Life protection insurance is a life insurance policy that is designed to cover the insured for life. It pays a lump sum of money upon death, and about 5 installments of payout upon Total Permanent Disability of the insured. Life insurance policy usually also comes with Critical Illness coverage that also pays a lump sum upon the diagnosis of the covered critical illness defined by the insurer.
The following three types of life insurance are currently sold in the market.
|Type of Life Policy||Coverage|
|Traditional Whole Life Policy||Whole life|
|Term Policy||Up to a specified age, say 60|
|Investment-linked Life Policy||As long as it is in-force|
Whole life policy costs higher compared to a term policy for the same sum insured. For investment savvy people, it is good to buy the term policy to cover the required amount of sum assured for life and total permanent disability. You may then channel the remainder sum of premium saved in other investment that reaps returns of 4% and above. However, it is still advisable to buy at least one life policy that covers you for life which also includes critical illness. This is to ensure we are independent and able take care of ourselves financially at any stage of our life. The general rule of thumb is to get insured for about 5 times your annual salary for critical illness and 7–10 times against death and total permanent disability. However, I think it is good to do a financial needs analysis to get a better estimate of the insurance coverage needed.
There are also two types of whole life policy,
• Limited premium of a fixed number of years, say 20
• Premium to be paid for life till age, say 85
The limited premium only needs your commitment to pay for a fixed number of years, say 20 years. However, the coverage will continue for your entire life-time. Likewise, normal whole life policy will cover you for life but need to pay for a longer duration till say age 85. The monthly limited premium whole-life policy will be more expensive than the traditional whole life policy. However, in the long run, you stand to save money since the payment years is shorter. So the choice of the type of whole life policy really depends on your budget.
Whole life policy accumulates cash and bonus and is hence a participating policy. Term life policy is a non-participating policy since it does not attract any returns at the end of the policy. Also, the coverage is normally up till 60–70 years old, depending on the offer by each insurer.
Investment-linked life policy invests the premium collected into the unit trusts offered by the insurer. It offers some coverage of death and total permanent disability up to about 5 times the annual premium or the value of your units, whichever is higher. So, in a way, your capital investment is in fact protected. You may need to add on riders to cover for the critical illness. The only caveat of this type of policy is that the coverage ends when you sell away all the units in the investment-linked policy. However, it has the potential of earning a better returns based on Dollar Cost Averaging. How it works is to invest the same dollar amount in a fund at regular intervals. The insured is able to capitalize on market cycles by purchasing more units when prices are low and fewer units when prices are high. In the long term, the cost of each share is lower than the unit’s average price during the same period. And to maximize the market cycle, we should pay the premium monthly instead of yearly.
Download the Financial Needs Analysis spreadsheet now to determine the amount of funds required for the various area of insurance coverage!
Ginny Lim Gek Eng
Web : www.aboutfinancialplanning.net