Understanding term insurance

If you’ve only got a minute:

• Term insurance is a life insurance policy that provides coverage against risks like death and terminal illness over a specified period.
• It does not accumulate cash value and is purely focused on providing protection during the coverage period.

Term insurance is one of the most basic and affordable types of insurance and it can be used as a critical component of your financial plan.

Here's an overview of what term insurance is, who can benefit from it, and why it may be an important consideration.

What is term insurance and how it works?

Term insurance is a type of life insurance policy that provides coverage against risks like death and terminal illness, for a specified period or "term." If the insured passes away within this period, a death benefit is paid out to the beneficiaries.

Unlike whole life insurance, term insurance does not accumulate cash value and is purely focused on providing protection during the coverage period.

Key features

Fixed coverage period

Term insurance policies are characterised by their fixed coverage periods, which can range from 10 to 30 years or more.

During this term, the policyholder pays regular premiums to maintain the coverage. If the policyholder outlives the term, the coverage expires without any payout. It can be renewed if the policy includes a renewal option.

No cash value

One significant difference between term insurance and whole life insurance is that term policies do not accumulate cash value. This means that the premiums paid are solely for the protection benefit and do not build up any savings or investment component.

Premium payments

As there is no cash value, premiums for term insurance are generally lower than that of whole life insurance, making it an affordable option for many. The premiums are usually fixed for the duration of the term, providing predictable costs for policyholders.

Types of term insurance plans

Level-term Insurance

Level-term insurance provides a fixed death benefit and premium throughout the policy term. This type is popular for its simplicity and predictability.

For example, DBS TermProtect offers a flexible term (5 to 40 years) and provides a lump sum payout (up to S$500,000) should unforeseen events (death, total and permanent disability or terminal illness) happen.

You won’t have to worry about rising premiums over time with the policy’s fixed premiums.

Decreasing Term Insurance

Decreasing term insurance features a death benefit that decreases over the policy term, typically in line with a mortgage or other debt repayment schedules. Premiums usually remain constant, but the coverage amount reduces over time.

eDecreasingTerm is a type of decreasing term insurance policy that can safeguard your home if the unexpected happens.

The sum insured decreases at your chosen decreasing interest rate over the policy term (in line with your reducing outstanding home loan). Your beneficiaries will receive the remaining sum assured if an unfortunate event happens to you.

Renewable Term Insurance

Renewable term insurance allows policyholders to renew their coverage at the end of the term without undergoing a medical examination. While premiums may increase with each renewal, this option ensures continued coverage and a greater peace of mind.

Convertible Term Insurance

Convertible term insurance policies can be converted to whole life insurance or endowment policies without a medical examination. This feature provides flexibility for policyholders who may want permanent coverage in the future.

With ManuProtect Term (II), you can opt for automatic renewal (premiums will be based on the life insured’s age at the point of renewal) for policy term of 5 or 10 years (up to age 85).

You can also convert the plan to a participating policy (capped at the original sum insured), regardless of health condition(s).

Read more: Understanding endowment policies
Find out more: Types of endowment plans

Common misconceptions about term insurance

Many believe that term insurance cannot be renewed and is a waste of money since it doesn’t build a cash value. However, do keep in mind that these policies are designed for protection, not investment.

Policy renewal is available as well, depending on the plan type. 

Term Insurance
Pros	Cons
Affordable	Lack of cash value
Relatively high coverage	Coverage ends after the term expires
Straightforward with no complex investment components	Higher premiums upon renewal (due to older age and changes in health)

 

Who should consider term insurance?

Term insurance is a practical and cost-effective way to ensure protection for various life stages, from young families to those with significant loans and those seeking temporary and/or affordable coverage.

Who?	Why?
Young families	Often have significant financial obligations and dependants who rely on their income.
Families relying on sole breadwinner	Relying on a single source of income is risky. To cover expenses such as mortgage payments, education costs and everyday living expenses.
Individuals with large debts	To ensure these obligations are covered if they pass away prematurely.
Those seeking temporary coverage for specific needs	Targeted protection to cover years until retirement or to ensure their children’s education expenses are accounted for.

How to choose the right term insurance policy

Assess your coverage needs 

The first step in choosing the right term insurance policy is to assess how much coverage you need. This involves evaluating factors such as income replacement (duration), outstanding liabilities (mortgages, car loans, credit card debt), future expenses (children’s education, marriage or other significant life events) and other financial obligations.

The Life Insurance Association (LIA) Singapore recommends obtaining protection equivalent to 9 x annual income for Death & Total Permanent Disability (TPD). For example, if you earn S$100,000 a year, you can consider having a plan that provides a payout of S$900,000 for Death & TPD. This provides essential financial support for household expenses and kids’ tertiary education costs in the event of a premature death.

As everyone has different financial circumstances, it is prudent to speak to a professional financial adviser to work out the coverage amount based on your needs.

Alternatively, check out the Plan & Invest tab in digibank. Simply key in your information (number of dependants, savings, existing coverage - if any, income, debts and expected future expenses) and the app will crunch the numbers and generate a personalised report for you based on your current financial situation and future goals.

Determine the appropriate term duration

Choose a term length that aligns with your financial responsibilities. For example, if you have a 20-year mortgage, a 20-year term policy can provide coverage until the mortgage is paid off.

Compare premium costs

Compare premium costs of similar coverage amounts and terms from different insurers to find one that has the best value for your needs.

Is there a need for additional riders and benefits?

Riders are additional benefits that can be added to your term plan to enhance your coverage. Note that adding riders comes at an additional cost.

Common riders:

• Waiver of premium – you’d be exempted from paying premiums if you become totally and permanently disabled or have a specified critical illness.
• Accidental death benefit – provides extra coverage if you die in an accident.
• Critical illness – offers lump sum payment should you be diagnosed with a specified CI. LIA has recommended a CI cover of 4 x annual income to cover expenses during the recovery period.

Review policy terms and conditions

Before finalising your purchase, make sure you understand the coverage details, exclusions and any potential limitations that might prevent a claim from being made.

Do check if the policy can be converted to a participating policy or if its sum assured can be increased at specified milestones.

Summary

Term insurance is a valuable tool for providing protection to your loved ones in the event of your unexpected demise. With its affordability, flexibility and simplicity, term insurance can be a crucial part of your financial plan.

Assess your needs, compare policies, and choose the appropriate term insurance to ensure peace of mind for you and your family.

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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.