There are many policies out there that help to replace your income in
the event you are no longer around to support your financial
dependents, especially your children.
These can generally be classified into 3 categories:
Term, Whole Life and Investment-linked policies (ILPs)
Term
Term
plans have low premiums because you are
mostly paying for the mortality charges (the risk premium to insure
your life). Term Insurance usually covers up to a maximum age. This is
the most cost effective method for pure
coverage.
Whole Life policies
These have
very high premiums. This is because you aren't just paying for the
mortality charges (the risk of insuring your life). Another
portion of the premiums also goes into the Participating fund of the
insurance company. The Participating fund uses multiple instruments to
yield a return. A cut of these returns is given to you via policy
bonuses every year. You may choose to encash some of these bonuses, but
if you choose to leave it in the policy, you will usually receive a
higher compounding bonus yield year on year.
ILPs
These
work the same as Whole Life, but instead of the Participating fund, the
premiums go into an Investment fund or funds. You are given the choice
to choose which Investment fund(s) you want. The catch is that the
insurance company is not obligated to give you a bonus. Thus there is a
chance to lose money if your fund performs badly. On the flip side,
there is a chance of getting a higher return compared to the
Participating fund should your choice of fund(s) perform well. Obviously
if you know nuts about investment, or cannot take losses, I suggest you
stay away from ILPs.
Whole Life and ILPs
usually do not have an expiration date. This is very useful for legacy
planning, whereby you would like to leave behind a sum of money to
benefit your children regardless of their financial dependence on you.
In summary:
Choose
Term if you are on a tight budget and wish to cover for a certain
number of years. You should target the expiry date at the time you think
your children should have all grown up and can support themselves.
Choose
Whole Life if you have the budget and the intention to leave behind a
sum of money to benefit your children regardless of their financial
dependence on you. This is probably because you want to add to their wealth, so that they may lead a more comfortable life after you have gone.
Choose ILPs if you want to do the
same as Whole Life, but you are extremely confident that the investment
fund(s) you choose can outperform the Participating fund of the
insurance company.
