Buying insurance can be an extremely confusing experience. It is a relatively complex financial product, and you will never know if your financial advisor is truly looking after your interest. Yet, if you can afford it, it is a necessity to safeguard you from the unexpected twist and turns that life may present you. For avid investors, it is a safety net for our financial portfolio.

I won’t dive too much into the importance of insurance because those are already widely discussed. But I will be delving into the thought process and approach that I adopted when buying my insurance policies. I am not a financial advisor. Note that everyone’s circumstances are unique and hence this should only be a point of reference for you.

In my opinion, these are the 2 must-have insurance policies (in order of importance).

1. Health Insurance (covering hospitalization charges)
2. Life Insurance (covering death, total permanent disability and critical illness) 

Hospitalization plans are easier to understand and decide on since there are fewer permutations to play around with. Hence, I will focus on life insurance in this article.

Step 1: Having a clear budget in mind

I was comfortable with spending at max 10% of my basic take-home pay (i.e., after CPF and excluding bonus) on insurance. This number will differ from person to person depending on how much you earn. 10% felt right to me.

Firstly, I had only just started working and I was confident that my salary will gradually increase while my insurance premiums are unlikely to increase in the foreseeable future. Hence, this 10% is only temporary and will only keep going down.

Secondly, 10% of my salary on insurance still left me with sufficient room to meet both my investments and savings goals while allowing me to splurge and live life occasionally. ‍

Step 2: Diagnosing your needs

When buying life insurance, there are 4 main things you want coverage on.

1. Death
2. Total Permanent Disability ("TPD") 
3. Early Critical Illness ("ECI")
4. Late Critical Illness ("CI")

‍Death and TPD: For death and TPD, I was thinking along the lines of the peak liabilities I envisioned myself to have in the next 10-15 years. A simple calculation below:

• House (about $700k of housing debt/mortgage)
• 2 kids ($200k each to sustain them until university)
• 1 year of living expenses at $8k/month for my future dependents to pick themselves up

This adds up to about S$1.2m of death and TPD coverage I would ideally need.

Early Critical Illness: I did a simple estimation of roughly 3years of expenses at $5k per month. This translated to a roughly $180k coverage needed.  

Late Critical illness: Similarly, I did a simple estimation of roughly 6 years of expenses at S$5k per month. This translated to roughly $360kcoverage needed.

Some financial advisors may come up with very complex bottom-up calculations to arrive at these figures. I find that they end up making too many assumptions and thus making the output remotely accurate. Hence, a ballpark figure like the above was sufficient for me.

Thereafter, I examined the policies I have. I had previously bought another plan back in NS that provided $150k in death/TPD coverage and $75k in ECI and CI coverage. I also had the MINDEF Group term at 200k death/TPD coverage. Hence, I was able to arrive at my coverage shortfall of:

• Death/TPD = $1.2m(What I need) - $350k (What I have) = $850k
• ECI = $180k - $75k = $105k
• CI = $360k - $75k = $295k

Now, with both (1) what I can afford and (2) what coverage I need in mind, I proceeded with shopping for different types of policies. This is also when I started talking to several different agents.

Step 3: Choosing the type of plan that suits your circumstances best  

Broadly speaking, there are 3 types of plans to consider

1. Term Life
2. Whole Life
3. Investment-Linked Plans (those with insurance imbedded

Why Investment Linked Plans are not ideal

‍Investment Linked Plans (“ILPs”) were out of the question from the get-go. How these plans work is that you pay a fixed sum every month and the insurance company will help you invest that money by purchasing units of various funds they have set up. Each year, you then pay your insurance premiums with these units you own. The ideal situation is that eventually, your investments grow so big (through the power of compounding) that it pays for themselves (i.e., the returns from the investments will be sufficient to payoff the insurance premiums). Prima facie, ILPs doesn’t sound so bad.

However, 2 big red flags make ILPs unappealing to me:

Firstly, unlike term and whole life plans, the insurance premiums within ILPs increase exponentially with age. Depending on how the market performs, and which part of the market cycle it is, you might end up needing to top up a significant amount of money to keep the policy running. Below is an example from a plan recommended to me by an agent representing one of the biggest insurance companies operating in Singapore.

Secondly, the high distribution and management fees involved in these ILPs. When buying ILPs, you are essentially dollar cost averaging into funds created by these insurance companies. These funds often work on a fund-of-funds model, meaning they invest in other funds run by other asset managers. This is extremely unideal because you will essentially be paying management fees twice. Once on the insurance company’s fund that you are investing in, and another on the funds that these insurance company’s funds invest in. Furthermore, it’s not like many of these funds are out of reach by retail investors. Apart from insurance premiums and fund management fees, there is also a myriad of other fees involved, such as policy/admin fees, fund switching fees, bid-ask spread, etc [Source].

Term-Life or Whole-Life? 

This leaves us with term-life and whole-life plans to deliberate between. Term life policies are akin to renting a house. You pay a fixed monthly/annual fee until a certain age when the policy then stops. Whole-life policies are akin to buying a house. You pay a much higher fee for a shorter duration (usually 25 years, but can be shorter), but the policy will remain for your entire life even after you stopped paying for it.

Here are the 3 main reasons why I bought term-life instead of whole-life.

Firstly, whole life is simply too expensive for me now. The bottom table compares the cost of a whole life and term life plan from the same insurer. It’s not really an apples-to-apples comparison, but it does provide some insight into the cost differences.

In the above scenario, I would have to fork out $237 a month and yet, it is still insufficient to cover my coverage shortfall highlighted in step 2. Given that I am drawing a fresh grad pay, buying whole life doesn’t seem viable.

Secondly, the idea of “buy term invest the rest” greatly appealed to me. As seen above, you will pay significantly less for term life and could thus channel those savings into investments. Assuming that you diligently invest those differences, you will likely be better off than buying a whole life plan.

In my illustration below, I compared 2 scenarios and my understanding was that a roughly 4% annualized returns for investments made was the breakeven point. 4% sounded realistic to me.

1) Term life policy with $1mdeath/TPD, $80k multi-claim CI, and $200k late CI until 70 years old

2) A mix of whole life ($150k death/TPD, $50k ECI, and CI with3x multiplier until 70 years old) with a term life top-up ($750k death/TPD until 70 years old)

Note that it is not an apples-to-apples comparison since the coverage between the 2 is not the same. It also did not consider bonuses from the whole life plan. However, I had to make do with the limited information I had on hand and conduct a rough comparison.

TLDR: Essentially, this table is saying that if your annualized returns are approximately 4% or above, you will be better off with buying term and investing the rest.  

Thirdly, I don’t foresee myself requiring insurance beyond retirement. Ideally, beyond 70 years old, I will be able to self-insure through my savings and investment portfolio. Legacy planning is not something I am seriously considering now and if I do have children, I would hope that they can make it by themselves rather than surviving on a windfall.

There is no right or wrong. Both whole life and term life have their merits. The above are reasons specific to my circumstances and yours might differ. For example, if you don’t invest at all or are a high-income earner who can afford it, whole-life policies might make more sense for you.

Step 4: Identifying the insurer that offers the best product

Now all’s that left is to purchase the product you want (Step 3) at the coverage you need (Step 2) from the insurer that offers a deal below your budget (Step 1).

If you are buying term-life policies, there are a few things to consider across insurers:

1. Cost
2. Comprehensiveness of their multi-claim CI policies if you intend to go for multi-pay
3. Early CI coverage/definitions. My understanding is that late CI coverage/definitions are standardized across insurers by regulation
4. Claim process

An experienced agent would be able to best advise you on the above. I personally signed up for the Singlife Elite Term plan because it was cost-competitive and has a comprehensive multi-claim structure.

Other insights and considerations

It might be cost-effective to buy slightly more death/TPD insurance

While computing the numbers, I noticed something interesting. While premiums for CI increase linearly with increasing coverage, it is not the case for death/TPD.

• For the Singlife EliteTerm plan quoted to me, a $750k death and TPD coverage would cost $48.83 per month. The same plan at $1m death and TPD coverage cost $55.4 per month. This means that despite a 33.3% increase in coverage, I was only paying 13.5% more.
• For multi-pay CI, a$80k coverage cost $57.87 per month while a $100k coverage cost $72.33 per month. This means that a 25% increase in coverage translated to an equal 25%increase in cost.
• Same thing for late-stage CI, a $150k coverage cost $140.65 per month while a $200k coverage cost $187.55 per month. This means that a 33.33% increase in coverage was met with a 33.35% increase in cost.

Hence, given the cost-effectiveness of death/TPD policies, it might make sense to buy a little bit more now in anticipation of the future. Death/TPD coverage is also a lot cheaper than CI coverage as seen in the numbers quoted.  

Should I stagger my term life purchase instead?

Instead of buying 1 term life policy that covers most of your foreseeable future's needs, you might be considering staggering your purchase by buying 1 term life policy for your current immediate needs and another once you hit a different life stage.

I did some comparison on this front as well, and the quotes provided to me by my agent suggested that you are better off buying what you need in one setting, when you are younger and can lock in a cheaper premium.

Multi-claim or Single claim?

There is no clear answer to this. I am slightly more risk-averse and thus was heavily leaning towards multi-claim. Some of my friends tell me that you are unlikely to survive 2 critical illnesses, so there is little point in getting multi-claim. I even know of a friend who had spoken to several doctors to seek their opinion pertaining this and ended up buying single claim CI policies. Ultimately, it is up to personal preference and belief. I am generally more risk averse and since my budget allowed for it, I decided to go with multi-claim.

Conclusion

Again, I want to stress that this is just 1 possible way or framework of looking into life insurance. The quotes given to you might differ from those given to me. Hence, please do your own calculations to verify. This should serve merely as a scaffold on which you build your own opinions based on your specific circumstances.