All the different types of life insurance
When it comes to financial planning and investing, the first thing is wealth protection. Other than medical insurance for citizens and permanent residents of countries without universal health care, one other type of insurance that is essential for almost everyone but not everyone is life insurance.
Most will probably knows what it is, a life insurance insure against accidental death, total permanent disability and some common critical illnesses.
Although there are many types of life insurance, the protection part being offered by them is about the same, that is pay a sum of money or annuity upon accidental death, total permanent disability and some common critical illnesses. There may be slight differences such as definitions of permanent disability, numbers, types of critical illnesses covered and specific exclusions for life insurance policies offered by different insurance companies but there are more or less covered similar events.
Since life insurance is what most people need to buy, there is a need to know what types are available, what differentiates each from the rest. Knowing which type is suitable for your current life stage and income is the first step, the next is compare and contrast similar life insurance policies from different reputable insurance companies. For example, if endowment plan is deemed suitable for you after careful consideration, there is a need to select the most optimal in terms of premiums, coverage and end cash value from the different insurance companies in the market.
Of course, the insurance companies being shortlisted for purchasing life and medical insurance need to be of equal footing in terms of financial strength, reputation and probability to become bankrupt.
Take now that all the following six types of life insurance provide the same type of protection in general, just that got some differences. The difference between the first two and rest lies in the first two is purely protection and there is no cash value at the end of the policy term. Due to this, group term and term life insurance offers greater protection in terms of monetary benefits when the events insured occurs for the same amount of premiums, relative to the other four types that got cash value.
There are a number of parameters to consider when deciding to choose which type of life insurance cover. Some of the more important ones are age, life stage, number of dependents, dependability of dependents; amount of earned and passive income now, expected amount of earned and passive income in the foreseeable future, stability of earned and passive income now and in the foreseeable future, and last but not least, your own personalities – which is a main factor in deciding whether to subscribe to buy term and invest the difference train of thought.
1. Term life insurance
This is an insurance plan that offers pure protection and no cash value. As a result, relatively to the last four types of life insurance, the same premium can provide greater amount of coverage, or in other words, the same amount of coverage cost lesser in premium paid, that is in general.
Then there are two sub groups of term life insurance – one is level term insurance and another is decreasing term insurance.
There is a school of thought whereby it is better to buy term and invest the difference. However, whether this is good or not depends on the specific individual. In other words whether it is better is both yes and no at the same time. Not everyone is suitable to buy term and invest the difference, and for some people, it is better to buy term and invest the difference. This issue will be touched on and covered thoroughly in future.
The good thing about term life insurance is that it is a relatively simple financial product and comparing term life policies from among different insurance companies to find the lowest premiums for the same sum assured is a relatively simple affair.
2. Group term life insurance
This is basically similar to term life insurance, just that the premiums will be cheaper for the same sum assured, relative to a term life insurance.
However, whether you are eligible for some group term life insurance depends on whether you belong to any associations and how likely that you are going to be its member in the decades ahead.
3. Endowment plans
This is basically a life insurance with savings elements with higher interest rate than usual banks savings accounts. When buying endowment plans, need to take note of the guaranteed yields. Most endowment plans got a minimum guaranteed yield to maturity while some don’t have, this is the yield that you need to compare and contrast across all plans by different insurance companies, not the past returns and future projected returns as they may not materialized when the time comes. As a result, one can simply ignored the benefit illustrations for projected returns when doing comparisons on endowment plans across all plans that are available from different companies.
Strictly and theoretically speaking, you cannot expect the yields of endowment plan to be more than the return of stock and bond market as a whole. This is simply because, the insurance companies generate the returns for endowment policies from stock and bond markets, but in actual fact, it is mostly from the debt and bond market as their returns are more stable. On top of that, insurance companies need to cover administrative and marketing expenses, commissions to agents and brokers, and last but not least, profits for the shareholders of insurance companies.
Due to its cash value at maturity, one cannot expect the same premiums can provide the same sum assured relative to a term life insurance. In other words, one should view endowment plans as a form of savings rather than protection as for low income earners, the sum assured will not be enough or that one need to spend more on premiums for the required sum insured. That means if you want greater protection, it will be more cost effective to use a term life or group term life insurance rather than increase the coverage for endowment plans.
Depending on specific individuals, this type of life insurance can form a part of your portfolio for the risk free return portions. Lastly, endowment plans should be viewed more as a savings plan with higher interest rate than that given by banks rather than use it as protection only.
4. Whole life insurance
The name already suggests to you that this type is specially for covered the whole of your life, term life insurance only provides cover up till a certain age while whole life provides coverage until 99 years old. There are similarities between whole life and endowment policies, in the sense that, endowment gives you the sum assured, together with some accumulated bonus if there is after the policy matures, hence the money for life insurance protection after a certain age, though the endowment policies is terminated while whole life provides the cover as long as you paid the premiums even after some age.
There are benefits and disadvantages as well in buying whole life insurance, the benefits are the premiums that goes in building up the cash value of whole life will one day be able to pay off all the premiums for the remaining years. In addition, the premiums will also remain constant during the time when you are covered, unlike term life insurance which can increase if there is an increase in overall claims.
The disadvantages are of course that insurance is not free, one need to pay premiums on time. If retrenchments set in before remaining premiums of a whole life policy are paid off and result in early terminations, then one no longer is covered for the whole of his or her life. As such, one is better off paying off in a single large premium for a whole life policy to prevent terminations due to not enough money from unforeseen circumstances in life such as living in a country with no universal health care and a single large medical bill decimate almost all the savings, together with loss of employment.
Whole life insurance got cash value that is equal to the death benefits that is payable upon the maturity of the contract at around age 95 to 100 if nothing happens to the insured from inception until the whole life policy matures.
5. Universal and variable universal whole life insurance
Universal whole life is similar to whole life but with some flexibility and is more complex than whole life. There will be slight differences between policies offered by different companies in different countries.
In my opinion, I felt that one is better off not considering this universal whole life. It is far better to use a combination of term life, endowment, together with pure investments for the financial protection in the senior years, and maybe with a whole life policy for most people. Universal whole life may be suitable for certain people only.
6. Investment-linked life insurance
Investment-linked life insurance is combining life insurance protection with investments elements. Of all the types of life insurance that is listed here, I strongly discourage people from buying investment-linked life insurance. It is the most complicated among all the life insurance discussed here and is definitely not cost effective if you want protection or greater protection only.
As for investment part – investing through investment-linked life insurance policies is also not cost effective based on a few sound reasons. One is that not all, if not most of the premiums are not used for investments. In the first few years at least, the insurance company needs to keep the premiums for payouts in case somebody dies and in addition to the usual administrative, operating and marketing expenses. As a result, after accounting for all these, the actual percentage of premiums paid being spent on investments are not much.
In addition, there is the problem of another layer of cost like the POSB MyHome Fund if you choose to invest through investment-linked polices. First is that there are only two types of pooled investments – one is actively managed by first class honors fund managers and another is passively managed in the sense that the fund just simply buy and hold the stocks that made up an index. Secondly, actively managed funds have already being proven to do worse than passively managed index fund/ETFs, but with the exception of small caps and at least 1.5% per year in management fees to pay the fund managers. Thirdly, no matter which type of fund the investment-linked policy invest in, you will still need to pay either the 1.5% or more in management fees or less than 0.5% for index fund/ETFs in addition to some profits for the insurance company involved. Lastly, there is also lack of transparency in the fund holdings that your premiums are invested in which is not good.
Hence, it is far better to separate investment from insurance.
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I liked it. So much useful material. I read with great interest.