What is the purpose of insurance????
The purpose of insurance is to transfer our risk of a loss to another party in exchange for money. It is important that we adequately transfer our risk (i.e. sufficiently insure ourselves) and to keep the cost that we are paying for insurance low.
Some FAQ:
a. "I need life insurance coverage for my whole life."
Our financial obligations tend to decrease as we age due to the fact that, as our dependents grow older, they are dependent on us for a fewer number of years. We should have also built up sufficient assets such that if an unexpected event were to occur, we would have sufficient assets to leave behind for our dependents to live on. There comes a point of time in our life when we do not need any life insurance coverage to provide for our loved ones as they are no longer dependent on us financially.
b. "Whole life insurance is always better because I may only have to pay for a limited number of years and I can save as well."
For insurance companies to craft a policy where it is possible for one to pay only for a limited number of years, it means that a lot more has to be paid for the initial years to compensate for the other remaining years. If we are using whole life insurance for savings, for the low liquidity and returns it provides, we could use many other investment tools which allow us the flexibility to draw our money when we need to without any penalties and possibly achieve greater returns with them.
c. "More coverage is always better."
This only holds true if we do not have other financial commitments. Accumulating enough funds to retire is not easy to achieve. In a study done by AIA in 2014, 55% of Singaporean respondents were worried they would not be able to save enough as compared to a regional average of 44%. More worryingly, 35% of Singaporean respondents ranked saving for retirement as the most difficult goal to achieve in life. If we decide to spend more on insurance, something else has to go. This could mean prolonging our working years and pushing back our retirement age.
Our financial obligations tend to decrease as we age due to the fact that, as our dependents grow older, they are dependent on us for a fewer number of years. We should have also built up sufficient assets such that if an unexpected event were to occur, we would have sufficient assets to leave behind for our dependents to live on. There comes a point of time in our life when we do not need any life insurance coverage to provide for our loved ones as they are no longer dependent on us financially.
b. "Whole life insurance is always better because I may only have to pay for a limited number of years and I can save as well."
For insurance companies to craft a policy where it is possible for one to pay only for a limited number of years, it means that a lot more has to be paid for the initial years to compensate for the other remaining years. If we are using whole life insurance for savings, for the low liquidity and returns it provides, we could use many other investment tools which allow us the flexibility to draw our money when we need to without any penalties and possibly achieve greater returns with them.
c. "More coverage is always better."
This only holds true if we do not have other financial commitments. Accumulating enough funds to retire is not easy to achieve. In a study done by AIA in 2014, 55% of Singaporean respondents were worried they would not be able to save enough as compared to a regional average of 44%. More worryingly, 35% of Singaporean respondents ranked saving for retirement as the most difficult goal to achieve in life. If we decide to spend more on insurance, something else has to go. This could mean prolonging our working years and pushing back our retirement age.