Life insurance for family protection

You only need to worry about life insurance when you have dependents, e.g. after you are married and have children. In the event of premature death, the life insurance policy will take care of the financial needs of your dependents.

You should buy a low cost life insurance, such as a Term Insurance or Family Income Benefit. If you take the insurance at a young age, you only need to insure for 25 years, as your children would have been financially independent on the expiry of the insurance. Furthermore, after 25 years, you would have accumulated sufficient savings, and life insurance is not needed at that time.

If you buy Term Insurance or Family Income Benefit at an older age, you can buy for a shorter period, e.g. until your youngest child reach age 25. If you take up the insurance when your youngest child is 10 years old, you only need insurance for 15 years.

The best insurance is actually a Family Income Benefit. You can insure for 60% of your current earnings. If your monthly income is $5,000, you can buy this insurance to pay $3,000 a month in the event of premature death (i.e. during the term), for a benefit that is payable for the remainder of the term. If you buy a 25 year insurance and death occurs after 10 years, the Family Income Benefit is payable for 15 years.

Alternatively, you can buy a Term Insurance to provide a lump sum of 5 years to 10 of your annual income, for a term of 25 years. If the term is less than 25 years, you can reduce the insurance sum proportionately. If you need insurance for the next 15 years, you can insure for 3 to 6 years of your income.

A Family Income Benefit is better than Term Insurance, as your family will not have to worry about investing the lump sum payable on premature death. Instead, they will receive a monthly income.

You can upgrade your Term Insurance or Family Income Benefit every 3 to 5 years, to increase the insurance in line with your higher earnings. However, even if you do not, the basic benefit should already cover most of your financial needs of your family.

You can visit this website to get an indication of the premium rate that you should be paying for Term Insurance. Although the website is for America, you can get an idea about the premium that you should be paying for similar insurance in Singapore. I have not been able to find a website to give the premium rate for Family Income Benefit.
 
Tan Kin Lian