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guide-to-types-of-life-insurance-–-how-they-work-and-what-to-get

Life insurance is one of the most fundamental insurance policies that most people will purchase during their lifetime. It provides a payout to help alleviate any financial burden when you pass so that your loved ones would not have additional burdens.

However, you might be confused by the vast variety of options available. What are the best options for you and your financial situation?

Why Do I Need Life Insurance?

life insurance

Typically, people choose to buy life insurance to protect their spouse and dependents from devastating financial losses in the unfortunate circumstance of total and permanent disability or death. Life insurance is especially important if you are the breadwinner of your family. It acts as a security blanket that can help your family pay for their living expenses, and debt, and also help with any medical bills should you lose your ability to generate an income or even funeral expenses.

Crossing certain life milestones often prompt people to look into purchasing life insurance. These include getting married and starting a family, as there are now more people who are dependent on you and your income.

While you may think that life insurance is not a priority for you right now, it could be in your best interest to buy it sooner rather than later. Typically, insurance premiums increase with age due to the higher expected healthcare costs as you get older.

Types of Life Insurance

types of life insurance

There are three broad categories of life insurance — term life, whole life and universal life insurance.

Life insurance policies come as bundled or not bundled with investments. Term life insurance is typically not bundled with any investment products and only offers protection against death, permanent disability and, in some instances, critical illnesses. They are not a vehicle for investment and do not possess any cash value.

Read Also: Best Term Life Insurance in Singapore 2022

Whole life and Universal life Insurance, on the other hand, are often bundled life insurance policies. They not only offer protection against the aforementioned situations but also offer exposure to markets and possess a cash value.

Term Life Insurance Whole Life Insurance Universal Life Insurance
Coverage
  • Offers a one-time lump sum payout in the instance of terminal illness or death during a pre-determined duration (eg. 10 years/until 75 years old)
  • Able to get additional coverage (eg. total and permanent disability) as an add on
  • Offers a one-time lump sum payout in the instance of, terminal illness or death for your whole life
  • Able to get additional coverage (eg. total and permanent disability) as an add on
  • Offers a one-time lump sum payout in the instance of terminal illness or death for your whole life.
  • Able to get additional coverage (eg. total and permanent disability) as an add on
Premiums Fixed monthly/annual premiums.
Typically about S$30 – S$40 monthly*based on 35-year-old males and females, S$400,000 sum insured up to age 65
Fixed monthly/annual premiums.
Typically S$250 – S$350 monthly*based on 35-year-old males and females, S$200,000 sum insured
Large upfront premium. Able to vary monthly premiums.
Pros
  • Straightforward
  • Lowest premiums paid
  • Has a cash value
  • Purpose is to leave a sizable inheritance to your loved ones
  • Greatest flexibility
  • Able to amend your sum assured and premiums anytime
  • Has a cash value
Cons
  • Only insured for a fixed duration. If you do not make a claim during the duration of the plan, the plan automatically expires.
  • More expensive than term life insurance.
  • More expensive than term life insurance.
  • Upfront premium can go up to 6 figures.
Cash Value Typically no cash value; no payout other than terminal illness or death. Builds cash value over time.

Participating policies

  • Guaranteed and non-guaranteed bonuses, subject to the market performance of the participating funds.

Non-participating fund

  • Pays a guaranteed benefit only. Not entitled to bonuses
Builds cash value over time. Grows at a rate dependent on interest rates and market conditions of your investments

Traditional Universal Life Insurance

  • Premiums invested into bonds

Variable Universal Life Insurance

  • Premiums invested into funds
  • Performance of the funds may be inconsistent

Indexed Universal Life Insurance

  • Premiums are invested into a mixture of both bonds and funds, depending on our risk appetite
Risk No investment or expense risk as not bundled with investment products Participating policies

  • You bear investment risk as bonus payments are not guaranteed
  • You bear expense risk. If the expenses overrun, it will affect your non-guaranteed bonus payment.

Non-participating policies

  • No investment and expense risks as benefits are guaranteed
  • You bear investment risk as a portion of your premiums are invested in the market through funds in order to grow the policy’s cash value
  • You bear expense risk. If the expenses overrun, it will affect your overall cash value.

Cash Value

The cash value of a policy, also known as the surrender value, is what you will get back if you cancel your policy.

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How the cash value accrues with whole life and universal life Insurance policies is that the premium you pay gets divided into three portions. One portion goes towards the death benefit, another goes towards the operating costs associated with the policy, and the last portion goes towards the cash value of the policy.

In most cases, the cash value of the insurance policy will not start to accumulate until a few years in. The insurance company will invest your premium into a variety of conservative funds to grow the cash value.

Participating Whole Life Insurance Policies

These policies share the profits of the company’s fund. Its cash value comprises both guaranteed and non-guaranteed bonuses and is subject to the market performance of the participating funds. Bonuses are typically declared at the end of every year. Once a bonus is declared, it is guaranteed and cannot be taken back.

Universal Life Insurance Policies

It is possible for your cash value to decrease over time. If your investment returns turn out to be much lower than expected, the cash value could decrease after expense, administrative and other fees are deducted. Additional premiums have to be paid in order for the policy to continue.

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Read Also: Best Whole Life Insurance in Singapore 2022

What Type Of Life Insurance Is Right For Me?

types of life insurnace

Before purchasing a life insurance policy, ask yourself:
What is my profile and what do I want insurance for?

  • What are my goals and how can my life insurance policy help me achieve them?
  • How much can I afford to comfortably pay for my insurance premium?

If, for example, you are a new parent and are looking for pure insurance protection until your youngest child completes university, then term life insurance could be a good option for you. It not only offers the lowest premiums but also gives you the flexibility to only pay for coverage until your dependents are no longer reliant on you financially.

On the other hand, if you are a high-net-worth individual and would like the flexibility of being able to amend the amount you have insured, universal life insurance might be more appropriate.

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Take time to consider what options are best for you as many policies have a surrender charge. If you choose to terminate your policy early, you may be charged by your insurer.

Some Policies Available On The Market

Term Life Insurance

Whole Life Insurance

Conclusion

Life insurance is a vital instrument in everyone’s personal finance toolkit. It is important to consider the best policy for you as it concerns not only your finances but also your loved ones’ future. Whether you want more straightforward protection or a more comprehensive wealth management tool, there are life insurance policies out there that can help you achieve your goals.

After you have decided what type of life insurance is best suited for you, check out our comprehensive round-ups of term life insurance and whole life insurance for more information on individual policy benefits.

Read Also:

The article originally appeared on ValueChampion.

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