Are all term policies made equal?

We’ve all heard the analogy, buy term and invest the rest. We know investing is the act of growing our money and generating wealth. What is a term policy? 

TL:DR: Buying term to cover unexpected eventualities is prudent for a limited time. Long term planning ensures that coverage is maintained at reasonable levels.

A term policy is a type of limited-period insurance that covers us within a time frame. For example, Mat Moor buys a term death policy - since there’s no takaful in Singapore - it covers him till age 65. He passes on at age 67, and despite paying the term policy for 45 years, his estate couldn’t claim his insurance. The total premium of $150 per month over 45 years, $81,000, has gone wasted. 

Death cover up to a certain age purpose is to cover any liabilities and responsibilities. Mat Noor bought his policy to cover his loans and upon his unexpected death, his income for his school-going children. For these purposes, his objectives were met. 

At the age of 20, Mat Noor purchased a level-term policy. A policy that factors in his future premiums and gives him a guaranteed premium for 45 years. Level premiums are beneficial for the peace of mind that as you get older the prices won’t rise. We need to understand that premiums shoot up only at 40 years old.

As such the younger demographic aged 30 and below should not buy level premium terms. Most people have children above the age of 30 nowadays. This coincides with someone’s peak income. The level of insurance should cover your future loss of income or the size of the estate that they want to leave for future generations. With proper strategy, Mat Noor pays for a basic insurance portfolio from age 20 to 30.

Not yet married, he plans to have children and leave a substantial legacy behind. He works as a humble security guard, 12-hour shifts and is constantly on his feet. In his first decade of working, he budgets $550 for his portfolio, insurance and investments.

$50 a month can get him :

-$100k cancer cover, 

-$100k critical illness, 

-$250k death, 

- $600k accidental coverage and an 

- as-charged hospitalization plan with a $50/day hospitalization payout. 

Premiums will stay the same till age 30 years old. Single still, with no kids, the payouts go to his immediate family for his care should he become a liability himself. The rest of his budget goes to investing to reach a goal of $60,000. 

When he turns 34, Mat Noor is blessed with 2 children. He purchases a level term death insurance at $250 a month, giving him $500,000 in death coverage till age 99. Should he live till 99, the policy pays out the $500,000, ensuring his legacy is intact.

At age 34, he buys a level premium term. Despite increasing premium term prices being cheaper, he realizes at retirement he would not be able to sustain them.

From age 30 - 34, Mat Noor’s insurance premium increased to $68 per month.

At 65 his non-level premiums are unsustainable at $500 a month where it was once $50 a month in his 20s. At this point only his level premiums and hospitalization should be maintained and the balance cut from his portfolio.

His contribution to his investment had stopped at 28, once he reached his target. Despite having a mediocre job, with prudent advice Mat Noor manages to impart to his children a guaranteed $500,000, his investment account, his remaining CPF and HDB housing. 

His reason to leave a legacy? - My child’s prayers are one of the reasons we go to heaven. I give them a reason to be grateful.