPs:

Single-premium - the one-off sum paid upfront to purchase units in a fund
Regular-premium - ongoing premiums

Endowment Policies Are a Safer Bet Than ILPs

They include capital guaranteed benefits with the savings component being built into the monthly premiums. For example, a $300 a month insurance premium may have $120 going to insurance protection and $180 to the savings component. ILPs may also offer guarantees, but they tend to be much lower, as befitting the purpose of those policies.

The Insurance Part

Your ILP premiums are fixed at the point of purchase and will not increase as you get older. However, the price of the insurance part of the product will usually increase over the years (higher risk of death, severe illness etc.), even if you continue with the same coverage. Extra units are likely to be sold to fund this, thus leaving you with fewer units to build up cash value. Suppose your insurance coverage is high and your sub-fund returns are substandard. In that case, your units may not even cover the insurance price.

How Much Life Insurance Do You Need?

Financial experts will often say your life insurance policy should come to 10 to 12 times your annual income. The exact number you need will vary depending on many, many personal and financial factors. Here are two of the simpler factors:

Debt repayment – you can use life insurance to pay off student debt, mortgages, personal loans etc. Your policy should cover enough to pay them off, including interest rates in the event of the insured’s death.

Income replacement – the coverage you need will depend on many things, including how many sources of income there are in your household. If you have kids, you may want to take out life insurance for both spouses.

Speak with a trusted professional for coverage that suits exactly your needs.

LIFE INSURANCE. COMPLETED. ✅

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Disclaimer

Content is intended to be used and must be used for informational purposes only and should not be relied upon as financial or other professional advice.