Karan Singh Dhir, a Master’s in Business Administration (MBA) graduate of the Edinburgh Business School, UK has been a Senior Financial Adviser with Chartwell Associates Pte Ltd, Singapore since 2013 and previously a Financial Advisor with Global Eye Pte Ltd, Singapore since 2011. He recently joined Expat Insurance as a Life Insurance and Investment Products Specialist.
Family protection for loved ones
The biggest reason for someone to get life insurance is to financially protect dependent family members should the insured die. A person should get life insurance when he hasn’t accumulated enough financial assets and if he dies the life insurance will make sure his dependents are taken care of and maintain a similar standard of living as when the person was alive and working. Life insurance helps insured to fulfil family financial commitment like putting his children through university or helping his dependent wife with retirement income.
For example
Mark aged 35 and his wife Jenny aged 32 is a housewife. They have 2 children David (5 years old) and Amy (2 years old). Mark being the sole bread earner buys a single term life insurance for 30 years till he becomes 65 years old. He reckons by the age of 65 he should have accumulated enough financial assets to not need insurance, and both his children would have completed their education, and should be financial independent. If Mark dies young at 37, the life insurance proceeds would provide lump sum payment assisting Jenny to get a monthly income to run the household and also fulfill financial commitments like paying house mortgage and getting children through their primary and university education.
Paying off your mortgage
Most people need decreasing term life insurance to cover their mortgage regardless if they are single with no dependents or family with dependent children. Decreasing term life insurance is a term life insurance specifically designed to cover mortgage and the proceed decrease each years as the mortgage loan amount decreases.
For example
Mark aged 43 is single and has no dependents. He has a property back home in Australia and has mortgage outstanding of A$ 700,000 with a loan tenure of 22 years till he become 65. He buys a decreasing term life insurance of A$ 700,000 for 22 years which will make sure his mortgage is taken care off if he were to die. Decreasing term life proceeds decrease each year as the loan amount decreases and thus is cheaper option than term life insurance where the proceeds amount remains same throughout the duration of the insurance term.
Probate and tax planning
Probate means when a person dies his assets freeze and can only be distributed to his beneficiaries once his probate is granted for all the jurisdiction he has assets in. Probate is tax and other debt clearance to the jurisdiction authority. Probate clearance in simplest of cases can take usually 3 to 6 months and for most expats who have assets in few jurisdictions can take up to 2 years.
The beneficiaries can potentially get the life insurance proceed within a month’s time if the life insurance is written properly. It is one of the biggest benefits of life insurance by providing family members cash when they need the most.
Life insurance can be a tax planning tool for certain nationalities and in most jurisdiction life insurance proceeds are tax free. Life insurance proceeds are useful tool to pay off estate tax.
In Singapore life insurance premium in a taxable benefit up to S$ 4000 per year.
Savings vehicle
It’s mainly for whole of life insurance. Its more popular among local Singaporean than expats. Whole of life insurance covers the insured for whole of life and has a cash value and surrender value.
Usually if the client surrenders the insurance policy after 25 he gets his premium back and has potential to get a return of one to three percent.
The premium for whole of life is a lot higher than term life but provides the money back with some potential return. It is useful for people who need cover for life and also can make a safe return on their premium invested.
Premiums are cheaper when person is young and getting life insurance is a lot easier
Insurance premiums increase as the person gets older.
Being young you would be healthy now, but as you get older chances of getting ill increases making you uninsurable.
Peace of mind
The biggest reason anyone would get life insurance is for peace of mind that his family, business, char or mortgage is taken care of, should he die.
Most people get life insurance with riders like critical illness and total permanent disability rider.
Life insurance is bought for love ones to make sure they are taken care off should the insured die.
Critical illness and total permanent disabilities are mainly for personal protection when the insured is diagnosed with critical illness or is disabled.
Critical illness rider pays a lump sum to the insured when he is diagnosed with a critical illness. Critical illness is different from medical insurance as medical cover pays for the insured hospitalization where as critical illness pays out a lump sum payment. Critical illness rider is mainly used as an income replacement tool when the insured is critically ill and unable to work.
Critical illness is of two types
Enhanced critical illness pays out lump sum proceeds in case of cancers from stage 3 onwards.
Early critical illness pays out the proceeds from stage 1 itself.
Total permanent disability rider pays out a lump sum when the insured gets permanently disabled.
Mark age 35 has a life insurance policy of S$ 1,000,000 with enhanced critical illness rider of S$ 500,000 and total permanent disability rider of S$ 250,000 for 30 years till he becomes 65.
At age 41 Mark is diagnosed with critical illness and gets S$ 500,000 of critical illness cover. At age 52 Mark has a permanent disability and get S$ 250,000 disability cover. At age 62 Mark died and Marks beneficiary get S$ 250,000 life insurance cover.
Standalone critical policy is a lot more expensive than adding critical illness as a rider to life insurance, and provides the same benefit.
Life insurance is also important tool for legacy planning for ultra-high net worth individuals through universal life insurance. (I don’t know whether expat insurance would be offering universal life).
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