What is life insurance, why you need it, and, its types.

Life insurance is a financial product that pays you or your loved ones a sum of money after a set term or upon an unfortunate life event. But in simple terms, life insurance is a safety net designed to financially support your family in case you are no longer able to do so yourself, maybe due to an accident, or suffering a total and permanent disability or in case of your untimely demise.

Why is important to have life insurance?

Paying for your child’s education, saving up for a comfortable retirement, and buying a holiday home – these are some of the most common goals that families have. We are sure you and your family have similar financial objectives as well.

However, life at times can be very unpredictable – we do not know what tomorrow holds. That is why it is important to have life insurance. A good plan will act as a safety net, ensuring that your family’s goals and standard of life is cushioned from the financial impact of an unfortunate event.

Types of Life Insurance:

Opting to get life insurance is smart, but it is only half the job done – the other half would be choosing the right type of plan for your needs. There are two types of plans you can choose from in Singapore – term plans and bundled plans.

These plans might differ with respect to affordability, benefits, coverage, duration, and so on. Therefore, before you decide to buy one, you first need to compare each of these plans to see which one suits your needs best.

Term life insurance:

These plans are valid for a specific tenure, say 10, 20, or 30 years. If  an unfortunate event such as suffering from a critical illness, or being left with total and permanent disability, the plan will provide a lump sum payout. However, if you outlive the tenure, the policy simply expires and you do not receive any payouts.

These plans are perfect if you are looking for affordable yet comprehensive protection. This is because term life insurance plans have low premiums, yet they offer substantial payouts in case of death or other unfortunate events covered by the plan.

Life Insurance Explained

For instance, some plans will have a minimum annual premium of S$ 300 and provide a maximum sum assured up to S$ 80 million and more! The best part is that you can increase the sum assured over time. You can also avail protection for tenures of up to 75 years, during which you could increase the sum insured every year, based on your needs.

Bundled Plans:

Bundled plans refer to whole life, endowment, and investment-linked policies (ILPs) as these bundle protection and investment into one. These plans have one thing in common – they have the potential to provide some cash payout if you survive the policy tenure (surrender value in case of whole-life plans), which is not the case with term plans. However, besides this, they all function slightly differently from each other.

i) Whole-life plans:

Whole life plans usually provide coverage for your entire life. They are of two kinds – participating and non-participating. Non-participating plans offer guaranteed cash values when you make a claim. On the other hand, participating plans allow you to share in the profits of your insurance company’s participating fund.

You get a share of the profit in the form of bonuses or dividends that are added to your policy. These bonuses or dividends are not guaranteed as they depend on the performance of the participating fund. When a claim is made, all the bonuses or dividends that have been declared will be paid in addition to the sum assured.

ii) Endowment plans:

Endowment plans are often referred to as savings plans. This is because they help accumulate and grow your money to meet a specific life goal, such as your child’s education or your retirement. Endowment plans usually have a policy term of 10 to 30 years. At the end of this tenure, the policy matures and you get a lump sum payment.

This payment could be guaranteed or could include bonuses, depending on whether you choose a participating or non-participating endowment plan. You could also opt to receive payouts at pre-specified intervals during the term of the policy and get the remaining amount at the end of the policy tenure; these are known as anticipated endowment policies.

iii) Investment-linked plan (ILPs):

Investment-linked plans are life insurance policies that combine insurance coverage with investment opportunities. When you opt for an ILP, the premiums you pay are invested into sub-funds of your choice. Every year, some units of your sub-funds are sold to pay for the insurance component of your plan, while the remaining units stay invested to earn you handsome returns.

In case the policyholder meets with an unfortunate event covered by the ILP (death, TPD, critical illness, etc.) then the plan will provide a payout. This payout could be a guaranteed sum assured (such as 105% of the total premiums paid) or the value of the sub-funds that point or even a combination of the two, it completely depends on the plan you purchase.

We can’t say which one of these plans is best for you – that’s something you need to decide for yourself, preferably after consulting with a financial expert. But if there’s one thing that is certain, it is that life insurance is vital. Without it, you leave all your all your life goals and financial plans to chance. But with it, you can sleep at night, knowing that you’ve got your family covered, come what may – and that’s priceless.

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