Life insurance plays an important role in Singaporeans’ financial planning. It is the bedrock of any financial plan. If you still haven’t gotten your life insurance plan sorted out, here’s a quick guide to help you get your life insurance to cement your financial plan.
Life insurance: the ‘what’ and the ‘why’
What is it and how does it work?
Did you know the word insurance actually took root from the Latin word ‘securus’. Latin’s ‘securus’ has a literal meaning of “free from care”, which is essentially what insurance provides for us.
As the word suggests, insurance is designed to provide the last line of defence for your financial planning. It provides protection against financial losses when a trigger event takes place, e.g. death or illness. In the particular case of life insurance, a financial payout is provided in the event of death or total and/or permanent disability (TPD).
Why should you get life insurance?
One of the biggest reasons for buying life insurance is for financial protection. In the event of death or TPD, life insurance acts as a financial backup to help your loved ones tide over the loss of a loved one without worrying about the cost of daily living.
Step-by-step guide to buying life insurance
Now that we are clear about the ‘what’ and the ‘why’, it is time to go into the ‘how’ with a step-by-step guide of buying life insurance. When it comes to buying life insurance, there are three key decisions that you need to make: Coverage amount; Choice between term or whole life and; Length of coverage.
To help you make a decision in buying life insurance, here are three questions that will guide your considerations when buying a life insurance plan.
1. Choosing between term or whole life insurance
For term insurance, you are only paying for the protection element during a stipulated time frame (e.g. during your prime working years). If the death or TPD event does not occur during the coverage period, there won’t be any payout from your insurer. For whole life insurance, a payout is provided upon occurrence of death or TPD, regardless of when these events occur. In addition, most whole life insurances build up cash values after a minimum period, that you can choose to leave behind for your dependants or as your retirement income.
2. How much insurance coverage do you need?
One of the many key aspects to consider when buying life insurance is the amount of coverage you will need. After all, life insurance is meant to act as a financial backup plan for your loved ones. Thus, making sure that you have a life insurance plan with the right coverage is important. So, the question is, “How much insurance coverage do you need?”.
One common way of calculating the amount of insurance coverage is to use your annual salary as a gauge. As a general rule of thumb, coverage of a life insurance plan should be around 10 times1 of your annual salary. The rationale is simple. This general rule of thumb lets you provide 10 years’ worth of income for your loved ones for their daily living expenses.
3. What is the ideal length of coverage for you?
The third consideration you need to make when purchasing life insurance is to determine the ideal length of coverage. Term insurance provides coverage for a specified period whereas whole life insurance covers you for life. For example, you can choose to be insured for a period of 10 years under term insurance. For whole life insurance, the coverage goes on until you turn 99.
Typically, the ideal length of coverage is the time it takes for your dependent(s) to be financially independent. For instance, if you are expecting a newborn, the ideal length of coverage for you will be around 25 years (i.e. the number of years for your newborn to become independent).
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Source:1 The Sunday Times © Singapore Press Holdings Limited. Extracted with permission. “Protect your loved ones in event of sudden death”.