When it comes to life insurance, there are a few different types. Do you understand the difference between them? In this article, we will explore the most common life insurance policies in the market. There are 4 mains types of life insurance policies. They are Term Life Insurance, Endowment Insurance, Whole Life Insurance and Investment Linked Policy (ILP).
1. Term Life Insurance
Term life Insurance is generally the cheapest form of insurance as they provide the highest coverage with lowest premium. Term insurance is recommended for individuals who require high levels of protection but cannot afford to pay too much for it. It can also be used as a supplementary insurance to raise the protection temporarily until it is no longer required.
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However, the term insurance does not have cash value in the policy upon expiry. Term policies are usually renewable up to an age limit at which they are no longer available, around 60-70 years old. Term policies may also come with a convertible option to convert it into a whole life policy.
While premiums are low initially, the premiums do go up as the policyholder ages. One of the alternatives is to get a level term insurance policy. Many people do not know that this product exists as insurance agents do not promote it generally. A level term insurance policy locks in the premium until a certain age. Level term insurance is highly recommended if you want a long term protection up to the age of 60+.
2. Whole Life Insurance
Whole life insurance policy is a lot more expensive than term insurance, but provides coverage for the policyholder’s whole life as compared to term insurance which has an age limit. The premiums are constant throughout the policy, so it is easy to budget for the insurance premium.
Whole life insurance accrues cash value over term, which consists of a guaranteed portion and non-guaranteed portion as discussed earlier. It is more important to focus on the guaranteed portion as the company may not declare the bonuses as projected.
3. Investment Linked Policy
Investment linked Policy is generally a life policy which has benefits linked to investments. While investment linked insurance has the potential for higher returns as compared to normal whole life insurance, it also has potential downside risks like any investments. The investment portion is invested in unit trust like instruments, so the cash value is based on the price of the invested funds. However, the sum assured is generally much lower as compared to term and whole life.
4. Endowment Insurance
Endowment Insurance is a combination of insurance and savings instrument which provides a lump sum of money at maturity. It is commonly used as to save for purposes such as children’s education or retirement. So the endowment policy should expire just before the funds for the intended purpose are required. However, the sum assured is generally much lower as compared to term and whole life.
About the Author
Calvin Yeo is the Managing Director of Doctor Wealth Pte Ltd (www.drwealth.com), which is an online financial planning platform. He is also a Chartered Financial Analyst (CFA) as well as Certified Financial Planner (CFP).
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