What type of life insurance should you choose?


While shares and bonds and time deposits are more traditional investments, a large number of Singaporeans also use life insurance policies for long-term investments. Indeed, consumers here hold more than 13.1 million life insurance policies & insurance now accounts for 9.3% of households’ net worth.

A key question some investors may have is whether buying a whole life insurance policy as an investment is better than buying a cheaper term insurance policy & investing the difference elsewhere.

It is important to start by looking at why one should buy life insurance at all.

Fundamentally, the goal of life insurance is to make sure beneficiaries such as young children or elderly parents have enough money to pay for their needs if something happens to the breadwinner in the family. There are several types of life insurance that can achieve this objective.

The simplest option is term life insurance. You pay a premium, and the insurer guarantees that it will pay your beneficiaries a fixed amount if you’re not around. Term life insurance covers you for a pre-determined amount and duration. Payments go entirely towards insurance, so there is no cash value after the policy ends.

Another alternative is a life insurance policy which includes an investment component. Consumers can buy a policy which uses part of the premium to pay for life insurance and give the rest to the insurance company to invest. Premiums are significantly higher than for term insurance.

One option with an investment component is “whole life insurance”, which covers you for your lifetime and also provides long-term savings. A portion of your premiums go towards insurance protection, which pays out a lump sum if you die, while the rest is invested by the insurer and pays a guaranteed minimum return, as well as a bonus in some cases. The Life Insurance Association of Singapore (LIA) says that whole life insurance guarantees lifelong protection as long as your premiums are paid, and it builds up a cash value which you can withdraw or borrow against.

A more complex alternative is investment-linked policies (ILP), where the value depends on the performance of the investment. You can purchase ILPs with a single premium, or pay premiums in regular instalments and have the flexibility to adjust your insurance amount. For ILPs, the LIA noted, the performance of the funds is not guaranteed and the value can rise or fall, so the maturity values will be adversely affected if a fund performs poorly.

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