Decreasing Term Life Insurance can be a cost effective solution Skip to Content

Decreasing Term Life Insurance can be your low cost insurance solution

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

  1. Student Loans
  2. Credit Card Loans
  3. 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%.

Example:
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.

Summary

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.

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romanize

Tuesday 23rd of July 2013

Thank you Drizzt. it helps me a lot!

Kyith

Wednesday 24th of July 2013

no prob. are u looking for a plan like this?

Simon

Friday 20th of April 2012

With regard to level term and decreasing term insurance, i think which i opted level term was because half way thru e.g. 30 yrs, the coverage dropped so much... and buyers must understand that they have to adjust for inflation, e.g. children's tuition fees in 18 yrs....

Drizzt

Monday 21st of May 2012

agreed Simon. in the first place when they identify the amount they need to calculate a reasonable rates. take for example i spoke to a young friend recently his semseter uni tuition fee in 2012 is 9800. mine was like 5500 in 2001. in 10 years the growth rate is 5.3%!

huat

Wednesday 21st of July 2010

Thanks Drizzt. Now i know how you determine the dividend value. Its based on forecast and not last year's actual. Its logical. Wonder why the price keep increasing even though the yield is not as high compare to the others. Rgds.

Drizzt

Thursday 22nd of July 2010

thats the market to you my friend. it sometimes fluctuates off its tangent

Huat

Wednesday 21st of July 2010

Drizzt, im not sure. below is the extract of dividend value extracted from starhill website and checked with Shareinvestor. I know i should check sgx website but im lazy. :P

Period Div 1Q10 - 1 Jan to 31 Mar 10 => 0.95 cents

4Q09 - 1 Oct to 30 Dec 09 => 0.97 cents

3Q09 - 1 Jul to 30 Sep 09 => 0.95 cents

2Q09 - 1 Apr to 30 Jun 09 => 1.90 cents

1Q09 - 1 Jan to 31 Mar 09 => 1.87 cents

In total for full year 2009, the total div should be 5.69cents. My guess is you have only used the numbers from 1st Q and 2nd Q. Correct me if im wrong.

Drizzt

Wednesday 21st of July 2010

Hi Huat. it is likely i don't factor in those 1.90 cents dividends as going forward, that is not the yield that you will be looking for as you stay vested.

best regards.

Huat

Tuesday 20th of July 2010

Hi Drizzt, 1st of all.. thanks for the dividend tracker. Im wondering how you get the dividend(SGD) value. Is it based on last year's dividend actual? Seems like Starhill global dividend actual value should be more than what is stated in your tracker. Thanks

Drizzt

Tuesday 20th of July 2010

hi huat, i update this like 3-4 months ago. was it that wrong?

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