Sunday, March 14, 2010

Term Insurance

I signed up for a term insurance recently from Great Eastern covering me for SGD$200K upon death, and covering hospitalisation for critical illnesses. The cost to me is $564 annually as I pay per year. It's about what I can afford right now without seriously slowing my journey towards financial freedom. I'm a believer of buy term invest the rest.

A quick summary of my protection, not that I have a lot:

1) CPF 40k insurance
2) Great Eastern HealthShield (for Hospitalisation only)
3) Great Eastern Smart Living Term Insurance
4) Company Group Insurance

If I were to die right now on the spot, number 1, 3, and 4 would pay a total of about $250k. Coupled with the amount I have in equities, dropping on the spot right now would provide my family with $380k. Not a lot, but sufficient for them for 7 years if they spend $50k a year.

Or they could use the $250k and top up my holdings for average of 7.5% gain, reaching a total of about $25k dividends per year, or $2k a month.

Enough of these morbid thoughts on death!

Fact is, we all need some form of insurance. I was taking a high risk by not getting one earlier, and chose to use that small amount to accelerate myself on my journey... Not that 50 bucks a month is a lot of help.

Insurance is a form of moat. It protects our wealth, and reduces the need to erode our wealth when instances of illnesses appear. There's little point working super hard to earn a lot of income, to let it feed the medical community because we did not spend a small amount of our income on insurance.

Just like a country spend a portion of it's GDP on the armed forces to protect its survival. Just like how ancient cities spend a portion of their taxes on building walls and moats to protect against unexpected enemies. Just like how companies spend on R&D to maintain an economic edge over their competitors. We spend on insurance to protect ourselves against unexpected events.

Insurance is indeed a crucial part of personal finance, an important part of our financial planning.

But given so many different choices, ILP, Life Plan, Term, etc, which do we choose?

A short summary of the 3 different types in my layman's terms:
Life Plan is basically, you pay a fixed amount per month for the first 20 years. After which, you are insured till age 67 years old. At my age, I would pay for 20 years, and get insured for 20 years after that without any further payments. However, the coverage is low, and the returns of a few percentage terms isn't exactly very fantastic after 40 years. Most valuable if I buy for my future kids at the age of 1.

ILP is basically Investment Linked Plans. Basically, some of the monthly amount you pay goes to the term plan, and the rest fed into a Unit Trust of your choice. Of course, commission charges apply for buying the unit trust. I'm not sure of the percentage, but it could likely be similar to those charged by banks... 5%... There's no guarantee that the amount you put in can be recovered 100% unlike Life Plans. However, you will be participating in the equities market, participating in the bull runs and bear times. Should any time your ILP value drops below what is needed for the Term plan (which gets more and more expensive as you age), there's a need to top up the difference. In short, it's actually quite risky if you don't know how it works. Traditionally, however, unit trusts give returns of average 3 ~ 5% over the very long run.

Term Plan is basically the normal insurance, with all it's coverage, without any cash value. However, because of that, it offers the highest coverage for the amount that is paid.

I prefer buying term and investing the rest because I believe that the average 3~5% p.a. gain over the long run in unit trusts is easily replicated if I keep to my style of dividend investing. For example, I could just put the remaining amount into SingPost and enjoy a rather safe 6% dividend yield. In addition, if 3~5% is achievable, why would I want a Life Plan which does not seem as worthwhile, yet slowing me down in my journey by sucking $200 a month for some miserable interest and coverage?

That... is the reason why I would choose Term Plan over the other types.


  1. Hey momo,

    I'm looking at Great Eastern too. Same thinking as you. I'm getting one that covers death and critical illness without any maturity benefits. As I believe I can use that extra amount of cash and invest on my own.

    Does the term policy that you sign cover your entire lifetime or is that only up to a certain age? Any idea what's the name of the policy?

    Sorry treat u like an insurance agent... :X

  2. Hi Jingwei,

    Term doesn't cover entire lifetime. I believe all available insurance covers to max 67 yrs old?

    The name of my policy is Smart Living Term Insurance.

    Need me to intro you my insurance agent? :)

  3. Hey thanks. I think there's insurance covering for a lifetime. Will check with my friend probably by next month...he's also working in GE.

  4. Hi Jingwei,

    That would be called Life Insurace I believe :)

  5. Hi Momo,

    The bad thing about term is that once you reach certain age (65 there), the coverage is no longer there. People live longer these days and the chances of getting critical illness increases as we get older. What happens if you get critical illness after the term expires?

    I would not count company insurance as part of my insurance portfolio because it is not portable, so I'm glad you bought yourself a personal H&S.

  6. Hi LP,

    if I'm not wrong, Life Insurance terminates at 67 years old as well right?

    To me, by age 50, the best insurance comes from your personal savings. A coverage of $500k by Great Eastern wouldn't be a lot if we have an asset base of $5 mil.... Something like that... It's another of my double prong attack...

  7. Hi Momo,

    Not true. Whole life insurance covers you till 100, that's why it's called whole life. To me, the greatest advantage of having whole life is the extended coverage of CI till the day you are gone. It's never about the returns.

    I agree with you on your second paragraph. But I like to think 'what if'. What if I cannot save enough to do self insurance? Then at least I have something to fall back on when I need it.

  8. Hi LP,

    thanks for the heads up on whole life policy. I will check it up with my insurance agent again. I certainly didn't realise it was up to 100 years old.

    But at least for the year 2010, I will have my term plan :)


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