Tan Kin Lian's Blog: Decreasing term insurance

Wednesday, November 28, 2007

Decreasing term insurance

Hi Mr Tan,

I wanted to buy term insurance, but the insurance agent recommended against it. She said that the term insurance will stop the cover at the end of the term, and I need life insurance beyond that. She recommended that I buy a whole life policy and pay premium for only 20 years. I am confused.

REPLY

I recommend that you buy a decreasing term insurance to stop at age 65. You can insure for 5 to 10 years of your earnings. If you annual earning is $40,000, you can insure $200,000 and pay a premium of about $40 (assuming that you are about 30 years old).

If you save $4,000 a year in a low cost investment fund to earn 5% per annum, you will get about $260,000 at the end of 30 years. This is more than your sum assured of $200,000. If you have this amount of accumulated savings, you do not need life insurance beyond 30 years.

A decreasing term insurance covers you the full sum assured during the first year and reduces the cover each year by a small amount, until it runs out completely at the end of the term. The yearly reduction in the sum assured will be offset by your additional savings in each year.

You can ask an insurance broker to get you the best premium rate for a decreasing term insurance. They can source from a few companies. You can also call the insurance companies directly and ask for their quote.

Just tell them the following: I am a male/female, (x) years old. I want $(y) of decreasing term insurance for (z) years. How much is the annual premium?

Read this FAQ
http://www.tankinlian.com/faq/choice.html

9 comments:

Anonymous said...: Mr. Tan ,your recommendation is superb, you address both protection and accumulation efficiently. The female insurance agent, either she is not qualified or has conflict of interest.
In fact most agents would recommend wholelife because of huge commission in it or maybe they are ignorant that people don''t need insurance after 65 when you can use what accumulated as self insurance. The event you fear may or may not happen except death ,of course.
My advice is NEVER NEVER NEVER use an insurance salesman to look after your personal finances.; November 22, 2007 10:33 AM
Anonymous said...: Hi, I am a Financial Planner from Great Eastern and I have gained a lot of insights from Mr Tan's Blog. But other then decreasing term insurance, I believed in buy term and invest the difference, which are the basis of Investment-Linked Policies. But your point of view in a decreasing term insurance certainly sparks new insights that I can provide to my client.; November 22, 2007 4:49 PM
Anonymous said...: The reduction of term coverage is guaranteed.

The growth of the investment, however, is not.

If it seems too good to be true, it probably is. Exercise caution.

We should not be using historical performance of funds as indicative of future performance. I don't know if anyone can guarantee that if I put the suggested amount into STI-ETF will yield the amount Mr. Tan suggested, when I need it.

Sometimes it is easy to be greedy using the "what-if" scenarios. Using unrealised investment returns to protect what is real and certain may not be worthwhile.

But, hey, it's your life. Not Mr. Tan's or any of the anonymous contributor's. You can do whatever you want and frankly, nobody gives a damn. If you do follow any advice here, and it didn't turn out the way you want, nobody will claim responsibility (conversely, nor will anyone claim credit too).

Cheers!; November 22, 2007 6:01 PM
Anonymous said...: Wholelife with cash value is already bad choice ; with limited payment plan it is even worse. It is expensive and it deprives you of sufficient coverage. If you are rich it is okay, anything is ok. You don't even need insurance.
For the majority of us we make sure that the dollar is stretched and used to max our coverage and that is why we buy insurance and surely not to enrich the insurance agent.
For goodness sake , if insurance agents want to make money please rob the rich and don't improvish us. Help us and give us your best advice, if you have if not leave us alone.; November 22, 2007 8:50 PM
Anonymous said...: Wholelife and endowment plans guarantee you low return and not high
return. They also guarantee safety
of revenue for the insurance companies. They are sitting ducks for inflation. They are stuck when the rest of the world is moving forward.
To borrow MR. Tan's favourite phrase
"risk is to your advantage".......; November 23, 2007 9:31 AM
Priyadi said...: to anonymous poster above:

"The reduction of term coverage is guaranteed. The growth of the investment, however, is not."

another thing to be considered: if we manage our lives well, reduction of our liability is guaranteed. kids become independent over time, mortgage gets paid off, etc. we need to insure much less in twenty years than now. in my opinion decreasing term is almost always a better deal than level term insurance.; November 23, 2007 3:13 PM
Anonymous said...: buy term and invest the rest is good concept. However, most singaporean are still not confidence in investment mainly due to high charges (eg.regular ILP) or fear of short-term capital lost (eg.single ILP).
All above discourage buying wholelife, these i partially disagree.
Wholelife provide lifetime coverage which term insurance can't.
I do believe wholelife is necessary but at a certain limit of (less than $50K).
Yes, you can save more by buying term, however, it provided that you invest or save the $$$ in the end instead of spending it away.; December 01, 2007 9:40 PM
Anonymous said...: It can happen to wholelife too. Did you know how many hold their wholelife plan for wholelife? MOST before 60 surrendered (at least 90%)
What is the reason or reasons? Need money, cannot service premium, ill advised by agent to buy another wholelife etc.
Term is dirt cheap. If you lapsed there is not much lost too.
The key reason is YOU DON'T NEED INSURANCE AFTER 60.
Do keep an H&S medical plan till you die.; December 02, 2007 9:06 AM
Anonymous said...: I believe most companies limited premium plan provide the option to pay till age 64 or 65. This will help to reduced surrender rate @ 60 as mention above.
Just like i mention, if a person who buy term can't save, when they need money at later stage of life, wholelife plan can still provide some cash for them.
"Don't need insurance after 60" mean either you die early or you invest & save enough for retirement. Sad to say, not many singaporean are ready yet.; December 03, 2007 7:42 AM