You will be able to explain when term life insurance is needed and how to think about the amount.
At some point in your twenties, someone will suggest you buy life insurance. It might be a friend who has just become an adviser, a relative, or a bank officer when you open an account. The pitch often comes with a round number, half a million or a million, and a product that also promises to give you money back later.
Before any of that, there is a simpler question: does anyone actually need your income if you die? This lesson shows you how to answer it, and how to think about the amount if the answer is yes.
Term life insurance pays a lump sum to the people you name if you die during a set period, the term. The term might end at a particular age, such as 65, or after a fixed number of years. Many term policies also pay if you are diagnosed with a terminal illness, and some offer cover for total and permanent disability, often as an add-on. Check the policy wording for exactly what is included.
It has no savings value. If you are alive at the end of the term, the cover stops and nothing comes back. That is why it costs far less for the same amount of cover than policies that combine protection with savings. You are paying only for the protection.
You need life cover when your death would leave someone short of money. Two situations cover most cases.
The first is when someone depends on your income. A spouse who earns less than you, young children, parents you support each month. If your pay stopped, their rent, school fees or allowance would stop with it.
The second is when someone would have to repay your debts. A home loan in joint names is the common one in Singapore. If you die, your co-owner still owes the bank and has to keep paying from one income.
If neither applies, say you are single, nobody relies on your pay and you have no shared debts, you may need little or no life cover for now. That can change quickly with marriage, a child or a flat, and lesson 9.3 covers the life events that should prompt a fresh look.
The amount you need comes from the income and debts you want to cover and for how many years. A round number is a guess.
The basic method has four steps. Work out how much a year your dependants would need from you. Multiply that by the number of years they would need it, for example until your youngest child finishes school. Add any debts you would want cleared. Then subtract what is already in place.
Here is a worked example with figures made up for it. Kumar is 35, married with a three-year-old daughter. His wife works, but the household relies on S$36,000 a year from his pay. He wants that covered until his daughter is 22, which is 19 more years. S$36,000 x 19 is S$684,000.
His share of the home loan is S$250,000, and he wants that cleared too. That brings the total to S$684,000 plus S$250,000, which is S$934,000.
This is a starting point. It ignores inflation, which would push the figure up, and it ignores any income his wife could add, which would bring it down. An adviser or the detail in Insurance Decoded can refine it. But it is anchored to his family's real needs, which a round number never is.
Before working out any gap, list the cover you already have, because most people hold more than they think.
Many employers provide group term life cover as a benefit. Your HR portal or benefits handbook shows the amount. The catch is that it usually ends when you leave the job, so it should not be the only cover your family relies on.
The Dependants' Protection Scheme is a term life scheme for CPF members. Many members are covered automatically when they start working and paying into CPF, unless they opt out. It pays a lump sum on death, terminal illness or total permanent disability, up to a set age. The sum assured, the age limit and the premiums are published on cpf.gov.sg, where you can also check whether you are covered.
If your home is an HDB flat bought with CPF, check the Home Protection Scheme on cpf.gov.sg too, because it may already cover the loan.
Savings and investments you would leave behind also count.
Back to Kumar. He has S$100,000 of group cover through his employer and S$50,000 of savings he would leave behind. He checks his Dependants' Protection Scheme cover on the CPF website. His gap is S$934,000 minus S$100,000 minus S$50,000, which is S$784,000, less his Dependants' Protection Scheme payout. He also works out the gap without the group cover, in case he changes jobs: S$934,000 minus S$50,000 is S$884,000, again less the scheme payout. He would also check whether the Home Protection Scheme covers the flat loan, because if it does, the S$250,000 comes off.
None of this tells him which policy to buy. It tells him how much protection his family needs, which is the question to settle before talking to anyone selling a policy.
You do not need to finish the sum today. Start with the first piece: think through who relies on your income, how long they would need it, and what you owe that someone else would have to pay.
Write down who depends on your income, for how long, and any debts they would inherit, as the starting point for a cover amount.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).