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Insurance Basics

Different flavours to choose from.

Broadly speaking, they are four main types of insurance with different characteristics that set each other apart.
The basic building block of insurance.

Term insurance is the no frills version of insurance, covering Death, Terminal Illness and Total and Permanent Disability at a low cost. It is most straight forward and cost effective way of obtaining coverage.

Term Insurance gives cover (financial protection) to its owner for a set/finite amount of time (hence "Term").
Buyers of Term Insurance can choose to receive protection for a pre specified amount of time. It can range from 5 years to 45 years.
Coverage for term insurance is usually available only up to a certain age, usually up to retirement age of 65 for most insurers.

1. No Savings or Investment component
Due to the low cost, Term Insurance does not provide any returns.
If Death, Terminal Illness or Total Permanent Disability occurs, the policy pays out the Sum Assured to the beneficiary.

If there is no such death, TI or TPD, the policy will run out (expire) without further obligation from the insurance company.

2. Possible to extend coverage to other events as well
Some insurers provide an option for the policy owners to add on other events to be covered other than Death, TI and TPD. These events include: Critical Illness, Disability and Personal Accidents. As expected, these will add on to the cost of the Term insurance, sometimes substantially.

Provides coverage throughout the entire lifespan of a person

As its name suggests, a Whole Life Policy is one that provides cover for the whole of one's life. (As opposed to Term insurance, whose coverage ends within a specified period of time).

If any of the specified events occur during the life of the policy owner, the financial payout is received. Eventually the policy owner will die, and when that happens he will also receive the payout - abeit paid out to his estate or any beneficiary he names.

1. Premiums need not be paid throughout the entire lifespan.

A policy owner of a Whole Life Policy usually pays the insurance company a set amount every year and receives financial coverage for his whole life. In the past, whole life plans were designed for the policy owner to pay yearly premiums up to age 65.

These days, the premiums can be paid up in full within 15, 10 or even 5 years (but the amounts are adjusted upwards accordingly).

2. There is an element of Savings returns

A portion of the Premium is used by the Insurance Company to generate returns. The returns are usually called Cash Value and this amount depends on the rate of return generated by the company.

However the main focus of a Whole Life Plan is still skewed towards protection rather than savings.

3. Two ways to utilize the Savings returns

Upon a claim, the Sum Assured (basic cover) and the total accumulated Cash Value will be paid out.

Alternatively, the policy can also be voluntarily stopped by the Policy Owner (nothing happens to him, but he wishes to terminate the policy). When that happens, he is entitled to receive the Cash Value that has built up in the policy (if any).

4. Possible to extend coverage to other events as well

Part of the attraction of Whole Life Plans is the ability for the owner to choose many other insurance "add-ons" that provide a wide range of benefits. These can cover Critical Illness, Disability, Waiver of Premium benefits and many others.

These add-ons are usually available for purchase at a relatively low cost and are called "riders". (They 'ride' on the back of the main plan, which is the Whole Life plan in this case.)

Effectively a Savings plan, with minimal coverage

An Endowment plan is meant for the owner to set aside premiums for a set number of years and receive a financial payout once the policy ends. Many people use it for enhancing their savings returns, and hence it is also commonly known as a Savings plan.
As with all Life Insurance products, Endowment plans do pay out a specified financial amount if death occurs to the policy owner within the lifespan of the plan. But its focus is more on providing superior returns to the policy owner. The coverage provided tends to be a token amount.

1. Catered for people with a saving goal in mind

Endowment Plans present a low risk savings option to you.
In Singapore, it is often used as a saving plans for the children - the maturity date usually coincides with the child's tertiary education.

It should never be a primary source of your coverage as it is least cost-effective for coverage compared to other plans.

2. It has a finite period (stop watch)

Endowment Plans usually mature in 10 - 20 years. A major portion premiums paid go into generating returns for the policy and obtaining cash value.

Upon maturity, you will receive all accumulated cash value.
In addition, if there is a claim payout during the period of insurance, the higher of the sum assured or the cash value will be paid out.

3. Some Endowment Plans have regular payouts

Some endowment plans allow the owner to choose yearly or bi-yearly payouts even before the plan matures (ends). Such payouts are called Cash Backs/Coupons.

Cash Backs / Coupons may be also re-invested into the policy, enabling even better returns.

4. Early Termination of the Plan is possible, but not desirable

The owner can choose to terminate the plan before maturity and obtain the cash value already accumulated in the policy.

However that cash value (before maturity) usually is lower than the total premiums paid, hence does not make financial sense in most cases unless there is an urgent need of funds.

An Investment plan with some coverage

ILPs combine investments with life insurance. The premiums are split up to obtain coverage and investment units.
It is a flexible plan, usually with the option to adjust the proportion of Cover and Investment.

1. ILPs offer control by the policy owner

The owner gets to choose and control what he invests in - what he buys, and when he sells.

He also gets to choose between different investment units called funds. Different funds are offered by different companies, with varying objectives and risks.

2. No maturity period but Investment units are redeemable throughout anytime

There is no maturity date for ILPs. That is to say, you may continue with the same plan throughout your life.

You may sell some or all the units in your ILP at any time. However, when all units are sold, the policy is surrendered and your coverage will cease.

3. Multiple types of charges are involved

There are many different expenses to be deducted from the premium when it comes to ILPs. The most prominent one is referred to as the sales charge (when the investment units are first purchased.) It is computed as a percentage of the investment unit.

For example, if each investment unit is worth 100 dollars, a 3% sales charge means that an owner has to pay $103 for each investment unit.

Some costs to consider include the bid-offer spread, annual management fee, policy fee, and other costs that add up.
You may wish to understand these terms fully, before buying an ILP.

4. Designed for Financially-Savvy risk-takers

Financially-Savvy people take advantage of the flexibility and control offered by ILPs to enjoy superior returns while maintaining adequate coverage for themselves.

However you will need to be aware of which funds to invest in and the risks involved. As mentioned earlier, investments are associated with higher risks and higher potential returns. The potential for any financial loss should also be taken into consideration.

Plan Comparison
Here are the major focuses of each plan type
Term
Term

Whole Life
Whole Life

Endowment
Endowment

ILP
ILP