Life Insurance
Life Insurance
A Complete Guide to Life Insurance in Singapore
Life Insurance is one of the most ubiquitous types of insurance products available in Singapore.
You can bet that many of those around you have bought life insurance before. In fact, Singapore has one of the most developed insurance markets in the world. In 2020, the value of all life insurance premiums in Singapore were approximately 23.69 billion Singapore dollars. The total amount insured in Singapore through policies in force was about 1.55 trillion Singapore dollars. What exactly is life insurance? What types of life insurance are there? Which factors should you consider before purchasing life insurance? Let us at Bowtie walk you through a step-by-step guide to understanding life insurance!
What is life insurance?
The insurance industry in Singapore is regulated by the Monetary Authority of Singapore (MAS) under the Insurance Act. The insurance business is divided into two categories: life insurance and general business or non-life insurance.
Life insurance is a risk management tool that ensures the financial protection of your dependents if you unexpectedly die. Life insurance coverage provides a financial safety net, it guarantees that the insurer pays a sum of money, exempt from estate tax, to named beneficiaries when the insured dies. It is an essential part of a sound financial plan.
You may determine your desired amount and form of life insurance based on your individual situation and needs. How much you’ll pay for life insurance is based on your age, gender, health, habits and more.
What are the types of life insurance?
There are two primary types of life insurance: pure and cash value life:
1. Cash value life insurance
Cash value life insurance provides coverage for the life of the insured, and contains a cash value component. Whole life insurance is a common type of cash value life insurance in Singapore.
Managing the cash values of life insurance involves the investment department of an insurance company. Insurance companies earn by prudently investing the premiums they receive from customers in long-term, high-quality assets. The yield then goes to providing the insurer guaranteed and non-guaranteed benefits. A relatively big part of insurance company investment portfolios comprises investment-grade bonds (e.g. government bonds) that tend to be less risky than those designated as high-yield, usually deliver a more stable and defined return, and pay higher rates than traditional savings accounts. However, in order to cope with a low-interest-rate environment, insurance companies may increase their exposures to alternative investments (e.g. blue-chip stocks or real estate) to ensure their ability to pay policyholder claims.
Life insurance policy loans are available on cash value life insurance policies where there is sufficient cash value to borrow against. The insured must pay interest on the policy loan. However, since cash value life insurance policies provide lifelong coverage, should the insured choose to surrender the policy, the insured may receive a much lower amount than the premiums they have already paid.
With cash value life insurance, which is more expensive than pure life, your premium payments go to three places:
- Toward the cost of actually insuring you.
- Into the cash value.
- Toward policy fees, such as administrative costs and sales commissions.
2. Pure life insurance (without a cash value component)
For pure or term life insurance, the premium payments contribute largely to the cost of insuring the policyholder.
Since there is no savings, dividend or investment component in a term life insurance product, it is cheaper than cash value life insurance. The premium payment period is also relatively flexible, with common terms available in 1, 5, 10, and 20 year(s). Since term life insurance policies do not have an investment portion, you suffer no economic loss when you surrender your term life policy.
More importantly, the premium structure for pure life insurance is generally straightforward. The provisions and details of most term life insurance policies are similar, making it easy to shop around and compare rates.
| Cash Value Life | Pure Life | |
| Character | Long-term investment product | Pure protection/ term protection product |
| What does the policy include? | Life protection & savings | Life protection |
| Benefit Period | 10 years to a lifetime | 1, 5, 10, 20 year(s) |
| Premium | More costly | More affordable |
| Clientele |
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Who needs life insurance?
Most people understand the primary benefits of having life insurance, but before making a decision to purchase an insurance policy, we often face the looming question— “Do we really need life insurance?”
Whether to purchase life insurance mostly depends on your financial obligations and goals. If any of the following criteria apply to you, we suggest that you consider buying a life insurance :
1. You are the breadwinner
If you’re the breadwinner of the family, then you need life insurance to protect your loved ones from losing their main source of income in the event of your passing away. Insuring for an amount that approximates your total family expenses will provide adequate coverage in case of emergency.
2. Your kids are still young
Having kids is expensive. According to NUS economists in 2018, the cost to raise a child in Singapore is estimated to be between S$280,000 and S$560,000, depending on household income. Thus you have to consider how your absence would affect your family and whether your spouse would be able to raise your kids alone. Purchasing a life insurance policy is a smart way to help ensure your children’s financial security in the future.
3. You have a mortgage
If you have recurring debt obligations, such as your mortgage, if something were to happen to you, your family would have to shoulder the mortgage payments. Life insurance provides the financial support necessary to help your family if you die before your mortgage is paid off and protect your assets.
4. You’re a company founder
As a business owner, your death could lead to your company shutting down. You should have life insurance that helps keep your business afloat in your absence. The death benefit can go toward covering bankruptcy expenses, liquidation expenses, severance to staff, etc. if the business closes.
How to calculate your premium?
With a cash value life policy, you typically get coverage for a defined length of time (e.g. 10 years to a lifetime). Within this time frame, premiums stay the same price.
With a pure life policy that needs to be renewed regularly, premiums stay the same price throughout the term. But upon renewal, premiums can increase with age.
Factors that may affect your insurance premium:
- Age: As you age, the likelihood an insurer will have to pay out on your policy increases; therefore premiums increase.
- Gender: Women tend to live longer than men. The average life expectancy for women is 5 years more than men. Therefore, women generally pay less for life insurance than men do.
- Smoking: The health risks associated with smoking mean increased premiums.
- Past Medical History & Family Health History: A history of medical conditions, such as high cholesterol or diabetes, or a family history of illness, will increase your premiums.
How much life insurance do I need?
To calculate how much life insurance you need, consider the following six factors:
- Debt obligations, e.g. mortgage
- End-of-life expenses, e.g. funeral costs
- Dependent care expenses, e.g. monthly family expenses
- Children’s education expenses
- Existing coverage and assets
- Inflation rates
Which factors to consider when buying life insurance?
1. Evaluate your coverage needs
How much is your current financial contribution to your family? How many depend on you financially? In the event of your passing away, what can your family rely on for affording daily expenses and paying off debts?
Before shopping for life insurance, you must attend to the above questions. Otherwise, you cannot adequately determine the amount of coverage you need nor the optimal way of receiving payout.
2. Comparing different types of life insurance
As detailed above, there are two primary types of life insurance: pure and cash value life. The former caters to those who are financially stable, seek a longer benefit period, and wish to accumulate cash value; the latter caters to those, typically young people, who have less risk bearing capacity and need a higher sum insured. You should choose the life insurance type that suits your own needs.
3. Choose an insurance policy that you can afford
Before purchasing a life insurance, you should make sure that you can afford the total premium cost within the benefit period. Overestimating your ability to pay may result in a late or missing payment, causing a lapse in coverage, in which case you won’t be protected.
4. Understanding policy coverage
The types of life insurance on the market are diverse, and so are their levels of coverage. Before making a purchase, you should get a better grasp of your insurance policy by reading it with care. Understanding what is covered and the exclusions that take away coverage helps you minimize risk.
5. Checking insurers’ claim settlement history
You buy life insurance for the protection it affords at times of need. Failure to settle claims defeats the entire purpose of investing in a life insurance policy. To make sure that the insurer can pay out the full proceeds, it is imperative that you check the claim settlement history of the insurer. You may be dissuaded from purchasing if you find that an insurer has denied a claim for what you perceive to be unfair reasons.
What is Policy Owners’ Protection (PPF)?
The Policy Owners’ Protection (PPF) Scheme is an additional safety net that protects the interests of insurance policy holders in the event of a failure of a life or general insurer which is a PPF Scheme member. The PPF Scheme is administered by the Singapore Deposit Insurance Corporation (SDIC). The PPF Scheme provides added assurance that there is a compensation scheme for policy owners to reduce the financial impact on individuals in the event an insurer defaults.
The PPF Scheme protects life insurance policies (including riders) issued by licensed life insurers which are PPF Scheme members. The Scheme covers policies issued in Singapore by a licensed life insurer to both residents and non-residents of Singapore. However, policies issued by overseas branches of a licensed life insurer incorporated in Singapore are not covered.
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The above information was provided by Bowtie Team. It is for reference only. In no event shall Bowtie be liable to you or to any other party for any loss or damage whatsoever or howsoever caused directly or indirectly in connection with your access to or use of the content thereon.
