Tan Kin Lian's Blog: Term Insurance for 25 years

Tuesday, November 03, 2009

Term Insurance for 25 years

Here are some tips for buying term insurance:

a) Buy a term insurance for 25 years. You need insurance protection for this period. After this period, you do not need life insurance protection any more, as your children would have grown up and can take care of their own financial needs.

b) Even if your children still depends on you financially, you would have accumulated sufficient savings during the 25 years (provided that you invest in the right products that give you a fair return).

c) Buy a term insurance to cover 5 to 7 years of your earnings. If your earnings is $40,000 a year, you will need $250,000 (say).

d) If you wish to reduce the premium, you can choose a decreasing term insurance (where the sum assured reduces yearly over 25 years). Alternatively, you can buy an income benefit that pays 50% of your earnings over the remaining years.

You can read these examples in my book TKL Financial Planning.

To recap: at the end of 25 years, you do not need any life insurance cover. If you still have a housing loan, you can cover it separately under a mortgage insurance policy. Do not allow an agent to frighten you into buying a whole life policy, with the argument that you will not have any cover after the term insurance expires.

Tan Kin Lian

23 comments:

gerimegaly said...: Intentions right or wrong, I think many have got the message wrong about Life Insurance...

LIFE INSURANCE...
was/is never about Returns/Investment.
was/is to Create an Immediate Estate.
was/is Buying a Dollar, with just a few cents.
was/is all about Providing Hope, in a possibly Hopeless situation.

Go back to the Basics of what Life Insurance does, and you will never go wrong.; November 03, 2009 3:17 PM
Anonymous said...: But the life industry twisted the objectives of insurance and use the greedy agents to carry out their agenda. Is is now an addiction that insurance means saving and protection which is rubbish because both these elements conflict.
It has been wrongly promoted that life insurance business is a lucrative job , a get rich quick business that agents join to make it big at the expense of dumb consumers.; November 03, 2009 4:46 PM
Anonymous said...: Remove the commission and let's see how insurance agents view insurance.
I am sure not all those craps they used it on their customers.; November 03, 2009 6:51 PM
Anonymous said...: why cant cooperative take the bold step and implement fixed salary based agent only?; November 03, 2009 9:27 PM
Anonymous said...: Many FA firms are already doing that.And they don't have greed and ethics problems only the insurers' agents have.; November 03, 2009 11:32 PM
Khiat Han Hwee Adrian said...: Another way to get your term plan is via a guaranteed renewable term insurance using a short 5 to 10 years tenur.

The difference between the renewable term compared to a decreasing term is that you can renew at the same Sum Assured after 5 or 10 years if your needs is still high. If your need is lower by then, you can reduce your Sum Assured just like the decreasing term.
For the Decreasing Term plan, your sum assured is automatically reduced yearly and if your needs remain high after X years, you may need to take another insurance plan which insurability might be an issue.; November 04, 2009 11:15 AM
Vincent Sear said...: I think that an arbitrary figure like a 25-year term is not accurately applicable in every case. A target age should be more relevant, e.g. term till age 65 (if taking the insured's retirement as yardstick) or e.g. term till youngest child age 25 (if taking the insured's responsibility to care for children as yardstick).

A decreasing term is only good to cover mortgage, where it's decreasing to track a debt obligation that's also decreasing. I don't think that it's a good idea to use it as part of basic personal financial planning, because the value of a term policy is already inherently decreasing by way of inflation and non-participation in profits.; November 04, 2009 1:41 PM
gerimegaly said...: Yes...a good approach is to time the expiry of the Term cover till the youngest child becomes independent, ie. starts working. Typically it would be 25yrs old for a boy, and 23yrs old for a girl.

Using a decreasing term is also ok but due to it's inherent nature (yearly decreasing), it would mean that one would need to insure a slightly higher quantum, as compared to using a Term plan with a flat cover throughout the necessary period of protection.

But as Vincent correctly pointed out, the use of Term plans work out fine, if the aim is to care for children/dependents.

But what happens when one wants to leave a Legacy, or even a Donation to a Charity at one's Death? A Term plan may not be the best solution for situations like this.

And what about Critical Illness(CI) cover? Does one choose CI Term? What happens when the plan ends and you get struck by a CI thereafter? And what happens when the cure for your illness (if it happens) can be found in a Research Hospital overseas - typically in the US? Are you gonna blow your hard-earned savings, to pay for that illusive cure...especially when your Term CI has expired? A $150K to $200K CI payout in a situation like this, would be pretty helpful, don't you think?

Tell me...haven't you heard of people heading overseas, to seek treatment? Hey, it's not free, and it's not cheap!!

Surely, your local hospital plan does not cater for treatment (especially radical treatment) overseas...

Therefore, in my opinion, there must be a certain amount of CI Whole Life cover(coupled with your Shield Plan), in your portfolio, when you retire.

Just take some time to think about it guys...; November 05, 2009 8:34 AM
My Foot said...: The likelihood of being diagnosed of a critical illness is almost Zero.
Thats how the odds are calculated.
And its the FEAR that drives the sales.

No one in the industry is willing to reveal statistics that YOU are NOT going to get CANCER of the Colon... despite that fact that your family has one person who had.

They will argue the statistics to their favour and allow your own fears to influence your buying.

Leave a legacy?.. just leave a CD recording of how much confidence you have in the people who will survive you.. give them hope and encouragement even after you have departed. We are all dust.; November 05, 2009 11:07 AM
Anonymous said...: geringayly,
how many people can afford $200k-$300K CI wholelife? You talk like insurance agents, your words no need money. What legacy when the important need to provide for dependents is not even considered by most people. Why? money no enough to buy whole life to provide agents with big commission.
Term not enough? covering you until 80 years old not enough?Do you need a whole life to cover you till 80 years? You will be charged for inapproriate recommendation.
I bet that before 60 you will be itchy to surrender it.
Come one, do what is right and say what it is true.; November 05, 2009 12:21 PM
gerimegaly said...: Hahaha...yep, was just waiting for the creepy crawlies to crawl out of the woodwork.

We all live by the decisions we make in our lives. You choose your own path.

If you think that the chances of getting a Critical Illness are zero, then so be it.

If you think you can live by with just Term cover (Strictly Death Cover) & without CI Whole Life, then so be it.

Who am I to tell you what you should do? It's your life!; November 05, 2009 2:35 PM
Vincent Sear said...: My Foot,

If you think that the chance of critical illness is almost zero, then you imply the Government, particularly the Ministry of Health and the CPF Board must also be conning the people into reserving more than S$30k in Medisave and buying more than S$100k in Medishield insurance.

Without critical illnesses, how to incur such huge medical bills except by way of accidental injuries. That's why I think that healthcare and personal accident are basic necessities in insurance planning, and there're no too expensive. Critical illness cover isn't the same as healthcare insurance, it's based on life insurance. Life insurance usually comes with an accelerated claim (before death) in case of disability. Critical illness cover simply accelerates it to diagnosis, claimable before disability or death occurs.; November 05, 2009 4:04 PM
Anonymous said...: Those agents who propose whole life critical illness are actually proposing for themselves.In the first place how much can one afford? $50K 200K 300K? Big crabs...crawling side way..Or one should have $50K or $300K when one is old? Trying buying them.
Let us know how much should one have and what type of plan, you insurance agents out there.; November 05, 2009 7:55 PM
Vincent Sear said...: Critical illness can also be based on term policy accelerated, not necessarily based on the more expensive whole life or endowment.

It's a matter of cost versus time of claim. In a regular term or whole life policy, payout occurs at death or disability. With critical illness, it occurs at diagnosis. That's all. You pay more premium for what you get earlier. Nothing sinister. It's up to you to decide which is best for you. There're even double claims or triple claims policies available, once at diagnosis, once at disability and once at death. Of course, these are more expensive. Pay for what you want and get what you pay for.

Another way is to go on condemning and cursing insurance companies and agents, never buy insurance, and die happily ever after. Come with nothing leave with nothing.; November 05, 2009 10:29 PM
My foot said...: Hello Vincent Sear,

Medishield, medisave were created for reasons other than insurance.
Humans do fall sick and face critical illness too.
I wished that the Government could allow me to opt out of the Medisave, Medishield schemes, it remains a wish.

People visiting and reading this blog should be aware that buying insurance is not as important as some agents or financial planners make it out to be.

Insurance is not fundamental.
Breathing is.

Thank you for sharing and being engaged... thanks to MR Tan too for allowing discussions to flow.; November 05, 2009 10:43 PM
Anonymous said...: Anon, November 05, 2009 7:55 PM,

The insurance agents will advise you buy according to your budget. But what budget for what kind of products? Of course the budget for a wholelife critical illness..but then the budget can only buy limited amount of whoelife critical illness and I need 5 times of it.Never mind buy whatever you can now and wait till you have more money then buy slowly, say the agents. We see whether you have money to buy some more in the next review.
"But what if i kenna cancer tomorrow or next month?' asks the customer.
"Too bad , lah. Who ask you not to have money", replies the agent.
"But i have money waht and enough to buy a FEW HUNDRED THOUSAND OF CRITICAL ILLNESS and that is waht my financial planner told me." retorted the customer.
"but that one no cash value , you know. You pay and no money come back and also that one cannot cover you for whole of your life", agent trying to demonise the term product.
" In that case let me go back and consult my wife and my mother", replies the customer.I call you . Don't call me.
"you don't take too long, hor. You may die or get cancer." threatens the agent.; November 06, 2009 9:27 AM
Vincent Sear said...: I always believed that a good insurance agent should sell insurance not investment, sum assured not returns.

Participating with profits and investment-linked policies shouldn't be oversold, but could be used as basic policies to take on term and accidental riders.

For example, premium for a male age 30 should be about S$100 p.m. for a whole life critical illness participating policy with S$50,000 sum assured. To buy S$250,000 worth, he needs to pay S$500 p.m. which is very stiff for the average salaryman. The distribution costs would also be too high and the returns too low.

For a competent agent, it shouldn't be difficult to plan a policy with riders to achieve S$250,000 sum assured at about S$150 p.m. premiums. This would reduce the average distribution cost (because of the lower commission riders) but also reduce the returns (because of the non-par riders). It may prolong breakeven by 10 years or even longer.

However, refer back to the beginning this posting where I pointed out, sell insurance, not investment. The client has a sizeably meaningful sum assured for a comfortably affordable premium. His spare cash from buying an all-par policy for the same sum assured could be invested elsewhere for better returns.

At the end of the day, if he survives through it all safely without any claim, he can collect on the with-profits part of the policy as a refund with a little bonus. Had he bought all non-par, survival would mean zero return.; November 06, 2009 12:53 PM
Anonymous said...: But then on the other hand more went to his 'other investment' and the return from this freed money will more than cover his 'non par'; November 06, 2009 5:12 PM
Vincent Sear said...: To: Anonymous Nov. 6 5:16PM

Yes, he can also buy all non-par term and invest the rest of his savings. However, even though it may be cheaper, there's this psychology of resistance to paying for something and getting nothing back. So if a plan is packaged as not more expensive but he gets everything back in the end with a little bonus, I think that's worth considering. Anyway, different strokes for different folks. It depends on his risk appetite and way of thinking. I don't think there's right or wrong between honest and reasonable alternatives.; November 07, 2009 11:05 AM
Anonymous said...: You mean par products are meant for risk averse people? Are par products less risky? Is it misconception or perception? If both, both can be corrected, can't they? If it is not right for a person it is not right. A right is a right and no such thing it can be right and wrong.; November 07, 2009 5:30 PM
Anonymous said...: Risk of par products has gone up over the years. The annual bonus has been trimmed razor thin and that if the product is to get decent return the non quaranteed or the special bonus component has to perform well.The specail bonus is dependent on the investment portfolio of the life fund.If 80% of the return par products is dependent on the life fund portfolio consumers are better off investing themselves. Why should one's investemnt be lumped together with the others when one's objectives , time horizon and risk appetite are different.
It is a misconception that par products are low risk. It is not true any more.If the par products take 25 years to break even and if yours takes about 5 years whose is riskier? Common sense will tell you.
It is the insurance agents who lie or incompetent and who resort to frightening the consumers.The agents are not confident when it comes to investemnt. This separates the competent advisers from the unethical agents salesmen.; November 08, 2009 6:06 PM
Vincent Sear said...: To: Anonymous 11:05AM

Buy what you want and think reasonable. Look for perfection? I haven't found it yet. If you find it, please drop me a line.; November 09, 2009 4:32 PM
Anonymous said...: Vincent,
i found it. Don't buy par products.
Use BTITD to design your own products. Take charge and don't let the salesmen and women screw up your plan.; November 09, 2009 7:16 PM

Tuesday, November 03, 2009

Term Insurance for 25 years

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