Published November 22, 2004 BT
Getting started with insurance
By NANDE KHIN
BUYING life insurance is an important part of financial planning, and just because you are young doesn't mean you should dismiss the idea of taking out insurance.
Specifically, life insurance can help with not only risk management, but also retirement planning and investment planning.
Risk management is about how you can still have income when events (such as premature death, disability or illnesses) strike.
Retirement planning is about how to build up wealth during working years to have financial dependence during retirement years.
Investment planning is about buying into different financial instruments to meet investment goals and grow you wealth.
And there are several types of life insurance to meet the different needs of the policy holder.
For risk management
Whole life insurance:
With whole life insurance, you get life-long protection. You pay premiums throughout your life, but these can be changed to a limited period. The policy will pay out the sum insured and any bonuses you have built up (if any) when you die or become totally and permanently disabled (if this benefit is provided).
This plan is suitable for long-term savings if you would like the insurance company to invest on your behalf.
Term insurance:
With term insurance, you get protection for a set period. It pays the sum insured only if you die or become totally and permanently disabled (if this benefit is provided) during this period.
Endowment insurance:
With endowment insurance, you get both protection and savings. The policy pays the sum insured and any bonuses you have built up at the end of the set period of time (maturity date), when you die or become totally and permanently disabled if it happens during this period.
For retirement planning
Life annuity:
A life annuity provides a regular income to you. Usually you pay a lump sum which is invested by the insurance company in return for monthly payouts.
There are also annuities that are designed specially for members of the Central Provident Fund (CPF), under the CPF Minimum Sum Scheme or Minimum Sum Plus Scheme. For this annuity, you can invest the minimum sum with an approved life-insurance company to provide a monthly income for the rest of your life.
For investment planning
Investment-linked insurance:
Your premiums buy life-insurance protection and investment units in a managed fund. Like a unit trust, your money is pooled with that of other investors and invested in short- and long-term investments.
The price of your units depends on how the investments in the fund perform. What it pays depends on the price of the units at the time you cash it in or die. You may also get a death benefit.
As a prospective buyer, you should first understand the type of policy that best suits your needs. Some products offer only protection and do not provide a savings element (in other words, it does not provide a cash value if you cash it in).
Other products offer a cash value if you cash them in after a certain number of years. However, if you cash in your policy early, the value you receive may be less than the total premiums you have already paid.
It is best to talk to get professional advice from representatives of licensed or exempt financial advisers who are qualified to advise on and distribute life-insurance products.
Note that a life-insurance contract is based on good faith. You must truthfully reveal all the information asked for in the proposal form and provide any other details they ask for.
If you do not provide important information on your proposal form, any policy issued may not be valid. If you are not sure whether a fact is important, you should reveal it anyway.
Sources: Life Insurance Association, Moneysense Guide to Planning for Your Family's Financial Future, and Your Guide to Life Insurance
Getting started with insurance
By NANDE KHIN
BUYING life insurance is an important part of financial planning, and just because you are young doesn't mean you should dismiss the idea of taking out insurance.
Specifically, life insurance can help with not only risk management, but also retirement planning and investment planning.
Risk management is about how you can still have income when events (such as premature death, disability or illnesses) strike.
Retirement planning is about how to build up wealth during working years to have financial dependence during retirement years.
Investment planning is about buying into different financial instruments to meet investment goals and grow you wealth.
And there are several types of life insurance to meet the different needs of the policy holder.
For risk management
Whole life insurance:
With whole life insurance, you get life-long protection. You pay premiums throughout your life, but these can be changed to a limited period. The policy will pay out the sum insured and any bonuses you have built up (if any) when you die or become totally and permanently disabled (if this benefit is provided).
This plan is suitable for long-term savings if you would like the insurance company to invest on your behalf.
Term insurance:
With term insurance, you get protection for a set period. It pays the sum insured only if you die or become totally and permanently disabled (if this benefit is provided) during this period.
Endowment insurance:
With endowment insurance, you get both protection and savings. The policy pays the sum insured and any bonuses you have built up at the end of the set period of time (maturity date), when you die or become totally and permanently disabled if it happens during this period.
For retirement planning
Life annuity:
A life annuity provides a regular income to you. Usually you pay a lump sum which is invested by the insurance company in return for monthly payouts.
There are also annuities that are designed specially for members of the Central Provident Fund (CPF), under the CPF Minimum Sum Scheme or Minimum Sum Plus Scheme. For this annuity, you can invest the minimum sum with an approved life-insurance company to provide a monthly income for the rest of your life.
For investment planning
Investment-linked insurance:
Your premiums buy life-insurance protection and investment units in a managed fund. Like a unit trust, your money is pooled with that of other investors and invested in short- and long-term investments.
The price of your units depends on how the investments in the fund perform. What it pays depends on the price of the units at the time you cash it in or die. You may also get a death benefit.
As a prospective buyer, you should first understand the type of policy that best suits your needs. Some products offer only protection and do not provide a savings element (in other words, it does not provide a cash value if you cash it in).
Other products offer a cash value if you cash them in after a certain number of years. However, if you cash in your policy early, the value you receive may be less than the total premiums you have already paid.
It is best to talk to get professional advice from representatives of licensed or exempt financial advisers who are qualified to advise on and distribute life-insurance products.
Note that a life-insurance contract is based on good faith. You must truthfully reveal all the information asked for in the proposal form and provide any other details they ask for.
If you do not provide important information on your proposal form, any policy issued may not be valid. If you are not sure whether a fact is important, you should reveal it anyway.
Sources: Life Insurance Association, Moneysense Guide to Planning for Your Family's Financial Future, and Your Guide to Life Insurance