Understanding life insurance

The primary reason we buy life insurance is for protection — it can provide financial back-up during emergencies when we pass on or become totally and permanently disabled.

Some life insurance products bundle insurance with an investment component and can be used to provide for your retirement income or to accumulate savings to leave behind for your loved ones. These will cost more.

A life insurance policy is a contract between you and an insurance company. In return for the benefits provided by your policy, you pay a premium for an agreed duration.

There are 2 main categories of products:

Term insurance – Sometimes called unbundled products as they provide you with protection coverage for a fixed period of time without any investment feature.
Bundled products – Refers to whole life and endowment policies as well as investment-linked policies (ILPs) as these provide for protection and investment.

Assessing how much insurance to buy

Buying a life insurance policy is a long-term commitment. It takes time to assess what you need and what you can afford.

Start by assessing how much insurance protection to buy. If you are also looking to invest for a financial goal, you need to assess how much savings to build and the time you have to achieve this (your investment horizon).

Your protection needs

What do you want to protect against? You could protect your dependants’ needs upon your death. You could also protect you and your dependants’ needs should you become totally and permamently disabled.

How much insurance cover do you need?

How many dependants do you have? How many years before your youngest child starts working and becomes self-reliant? Do you have parents to support?
What debts and other obligations do you have?
How much do you need for your children’s education?
Do you already have some savings to rely on?

Your savings and investment goals

What are your financial goals? Paying for your children’s education or saving for retirement? Note the time frame or investment horizon. How much will you need to retire comfortably?

How much money do you need? When do you need it? For example, you may need $30,000 in five years’ time for your daughter’s education. or an extra $200,000 in 15 years for your retirement. Knowing when you need the money and how much capital you have will help you make better decisions.

What other savings and investments do you have? How will the insurance product fit in with what you already have?

Affordability

Can you afford the premiums?

Buying life insurance is a long-term commitment and it’s important to be able to keep up with the premiums. If you are unable to keep up with your premiums, you policy may lapse or be terminated.

Before committing, consider if your employment situation may change, and whether your household income will be affected if you or your spouse stops working.

If your budget is tight, get term insurance to cover basic living expenses until your youngest child starts earning an income.

Note: It is important to know if you are buying life insurance for protection alone or to build savings too, how much to buy, and what you can afford.

You will be guided through this process if you deal with and seek advice from a financial advisory (FA) representative.

Direct purchase insurance products are available at lower cost, if you are prepared to do this on your own.

Before you buy

Before you purchase an insurance product, here are a few things you should do:

Give all the required information

You must provide all the information asked for in the proposal form and any other details asked for by the insurance company. If you’re not sure why it is needed or why it is important, ask the insurance company or your FA representative.

Check that all relevant information you have provided is included in the proposal form. Check that the proposal form is completed.

If you spot any inaccuracies or missing information, do not sign the proposal form and ask for it to be amended immediately. The policy may be voided if there are errors or missing information, and your (or your dependants) could end up without protection.

Make sure you are fully satisfied with the information shown in your proposal form.

Make sure you understand the product Read your policy documents and ask questions when in doubt. Take the documents home to read if you need more time. Ask the insurance company or your FA representative about the following:

Before you buy:

To explain all calculations
Whether the policy has exclusions
Whether you need to disclose your existing medical conditions and family medical history
To confirm your conversations in writing
When the free-look cancellation period begins
When you can expect to receive the policy documents
Who in the insurance company you can call, other than the FA representative, if you want to enquire on the status of your application

After you buy

How to make a claim
How the assessment is made
How long it will take

Be cautious:

You should

Never sign blank or incomplete forms
Never write a cheque to pay directly to the FA representative. You should make payment to the insurance company.
Avoid paying cash. If you need to pay any cash, make sure you receive a valid receipt.
Never give your NRIC to strangers or without first clarifying why it is needed
Beware of verbal promises and guarantees of high returns
Insist on written confirmation before committing to buy a product

How much will you be paying?

The premium you pay depends on the protection coverage, the financial returns you want, or a combination of both. Take time to think about what you can afford when deciding on the type of product and the amount of coverage to buy.

You should also factor in the commitment period and whether your existing savings can withstand any unforeseen financial emergencies.

Your responsibility

Always check the statements and read the letters sent to you by your insurance company. If there’s anything you don’t understand, immediately ask your FA representative or insurance company about it.

Policy Owners’ Protection (PPF)

Are you aware that in Singapore, there is actually protection for your insurance policies? The PPF Scheme protects all life insurance policies issued by licensed life insurers who are PPF Scheme members. Examples of life policies covered by the scheme are:

Individual and group term life policies
Individual and group whole life policies
Individual and group endowment policies
Individual and group annuities
Individual and group long-term accident and health (A&H) policies

Accumulated values of coupon deposits, advance premium payments and unclaimed moneys under all insured policies are also covered. The PPF Scheme, however, does not cover policies issued by overseas branches of a registered life insurer incorporated in Singapore.

Singapore Deposit Insurance Corporation (SDIC) provides protection for guaranteed benefits of life insurance policies, subject to applicable limits.

For example, individual life and voluntary group life policies, there is a limit of S$500,000 for the guaranteed sum assured and S$100,000 for the guaranteed surrender value per life assured per insurer.

What does “per life assured per insurer” mean? If you have several life insurance policies with an insurance company, the limits will apply on the total combined benefits of your insurance policies and not individually.

For individual and voluntary group annuities, there is also a limit of S$100,000 for the aggregated commuted value of guaranteed benefits per life assured per insurer. However, policy owners making claims under accident and health (A&H) policies will be fully compensated.