Tan Kin Lian's Blog: Family Income Policy

Friday, February 29, 2008

Family Income Policy

A family income policy pays a monthly income for the remainder of the term, in the event of premature death of the policyholder.

For example, a male at age 30 can take a 30 year policy to provide a family income of $3,000 a month for an annual premium payable of $1,068 (based on my benchmark).

If death occurs at the start, the policy pays $3,000 a month for the 30 years, or a total of $1,080,000 (i.e. more than $1 million). If death occurs at end of 10 years, the income benefit is payable for 20 years (total of $720,000). If death occurs at the end of 20 years, the benefit if payable for 10 years (total of $360,000). If premature death does not occur, the policy expires at the end of 30 years, without any cash value.

The policy can be taken to provide a lower monthly benefit at a proportionately reduced premium. For example, the premium payable for a monthly benefit of $1,500 is $534.

The advantages of this policy are:

1. It provides a very large benefit at an afforable premium
2. It pays a monthly income, so the family does not have to worry about investing a lump sum payment.
3. The policyholder can invest the savings in a low cost, diversified investment fund to earn a higher return, compared to a whole life policy.

5 comments:

Anonymous said...: According to your description, it seemed that for the family income plan if you don't claim in the 1st year, every year onwards you lose, $36,000 for the same $1,068 premiums you paid. It would be fairer if the premiums also reduced by the same rate. Or else, on the 30th year, you will be paying $1,068 to get $36,000 cover, which is not very logical. It is like paying same premiums for a depreciating asset.

Or else, why not spent the same $1,068 and buy a 1 million term policy for the next 30 years. At least on the 30th years, when you pay the $1,068 premium, you still get $1 million coverage, instead of $36,000.

R.; February 29, 2008 3:47 PM
Tan Kin Lian said...: If you wish to insure for $1 million under a level term policy for 30 years, the annual premium is likely to be $3,000 a year, i.e. 3 times of the family income policy.

It is better to spend one third of the premium and get a family income policy. There is no need to insure $1 million at age 60!; February 29, 2008 4:14 PM
Anonymous said...: You certainly have a good point.

Anyway, I asked around for a million level term cover, the range is between 1500~1700/yr. This could be an alternative for people who wish to get a lumpsum paid out. After all, some household may need more than $3,000 - an example is my family, we need about $5,000 a month to maintain, without factoring family vacations.

As I mentioned always, I buy insurance with the intention to claim. So while you don't see a need to insure $1 million at age 60, I see it as a good way to leave good money behind for my children (at least they will have head start for their retirement).

For me, if I were to pay $1,600 at age 60 to get cover of 1 million vs $1,060 to get cover of $36,000, I rather have the former.

cheers.

R.; February 29, 2008 8:56 PM
Tan Kin Lian said...: You can get $1 million term insurance cover at age 30 for a premium of $1,500 to $1,700, if the term is for 10 years or if you insure under a group insurance policy where the premium is subject to change on renewal.

If you wish to buy a term insurance at a level premium for a longer period, you have to pay a higher premium.

The benchmark premium for a male age 30 is:

10 year term: $1,127
20 year term: $1,803
30 year term: $3,290; February 29, 2008 9:34 PM
Anonymous said...: In my opinion, there is also a need to factor in your projected personal savings at age 60. It is fair to assume that as one ages, the savings will increase. Hence a decreasing term, though leaving $36K at age 60 is still alright, if you have around $800K - 900K savings then.

Some may ask, how do I save so much? Take heed from Mr Tan's advise, invest in a low-expense diversified equity fund.

I also personally feel there is no need to leave the mathematically correct amount for children. Sometimes, living through tougher conditions will mould one's character. I attest to this as I self-funded my university education by working part-time. It was a good character building experience.

blackbox; March 01, 2008 4:43 PM