How to Select a Term Insurance Plan
Since the drop of illustrated investment rate of return for participating policies, more and more people are looking at term insurance, especially those who believe the concept of “Buy term and invest the rest”. In this article, I will share with you how to select a term insurance that is suitable for yourself.
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Type of Coverage
In Singapore, the types of coverage of term insurance include death, total and permanent disability (TPD), advanced stage critical illness and early stage critical illness. You can choose the type(s) of coverage according to your current situation.
Death benefit covers the after-life liability of the life assured. If when the life assured is no longer around, there are dependants to be fed and home mortgage to be paid, death benefit should be taken into consideration.
TPD benefit covers the daily expenses when the life assured is disabled and there is no income. The daily expenses include expenses on dependants and home mortgage, as well as daily expenses for the life assured. In Singapore, there is long-term-care insurance covering one’s daily expenses when disabled. As a result, the TPD benefit in term insurance usually only need to cover the same liability as death benefit.
Advanced stage critical illness benefit and early stage critical illness benefit cover the daily expense when the life assured is diagnosed with critical illness and needs to stop working for treatment.
After selecting the type(s) of coverage, the sum assured can be calculated via the following formula:
Sum Assured = Annual Expenses x Number of Years Required + Other One-off Expenses
For death benefit, annual expenses are the expenses on dependants. For minor dependants (children), the number of years required usually is the duration from now till the dependant’ graduation from university and earning independent source of income. For adult dependants (spouse or parents), the number of years required usually is the duration from now till the average life span in Singapore. Other one-off expenses include the amount required to pay off home mortgage.
As mentioned previously, there is long-term-care insurance covering one’s daily expenses when disabled in Singapore. So the sum assured of TPD benefit can be the same as death benefit.
The annual expenses for advanced stage critical illness benefit and early stage critical illness benefit are similar. They are both the daily expenses when the life assured is diagnosed with critical illness and needs to stop working for treatment. Such expenses can be calculated by adding the special expenses during treatment to the daily expenses of the life assured before getting the illness. If the life assured is well covered by hospitalisation and surgery insurance, the hospitalisation and surgery expenses do not need to be added into the annual expenses. Based on the medical statistics in Singapore, the recovery period for critical illness (including early and advanced stages) is 5 years, while for early stage critical illness is 2 years. With this information, the sum assured for advanced stage critical illness benefit and early stage critical illness benefit can be calculated via the formula above.
If the life assured is well covered by hospitalisation and surgery insurance, the policy term of term insurance is usually till the retirement age. This is because when the life assured is retired, there is usually no more liability on dependants, no more home mortgage, and there is passive income (such as retirement annuity) to cover daily expenses. In this case, the coverage by term insurance is no longer important after retirement. You may use your expected retirement age or use the common estimated retirement age nowadays in Singapore, which is age 65.
When type(s) of coverage, sum assured and policy term are determined, you may contact your financial planner to get a quotation from the insurance company. Usually, the annual premium is flat along the whole policy term for term insurance. Since there is no cash value in term insurance, its premium is lower than participating insurance under the same sum assured.
Above are the common steps to select a term insurance plan. You are welcome to contact me directly if you have any inquiries.