7 Things you must know before you purchase any life insurance
Updated: Mar 30, 2021
In our previous article – Things you must know before purchasing any insurance - we’ve established that life insurance is one of the types of insurance you NEED to have in the area of risk management.
In this article, we will be going through some of the key considerations you should have when considering life insurances.
Topics that we'll be covering in this article include:
Why do you need life insurance
How much coverage is enough
Is early critical illness a necessity
Whole-life v.s. Term life
Should you get insured now or later
Always compare your insurances
My stance on life insurance
1. Why do you need life insurance?
For those who are not familiar with life insurance, it is an instrument that provides you with a lump sum in an event of death, disability, and critical illness. Common uses of life insurance include
income replacement – to provide for family expenses and liabilities when you are unable to earn an income due to accident or illnesses
legacy planning – to provide for the shortfall in the desired amount that is to be transferred to the next generation in an equal and fair manner.
2. How much coverage is enough?
The answer to your question largely depends on your purpose in purchasing life insurance. To keep things simple, we will be looking at life insurance as an instrument that protects your income-producing abilities.
Bear in mind that insurance planning is an art and not a science, there are no right or wrong answers, only what you are comfortable with.
If we are looking at life insurance as an instrument that replaces your income in an event of death, disability, or critical illness, the calculation of your coverage should be based on your annual income instead of your expenses.
By using your annual income instead of expenses, we will be able to provide for both your ongoing financial plans and your family’s expenses in the event where you are unemployed due to an accident or an illness.
Concerning the question of: “how much is enough”, a general rule of thumb would be to apply for coverage that covers for (x) numbers of years of income + outstanding liabilities – all existing assets.
Liabilities include home mortgage, children’s university education fee, etc.
With regards to all existing assets, for disability and critical illness coverage, I prefer not to include them in the calculation as we must take into consideration the use of these assets in an event of your eventual recovery. We cannot be planning for a scenario where you had to start your wealth accumulation from scratch after you have recovered.
As for how many years of income would be enough, a general guide would be:
For death and disability, the “ideal” coverage is heavily subjected to your age and situation whereas, for critical illness, I’d prefer to stick to the range of 5 to 8 years of potential future income.
The reason for doing 5 to 8 years of potential future income is because that is the average duration a person with a critical illness would take to either recover or to move on.
As such, I do not see a need to provide more than 8 years of potential future income unless you are not comfortable with having 5 to 8 years and don't mind spending more for higher coverage.
Now obviously, the theoretical coverage that you will need to have may not be something you would want to apply for due to budget constraints.
You have to balance between the trade-offs and decide what you should prioritize and how much you should apply for instead of blindly applying for the coverage recommended.
This is why insurance planning is an art and not a science.
3. Is early critical illness a necessity?
In my opinion, I feel that early critical illness is good to have but not a must-have.
In an event of early critical illness, I believe that most of us will still be in a condition where we can live our lives normally and we would not be deprived of our income-producing abilities. Having early critical illness coverage provides us with the option to not work to focus on recovery.
Having said that, my stance on early critical illness is this – if your budget permits for early critical illness coverage. Get it.
In terms of how much early critical illness you should apply for, I believe that having 1-2 years of your annual income would suffice as that is usually the duration it would take for you to recover or for the condition to worsen to late-stage critical illness.
Over my years of practice, I’ve not seen anyone who had regretted getting an early critical illness coverage but I’ve seen plenty of cases of people regretting not getting an early critical illness even though they could afford it.
4. Whole-life or Buy-Term-Invest-The-Rest?
There is a lot of debate over the issue of buy-term invest the rest v.s. whole-life insurance so let me share with you my stance on this.
As a rule of thumb, if you need the coverage for a long duration of time, a whole-life plan may make more economic sense. If you need the coverage for a short duration of time, term life makes more economic sense.
Just as you wouldn’t rent a property if you intend to stay in a place for a long duration, why would you “rent” your coverage if you need it for a long duration?
Then comes the idea of buy term invest the rest.
Look, I’m not a fan of buy-term-invest-the-rest. It seems good on theory but in reality, it is extremely difficult to implement it. There is a list of considerations that you need to have such as:
how do you invest to ensure that the returns you need can be achieved?
what should you invest in to ensure that it will not affect other areas of your financial plans?
what should you do if you need more coverage after the term plan matures?
Unfortunately, most consumers have no idea how to manage their investments.
They either lack the knowledge or the emotional control to implement an investment operation successfully over a long period. For this group of people, they will be better off buying whole-life for their long-term life insurance needs.
Even for myself, I prefer to use a whole-life plan as the main instrument to provide for my long-term life insurance coverage needs as I prefer to keep my insurance and investments separate.
I do not wish to have the additional mental burden of knowing that my insurance portfolio strategy is dependent on my investment performances as it will affect my decision-making process.
5. Should you get it now or later?
Long story short, getting life insurance earlier will always be better than getting it later as you are
locking in your insurability based on your current health condition.
locking in cost, which will be lower due to the lower age of entry as compared to if you purchased it later.
In terms of how much cheaper it would be for you to get it now rather than later, you can refer to the figure below.
6. Always compare your insurances
Though similar, no two insurance are identical. There is a reason why competition exists in all industry and the insurance industry is no different?
Competition within the industry had caused the different insurance companies to “be the best” in the specific areas. The areas that the insurance company chooses to focus on will affect the type of benefits they provide and the cost they charge. As such, no one insurer is the best at every type of insurance.
As an advisor, I strongly advise against laziness to not compare your insurances before you commit to it as a small difference in price over 20-30 years can amount to a large amount. It pays to just spend that extra effort to understand and compare the different options available before you commit to a long-term plan.
7. My stance on life insurance (and self-plug)
In short, when it comes to getting life insurance, you should
always get your life insurance immediately when you are financially ready
consider a whole-life for longer-term needs & term-life for temporary needs
consider your income and liabilities when calculating your insurance needs
get yourself covered for early critical illness if you have the budget for it
always compare your insurances before making a decision
Insurance planning is an art and not a science. There is no such thing as a one-size-fits-all insurance portfolio strategy that we could just copy, paste, and expect to be suitable for us.
As everybody’s financial situation and needs are different, you must look at your situation alongside your future expectations when it comes to assessing the amount and type of life insurance coverage you should be applying for.
Finally, compare your insurances! A few hundred dollars difference a year will add up over 20-30 years. Apart from costs, companies may also try to differentiate themselves by throwing in additional benefits that may or may not be relevant to you.
So, find the right coverage, the right type of insurance, and the right company that will provide you with the coverage that you need at the lowest possible cost.
Now here’s where the self-plug comes in.
As an independent financial advisor representative, I can be on your side in helping you assess your insurance planning needs and to compare the different options that are available to you today so you do not have to sink in days and weeks of your time to do it on your own.
If you do not have the time, interest, or know how to identify the right type of insurance and the right company you should be considering, you can reach out to me via telegram and WhatsApp and we’ll see what we can do together!
If you would like to view some of my past work relating to insurance planning, you can head over to my insurance planning page here.
Like what you've read? You can also join my telegram channel to receive first-hand updates. I blog weekly on financial planning topics, market analysis, and updates:
Daniel is a Licensed Independent Financial Consultant with MAS and a certified Associate Wealth Planner that provides advice in the following areas:
for investment planning advice - find out more here
for insurance planning advice – find out more here
for retirement planning advice– find out more here
This article is meant to be the opinion of the author and is for information purposes only.
This article should not be seen as financial advice
This advertisement has not been reviewed by the Monetary Authority of Singapore