The Motley Fool

60 Second Guide to Life Insurance

What is Life Insurance?

Life insurance provides a payout when you need medical services, suffer disabilities, or become the opposite of alive.

When you buy a life insurance policy, you pay a monthly sum (a premium), which varies for each individual. The premium is based on your age, state of health, medical history, career, and lifestyle, amongst other things.

0.60: Decide if You Want Term Insurance

Term insurance is a temporary policy, which expires after a given number of years.

There are two types of term insurance: Basic term insurance (sometimes called “protection only” insurance), and endowment insurance (sometimes called insurance “with a savings component”).

Basic term insurance provides a payout to your family if you pass on. That’s it. Less frequently, you may come across basic term insurance that also covers disability.

Note that you must die within the stipulated period (I can’t believe I just typed that) to get the payout.

Endowment insurance means apart from coverage, you also get a payout when the insurance expires. In effect, your premiums are “invested”, with variable returns.

Endowment insurance comes with distribution costs. This is a payment you make to the insurer, to handle your “investment”, and also to pay the insurance agent’s commission.

As such, endowment insurance policies cost more than basic term insurance.

If neither are for you, then…

0:40: Decide if You Want Long Term Life Insurance

The simplest forms of long term life insurance have fixed premiums, and fixed death benefits. However, there are hundreds of available policies with special features.

For example, some insurers provide “adjustable insurance”. In this case, the money accrued from premium payments can be used to lower your premiums.

Others provide investment-linked insurance. This is when the premiums are invested in funds of your choice; based on the performance of these funds, your benefits and payouts will vary.

Long Term life insurance is notorious for its complexity. You might want to consult an independent financial advisor before buying one.


0:20: Decide on the Coverage

Decide on the type of coverage you need. A few examples are:

  • Critical Illness: This covers medical emergencies like cancer, heart bypass operations, etc. in which Medisave funds may run dry (or fail to subsidize enough of the cost).
  • Total Permanent Disability: Gives a payout in the event of an injury that permanently prevents you from working. Examples are spinal injuries, loss of limbs, and loss of mobility.
  • Terminal Illness: Gives you a payout in the event you are diagnosed with a terminal illness (e.g. Final stage cancer, inoperable tumors)

The more coverage you want, the higher your premiums will be.

0:10: Shop Around

Each insurer has their own confidential formula, which they use to calculate your premiums.

This means three different insurers could give you three different premium rates. Be sure to shop around, before choosing one.