Insuring so that your dependents not able to pay huge financial burden can be cheaper than you realise
As a working adult aged 20-35, some of the hardest financial risks you are likely to face is:What if you are not around leaving your wife and kids to pay for the biggest financial burden, your mortgage.
One can argue that there are other big ticket credits that you can take up such as
- Student Loans
- Credit Card Loans
- Car Loans
But with home prices fluctuating around 400k, a single bread winner will be severely tested.
The solution known to many
The common solution, which is likely to be sold by most financial advisors you will meet is to take a whole life insurance.
The problem with that is to insure against a 300k mortgage payment, you will require a whole life plan of at least SGD 400 per month.
Folks who do not earn that much or have competing financial priorities will feel pressurized by that figure.
How can a decreasing term life insurance help?
A Decreasing Term Life insurance is a unique life insurance that provides a lump sum payment should the person is hit with death, TPD and in certain cases Critical Illness.
You will need to pay a fixed rate of premium payment for the limited duration that you and the insurer decide to insure against.
The unique thing about a decreasing term compare to a level term is that the sum that you are insured for decreases over time.
Your premium that you paid are uniformed and in this example the premium for 5 years is consistent at $-575.00.
Decreasing term works well here because the risk that you are trying to insure here decreases like the sum assured.
How is the premium like?
Premiums for decreasing term insurance tends to be lower than that of a level term, which in itself is drastically lower than that of a whole life insurance with cash value.
For a rough estimation take a look at the figures compiled by Mr Tan Kin Lian here:
For example, a male aged 30 can insure for $300,000 for 25 years by paying an annual premium of (say) $400 per month for a whole life plan.
If this person buys a decreasing term insurance, the annual premium can be drastically lower @ almost SGD$28 per month. (Note: the actual premium is likely to be lower, if you ask for competitive quotes from several companies).
A note that even if you don’t get a decreasing term (which is 35% to 60% that of a level term), buying a level term for 30 years will come up to SGD$76 per month. That’s not too high as well.
But a decreasing term will not have any cash value!
You have to be clear about the objective of a decreasing term life insurance. It is to ensure your family is able to pay off a mortgage or business for example.
If your objectives is to save for retirement or other purposes, then I would suggest you save on your own or have a separate portfolio of investments or insurance for that.
At the end of the day, we are looking for a low cost and if you compare the premiums paid, for the same amount of coverage, I believe the valued decision is with a decreasing term life insurance.
A Note on HPS (Home Protection Scheme)
If you purchase a HDB flat, either from HDB, or from resale market, you could purchase HPS (Home Protection Scheme) from CPF board by using your CPF. You could purchase from private insurance companies as well.
It is compulsory for HDB owners if you are planning to use any part of CPF
So how much should you be insured under HPS? Your share of the HPS cover should at least match the proportion of the monthly housing installment which is payable with your CPF savings and/or cash.
If you are the only person paying the monthly housing installments, you should be insured for 100% of the loan.
If you are paying 80% of the monthly housing installments, and your co-owner the remaining 20%, you should be insured for 80% of the loan and your co-owner, 20%.
Monthly housing instalment = $ 1,500. You are using $1,000 from your CPF and $200 cash, while your co-owner is paying $300 from her CPF to service the loan.
Your share of the cover should be at least:
$1,200 / $1,500 x 100% = 80%
Your co-owner’s share of the cover should be at least:
$300 / $1,500 x 100% = 20%
Note: The total share of the cover per household should add up to at least 100%.
The premium is calculated based on the following factors:
– Outstanding housing loan on the flat
– Loan repayment period
– Type of loan (concessionary or market rate)
– Sex and age of the member
Premiums are generally higher for loans of larger amounts or longer repayment periods. The premiums would be lower for younger persons and females.
It would come as a surprise to many that the cost to insure against huge risk like mortgage loans and the like is actually pretty small.
These are the plans that your advisor seldom talk to you about and it pays to be a well informed consumer.