Term insurance replaces loss of earnings

Dear Mr. Tan,

My insurance adviser said that a term insurance policy will expire at the end of the term and after that, I will not have any more life insurance coverage. She said that it is better to take a whole life policy, as it provides coverage for the whole of life. I am undecided. What is your advice?

REPLY
Most people need life insurance to cover the loss of earnings in the event of premature death. They need the life insurance policy coverage only during their working life. The policy pays a benefit to replace the lost income and take care of the family needs when the children are still young.

When a person retires from work, there is no need for life insurance, as there is no lost earnings to be covered.

If you take up a term insurance policy, you pay a premium of about one-tenth of a whole life policy. This allows you to take a larger sum assured and protect your family more adequately. You need life insurance up to age 65 only.

You will find that a decreasing term insurance to be suitable for your needs. The sum assured starts at a high amount and decreases each year over the term. The premium is less than half of a level term insurance policy. You only need to pay about 5% of the premium for a comparable whole life policy.

Although the sum assured decreases each year, it is adequate for the family as the children have grown one year older, and need to be financially supported for a shorter period. The family would have accumulated one more year of savings with each passing year.

For example, a male at age 30 who takes a whole life policy to cover $300,000 has to pay a monthly premium of $500. This person can take a 20 year term insurance policy covering the same amount for a monthly premim of only $50. For a decreasing term insurance policy, the premium is about $25 a month.

If he takes a 30 year term insurance policy, the premium will be about $100 (for level term) and $50 (for decreasing term). They are much lower than the premium for a whole life policy.

There is another policy, called the family income policy, that pays the benefit as a monthly sum (say $3,000 a month) for the remainder of the term. I shall explain this policy in more detail separately.

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