How to get the most coverage out of your term insurance premiums

This article is meant for people who are considering or has already adopted the buy-term-invest-the-rest approach.

In this article, we will be examining how we can optimize your term insurance portfolio by asking the question of:

“Would it be cheaper if I get term insurance that covers my mortgage liabilities and income today or gets it only when I need it”

As such, we will be exploring three different scenarios based on a different assumptions:

Scenario 1: Getting term insurance that covers for both mortgage liabilities and income today even though you do not own a home or have any mortgage liabilities yet.

Scenario 2: Getting term insurance that covers for your income today first and then gets a separate term insurance for your mortgage liabilities later when you own a home.

Scenario 3: Getting term insurance that covers for your income today first, and then replacing the term insurance with another term insurance that covers for both your income and mortgage liabilities.

The key assumption made for the calculation would be:

1. An annual budget of $2,000

2. The remaining amount, after paying for your insurances, will be invested in CPF SA

For detailed assumptions used in the article, refer to the disclaimer.

Let’s be real here, the reason why CPF SA is chosen as opposed to some investment yielding 8% P.A. is simple, you can't implement a constructive investment strategy with a few hundred dollars a year.

Key Findings:

Finding 1: It is cheaper to buy everything you need in one go

Getting term insurance that covers for both mortgage liabilities and income today even though you do not own a home or have any mortgage liabilities yet – is the cheapest option and also provides you with the highest ending portfolio valuation as compared to option 2 and 3.

Finding 2: It is cheaper to own 1 policy rather spreading the coverage between 2-3 policies

If you own multiple policies, it may be cheaper – depending on your age and market offering – if you were to combine them into one big policy providing for the same level of coverage rather than having multiple separate policies. The difference is shown between the values of scenarios 2 and 3.

Why does this happen?

This occurs due to the presence of two key things:

1. Economies of scale

2. Age of entry

Economies of scale

To put it simply, the higher the sum assured, the lower the cost per $1,000 insured would be.

This can be seen from the following quotations:

Even though the sum-assured is 100% higher – from $250k to $500k, the cost of insurance only increased by 50% - from $800 to $1200. As such, with the effects of economies of scale, it would make sense for people to make a one-time bulk purchase as opposed to multiple smaller transactions.

Age of entry

To put it simply, the earlier you purchase life insurance, the lower the cost would be.

An example is as follow:

Purchasing an insurance policy at the age of 25 will definitely pay lesser as compared to purchasing it at the age of 30.

This is because the older you are, the higher risk you pose – Death / Disability / Critical Illness - to the insurance company whom you are transferring the risk to. As a result, they will have to charge a higher price to you in order to offset the additional risks incurred by them.

What does this mean to you?

For those who do not have any insurances and are thinking of adopting the buy-term-invest-the-rest mentality, you may be better off purchasing all your insurance needs today provided that you have the budget for it and have the ability to quantify your insurance coverage needs.

For those who already have existing insurance, you might want to re-look into your own insurance portfolio and see if cost savings can be generated by combining your policies or even merely comparing the term policies you’ve got previously with current market offerings. Depending on your age, you might be able to generate cost savings in the hundreds and sometimes in the thousands depending on your sum-assured.

If you do not have the time to plan, research and compare the insurances for your insurance portfolio, you can reach out to me and we’ll work something out together:

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I look forward to hearing from you soon and stay safe.

Daniel is a Licensed Independent Financial Consultant with MAS and a certified Associate Wealth Planner that provides advice in the following areas:

• for investment and portfolio management advice - find out more here

• for insurance planning and portfolio optimization advice – find out more here

• for retirement planning advice– find out more here

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Disclaimer:

This article is meant to be the opinion of the author and is for information purposes only.

This article should not be seen as a financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore

Assumptions:

• Income replacement needs: $250,000 at age 25

• Mortgage liabilities needs: $250,000 at age 30

• Sum assured includes only Death/TPD/Late stage CI

• Coverage lasts till age 65