Life insurance is a serious commitment and choosing a policy can be a tough and expensive project to tackle. This may be why 70% of Singaporeans surveyed by Prudential in 2016 were found to be underinsured, with almost half citing budget constraints as a reason why they didn't want to increase coverage. Despite its high cost, life insurance can be a good way to protect you and your loved ones against the unexpected—if you know what you're getting yourself into. Below, we discuss 5 things you should know before deciding to get life insurance.
The Timing of Your Life Insurance Purchase Matters
Before you purchase a life insurance policy, there are certain things you should avoid doing. First, you should avoid making any doctor's appointments until after you purchase your policy. This is because any illnesses or diseases that will be found will be reported to your life insurance company and your premiums may end up increasing. Similarly, you should avoid participating in risky activities such as going on a trip where you'll be at risk of serious injury (e.g. skydiving, high altitude trekking expeditions) until 1-2 years after your policy has been in effect. Depending on how frequently you participate in risky activities, you may experience higher premiums.
You Can Buy As Many Policies As You Want
Unlike home, travel, car or domestic worker insurance, you are not limited to buying only one life insurance policy. In fact, you can buy as many life insurance policies as you want. But why would you want to? There are actually a few reasons why people spread out their coverage over multiple plans. First, consumers who initially bought whole life insurance may realise they need more coverage after major life events, such as marriage or childbirth. In such cases, they can either increase their coverage with their current insurer or purchase more coverage from a different insurer as a way to hedge against claim rejections. However, you must let your insurers know about every life insurance policy you're holding.
You Are Not Always Guaranteed to Get a Payout
As with all insurance policies, there are certain exclusions you should be aware of before purchasing a life insurance policy. These exclusions are worth knowing because the last thing you want to happen is for you or your beneficiaries to get denied a payment after years of paying into a plan. The first exclusion is suicide of within 1-2 years of starting coverage or reinstatement. Second, your claim may also be denied if your death was caused by a risky sports activity like max-depth scuba diving or cave exploration. Life is inherently risky and full of unforeseen events, so while you may not have full control over your claims' success, it is worth being aware of policy exclusions to understand the worst case scenario rather than getting an unpleasant surprise.
You May Not Actually Need Life Insurance
Life insurance is a good idea for sole breadwinners, business owners, parents and those with substantial debts. These are the people whose death can cause a considerable financial burden for their loved ones. However, if you are older and have no children or debt obligations, a life insurance policy may not be necessary. Instead, you can take advantage of CPF LIFE, the government's annuity scheme that provides a lifelong monthly income from funds taken from your Retirement Account.
Monthly Payouts of CPF LIFE Monthly Payouts for a 65-Year Old Male
Another group who may not benefit from life insurance can be individuals who are just starting their careers, as they may not be earning enough to add a life insurance policy to their monthly bills. However, younger individuals who do want some sort of protection can consider an affordable term life policy to take advantage of lower premiums—especially if they can convert it to a whole life policy down the line.
For both groups, a life insurance policy can be a costly addition during a period of life when they do not make enough money to tackle more bills. Instead, younger, single individuals should save for an emergency fund, experiment with medium-high risk/high reward investments or save up for a mortgage, while retired individuals with no family should put aside cash for healthcare and quality of life needs.
Cancelling or Switching Your Life Insurance May Not Always Be a Good Idea
While researching life insurance a few years down the line, you may find a policy better suited to your needs than the one you've already purchased a long time ago. Unfortunately, cancelling your life insurance policy so you can get a new one may not always be prudent. First, any medical conditions you acquire while on your old policy will be counted against you when you buy a new policy, leading to higher premiums and reduced coverage. Second, you may lose out on a considerable chunk of cash. This is especially true for term life insurance, which provides no cash surrender value for terminating your policy early, unlike whole life insurance. However, even if you do have a whole life policy, you may end up having to pay a surrender fee to cash out early, which tends to be the highest in the first few years of owning a policy.
If you still want to change your policy, the best option might be switching to a different plan from the same insurer. This may alleviate the need for a new medical exam and reduce the amount of new paperwork and underwriting that will occur. Furthermore, you may be able to use your cash surrender value to offset some of the cost of the new policy when switching to a cheaper whole life policy. However, you should be prepared to spend a few thousand dollars on commissions and fees out of pocket—especially if you are switching to a more expensive policy. Last, you should stay covered under your current policy until your new policy is in effect to eliminate gaps in coverage. Only once your new policy is approved and in effect should you let your insurer know you are cancelling the old policy.
Purchasing a Life Insurance Plan and Buying a Cake
Buying a life insurance plan is no easy task, but you can make the process simpler by breaking it down into smaller steps. For instance, you can think of buying a life insurance policy like buying a birthday cake. First, you can about the amount of coverage you need as the size of cake you need. If you have a lot of people to feed, you want a bigger cake; thus, if you have a lot of dependents or financial obligations, you need more coverage. Next, you can think of the flavours and style of the cake as the type of policy and its features. Are you looking for a centerpiece cake that will last a long time or a plain vanilla cake that will be eaten quickly? In other words, are you looking for a policy that will last you a lifetime and leave a legacy for your loved ones or do you need quick, simple coverage for a set number of years?
Next, you have to figure out whether your ideal cake fits within your budget. Just as you may get quotes from multiple bakers to see which one can make the cake you want within your price point, you can do the same with different life insurers. Comparing pricing is a good way to make sure you get the most value out of your policy. Lastly, optional decorations such as the writing or embellishments on top of the cake can represent the policy add-ons. They're not mandatory, but they're nice to have if you have room in your budget and you believe they're worth the cost. Breaking down something complex like life insurance into a more relatable purchase can make it easier to break down and analyse your needs without getting distracted by complex insurance jargon.
Once you have an idea of the policy you're going for, you should do your best to find a trustworthy financial advisor. A good advisor should be able to help you break down terminology into easy to understand examples, walk you through different plans that are available and help you identify gaps in your coverage without trying to upsell you. Remember, while life insurance is optional, your family's financial obligations aren't.