The big question of financial planning is whether we should pick a term insurance plan or a whole life insurance plan. While the debate still continues, we will address another popular question today in our journey with money.
Which term plan is better?
Highly sought after by investors due to the high coverage and low premiums, term plan have been getting popular in the recent years. Let’s recap the advantages and disadvantages of the plan.
Table 1: Comparison between Term Insurance plan and Whole Life Insurance plan
It is a common school of thought for investors to pay the minimum premium for the maximum coverage for insurance. This is a fair statement assuming only if the investor know what he is investing in (such as value investing or options mastery, etc) and getting good returns. He is therefore able to maximum his capital. The agreement here is that he/she still requires insurance (and a good investor will know insurance is important) and therefore looking into term plan.
What is a term in a term plan?
For term insurance, there are many different terms (as the name suggest). The more common ones ranges from 5 years, 10 years, 20 years, 30 years and until 100. When you are insured with a 5 years term plan, it means that for 5 years you will be paying $xxx premium. However, 5 years later, you will be paying more than $xxx as your age has increase and the risk to the insurance company is now higher. To illustrate, look at diagram 1.
Diagram 1: Explanation of how premium increase over 5 years
In diagram 1, you can see that at age 30, you will be paying $800/year for a certain coverage. The premium will increase every 5 years. The first increase is slow from $800/year to $900/year. At 60, the premium increment will be very high. At first glace, it might look like it is worth it in the 30. However, at the later age, the premium will be extremely affordable especially if you want to retire.
Which term plan is better for me then?
This will be a question to be answered. At which age will you like to be insured until? Some wants to be insured so that they can give money to their parents when they died. Some wants to ensure their children can still be provided for when the parents are not around. Some wants to leave a legacy for their children or grandchildren. The more interesting thing is that the needs will change along the years.
One client told me that he only wants to provide for his children until university. If something happens to him, he wants to ensure the children has money to study until university. A few long years later after his children graduated, he is in a dilemma now as he wants to leave a legacy for his children but the premiums are now not affordable.
A general rule of time will be, if there is a specific term in mind for purpose of the insurance, choose that term. (For example, the child is now 0, the parents wants to provide for the child until when he is 30). Otherwise, choose the longest term available.
Assuming a 30 year old non-smoker male who wants to be insured for $1 million. Let’s look at the accumulated premiums paid over the years between a 30 years term and a 45 years old term.
Diagram 2: Premium comparison of different term plans
In diagram 2, it seemed like a smart move to get a 30 years plan (green line) initially. Once the person attains age 60 however, the premiums will shift he will have eventually have to pay a extremely higher premium later on. I wonder who will pay $23000 premium a year at age 60 when the time happens.
In summary, if there is a specific term in mind for purpose of the insurance, choose that term. Otherwise, choose the longest term available.
For investors, you might want to check out “Why buy a saving plan when you can invest?” or What Type Of Insurances Do I Need In Singapore When I First Start Working?” or “Are you prepared for a critical illness in Singapore?”
All the best in your journey with money. Happy investing. Happy Insuring. Happy new year.