Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Sunday, 31 August 2014

Term or Whole Life Insurance?

My apologies for the slow blog posts. I had been away for a holiday to Korea for a week. Due to the recent airplane mishaps, I got a single-trip travel insurance, just in case. However, in the market, there is a travel insurance which covers you yearly. It then becomes obvious that the yearly coverage is for those who travel frequently, whereas the single-trip insurance is only for those who do not. While the premiums of travel insurance is not as substantial, it can be used to relate to life insurance, which often costs much more and is considered a major decision (since you most likely would only get it once in your lifetime).

You might be thinking how insurance is related to a more investment-themed blog and where am I posting this. Well, insurance is basically an investment where you transfer unwanted risks to another party for a fee. Hence, if planned and used correctly, it can be important in your portfolio.

Coming back to my topic of life or term insurance and the travel insurance example, most people would then think it is common sense to get whole life insurance to cover themselves for life. That's where common sense failed. Let me explain.

Life insurance is mainly bought for purpose of obtaining a payout upon the death or event of contracting terminal illness of the insured person. In simple terms, it is the monetary value attached to your life. If you think of it this way, the longer you live the lesser the value of your life. This is because as you age, the amount of value that you can bring becomes lesser, as you are less able to work. After retiring at the age of 65, you should have lesser responsibilities. Your children have grown up and are able to feed themselves. Your house mortgage should already be paid. Your expenses should dramatically decrease, similar to your income. Hence, the question is why should you pay the same amount to cover something worth lesser value.

Buying a whole life insurance which covers your entire life does not make economical sense as you are paying more to cover less value in your later life. Besides lining the pockets of your insurer and agent, there is definitely not worth it to get a life insurance, unless you are looking at giving the benefit payout to your children as an inheritance.

Some of you may argue that not everyone retires at age 65. This is understandable, given the rising financial pressures currently. You can still purchase a term insurance which covers you up to the age that you think is a safe estimate of when you can retire. It is not only flexible and costs much less in terms of premium, but it also offers basically the same benefits as the whole life insurance. If accumulated throughout your life, it can be a substantial amount which you definitely can use to smoke more cigars.

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