Buy Life Insurance Early

When we first started work, life insurance is furthest from our mind. There is no need to think about it because we are young, single and our pay is not significant. There are competing demands on how to use our salary and usually it is not enough as one might often say. One is also healthy and there should not be any worry of the unmentionable.

Life insurance provides financial protection for you and your family against financial loss that can occur after death or total and permanent disability. It can be designed to also provide you with retirement income and financial reserve in an emergency. It is both protection and savings combined.

My proposition is that it is never too early to start a Life Insurance plan. There are several reasons for this:

  1. When you are young and healthy, the premium payable is low and this premium amount is fixed for the rest of the Life Insurance period.
  2. If you start early, the premium contributions every month stretch over a longer period (say from 25 years old when you first started to 65 years later). Hence it will accumulate into a tidy sum with bonus or profits earned on the policy.
  3. You are protected from loss of ability to earn because of incapacity suffered.
  4. It forces you to set aside a small sum of money every month and this is one form of savings.

To illustrate, let’s talk about Whole Life with Profits Insurance (or some insurance company called it Whole Life with Reversionary Bonus).

The plan offers life-long protection. It pays the sum assured and accrued profits/bonuses on death or, where applicable on total and permanent disability of the insured person. Premiums are payable throughout life or adjusted to payable over a limited period only. (Note: Each life insurance policy is different and be sure to ask the insurer’s representative the details of the policy.)

A with profits policy is entitled to share in the profits of the insurance company (through dividend declared by the company) and this is dependent on the financial performance of the insurance company and is not guaranteed. Once the profit/bonus is declared to the policyholder, then this sum becomes permanent and is additional to the sum assured on the original life policy. The sum assured and the profits/bonuses are due to you on payout.

The Life Insurance policy has a feature known as Cash Value/Surrender Value. This is the cash amount which an insurance company will pay on cancellation of the policy. Whole life insurance carries this feature and normally cash values are given to a policy which has been kept in force for at least three years. (Please consult the insurance company on the cash value/surrender value of your policy.)

You can purchase many Whole Life Insurance policies over your working life once your income goes up. In this case, you start with a smaller sum insured and gradually increasing the sum insured in later life insurance policies.

2 examples of policies:

1. Whole Life Insurance Policy with Profits

Sum assured is S$35,000

Started in 1981 (in force for 25 years now since age 24 years old)

Monthly premium payable is S$61.95 (S$743.40 per year)

Total Reversionary Bonus at 31 Dec 2005 is S$27,583

Projected Death Benefit at age 65 is S$114,200

Projected Surrender Value at age 65 is S$74,100

Projected Investment Yield at age 65 is 4.01% p.a.

2. Whole Life Insurance Policy with Profits

Sum assured is S$50,000

Started in 1995 (in force for 11 years now since age 38 year old)

Annual premium payable is S$1,560

Total Reversionary Bonus at 31 Dec 2005 is S$5,675

Projected Death Benefit at age 65 is S$115,300

Projected Surrender Value at age 65 is S$64,500

Projected Investment Yield at age 65 is 3.28% p.a.

As illustrated, you pay higher premium as you get older. Because of the weaker world economy in recent years when compared to the first policy, the investment yield of the second policy is lower (3.28% p.a. compared to 4.01% p.a.). But 3.28% p.a. is still better than the savings interest rate. 

Written on 10/26/2006 11:38 AM

Copyright © 2006, the author known as LKT in Singapore.

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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