Thursday, 29 June 2017

Term Insurance

I have never talked about personal financial planning in my blog, even though it is such an important topic.

It is important because financial planning helps us manage risks of undesired events that can wipe out one’s savings and assets. The cost of dealing with, and recovering from, these catastrophic events is very large, such as medical cost for dread illness, cost of surgery due to accidents, or cost of having a caretaker over long term. These events are unforeseen but the risks are very real. Financial planning helps us prepare for these events happening, and enable us to recover from incidents more easily and get back on with our life.

Financial planning is a broad topic. Insurance is one important piece of the puzzle. A commonly shunned topic among common folks, but no less important than investment.

In general, insurance plans can be grouped according to the purpose and type.

Insurance
Purpose
Life Insurance
Health/Medical Insurance
Investment and Annuity
Type
Term Plan
Critical Illness
Investment Linked
Whole Life Plan
Long Term Care
Annuity
Endowment Plan
Medical Expense

Universal Life Plan
Disability Income


I just want to jot down some personal opinions here about Term Insurance. Purely on Term Ins alone, I am not wading into the debate on term vs whole life vs ILP. Tonnes of well-argued opinion pieces in other blogs.

It should be the bedrock of one’s insurance portfolio
I believe Term Plan essentially fulfils the simplest objective of protecting against permanent loss of income when family’s breadwinner dies or becomes incapacitated to work. Due to its low premium and pure-protection nature, it should be included in one’s insurance portfolio.

It is suitable to protect against temporary needs
Term insurance provides coverage for a specific period (hence the name ‘term’), after which the plan will end. It is suitable for temporary financial commitments which cease after some years. For example, mortgage loan payments with fixed loan tenure. Providing for dependents can also be a temporary need for some people who are clear about dependents’ timeline, ability and willingness to eventually self-support when they start working.

Consider difference in amount of financial commitment further down the road
First point here is that term plan should cover total amount of liabilities, which require some thoughts and projection. But do bear in mind that some liabilities would decrease as we grow older, because we have spent our working life providing for, or clearing off, these liabilities. Mortgage loan is one such case.

Another scenario. There is an ‘end-date’ to which we would need to provide for our kids, which is till the age they start earning their own keep. We need more money to raise 5-year-old kids compared to a 15-year-old. The older kids may take on part time jobs to supplement some income. One can explore suitability of a decreasing term life insurance here.

What happens after term plan coverage ends?
Term plan usually ends at 60 or 65. While financial commitment might have ended, possibility of major medical expenses increases with age. And medical procedures cost a bomb. Total surgery and treatment costs for heart bypass or liver transplant can a 6-digit amount.

One may still need an insurance that provide lifetime coverage against critical illness, especially during old age, to prevent a one-time capital drawdown to treat big diseases that can deplete one’s assets.

One consideration that I have is, would my financial assets built up over the years from investment be able to cover medical costs for different plausible illnesses or major diseases comfortably, and allow me to enjoy life travel around the world and perhaps hire caregiver too? Would need to do some deep visioning exercise and project the amount I would have accumulated by then. But given that future is largely uncertain, I need to be conservative in estimates. And there are many what ifs, such as another financial crisis just when I need to drawdown the capital for medical treatment.

But my heart says that I do not really want a large chunk of my wealth to be blown on single instance for medical treatments.

I read that there are term plans that cover up till age 99. Sounds like a solution too and that’s for another article some other day.


3 comments:

  1. Short and sweet writeup that covers the clear intention of a term plan. But looking at term that cover till age 99, i would guess till 65, and extendable every year from 65 to 99, would be an expensive option if coverage till 99 in my opinion. But whether there is a need for that, it then really depends on your financial intention or legacy that you may want to leave behind.

    Just my one cent worth,
    Ren

    ReplyDelete
  2. Hi FFAchiever Team,

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    ReplyDelete
  3. Hey thanks for this amazing post. Would love to read more of such blogs. You can also have a look at Term Insurance Plan for more information.

    ReplyDelete

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