Let us go through everything you need to know about term life insurance so you can make an informed decision to protect your future.
What is term life insurance?
Term life insurance (also known as pure life insurance) is one of the most common forms of life insurance that offers a lump sum payout in the event of your death or total permanent disability (TPD) which is pretty similar to whole life insurance. It all boils down to a few key reasons why some might prefer term life insurance over whole life insurance.
Why should I get term life insurance?
These are a few common reasons motivating people to get term life insurance:
- Cost of education for their children
- Wanting their family to still be cared for financially
- Outstanding mortgages and loans
- Not wanting to financially burden those they leave behind
- Some may worry about becoming permanently disabled because of a high-risk occupation, hence turning to insurance for peace of mind.
What is the difference between term and whole life insurance?
Term life insurance covers you for a specific amount of time, from as short as five years to as long as several decades. Most insurers offer protection for up to 5 , 10, 15, 20, 25, or 30 years based on the plans chosen (Axa, FWD, Etiqa, Prudential) starting from the age of 16. Typically cheaper than whole life insurance, the catch with term life insurance is the increase in premium as you age and as you extend your coverage.
Whole life insurance is designed to provide coverage for your entire life, and premiums will not increase with age. Typically, whole life insurance is more expensive as premiums help build cash value. This cash value, or known as guaranteed payment, can be withdrawn during your policy term, or be paid as your policy term ends.
Term life insurance vs. whole life insurance
Here are some of the differences between the two insurance policies that you should know:
|Term Life Insurance||Whole Life Insurance|
|Protects for a limited amount of time such as 10, 15, 20, 25 or 30 years.||Designed to provide lifelong coverage – can be extended up to 100 years old.|
|Provides no cash value||Cash value accumulates over the life of the policy|
|Lower premiums||Higher premiums|
|Premium might increase depending on the policy structure/extension||Premium generally stays the same throughout the entire policy|
|Payout guaranteed||Payout guaranteed|
|No dividends||Eligible for dividends|
What are the benefits of term life insurance?
Pros & cons of term life insurance:
It is cheaper than whole life insurance at least in its first year, as it is temporary and has no cash value.
- Flexible tenure
Free to choose your coverage term.
You can renew or convert your policy into a whole life insurance policy (at a higher premium).
A policy can be bought online without medical examination.
Options to customize a range of coverage for better protection are available.
It has no linked investment plans or additional policies.
- No maturity benefit
If you outlive your term insurance, the premiums paid to the insurer remain with them because it has done its job of providing you security during its term.
- Escalating premiums
Unlike life insurance, you do not have the option to lock in the premium you pay, which means if they hike up the premium due to age and perceived risk upon renewal, you will have to honour the new price or discontinue the policy.
- Limited coverage
Once the tenure of the policy has been decided, if you need additional coverage down the line, you’ll be forced to repurchase a new term life insurance policy at a higher price OR to purchase a whole life insurance policy which will also be at a higher price due to your age.
Unlike a whole life insurance policy, term insurance policies are extremely rigid. It has zero leeway for unpredicted changes such as loss of jobs or needing an increased coverage because you have additional dependents down the line.
How does term life insurance work?
The concept is simple. Decide on an amount you want to be insured for, the years you’d like to insure for (minimum at 5) then a premium will be calculated for you to start paying.
For example, Hassan has a term life insurance policy that covers death and total permanent disability (TPD) with a sum assured of RM500,000 for a duration of 15 years. The insurer gives Hassan the amount of the premium and it is to be paid monthly for the next 15 years. Naming his wife as the beneficiary of his policy, upon his passing within his coverage period, his wife will receive the sum assured. If Hassan becomes totally or permanently disabled within his coverage period, he will be given RM500,000 instead.
Note: How premiums are calculated varies based on the insurer and the type of term insurance itself. So it is best to talk to a few insurers before making a decision.
How much term life insurance should I get?
Understanding how much you need to be insured should be gauged after assessing your present and future financial requirement. This is applicable for level term insurance only. This amount that you decide is very important because you will not be able to change the sum assured once your term insurance is in force.
Usually, to mitigate the risk of this, people who purchase term LIFE insurance will also purchase rider policies (add-ons) to get extra coverage for areas that term life insurance does not cover such as critical illness.
Two main things you need to calculate are:
- Sum assured
This is how much you think you need (to be given to you or your family) in the event of total permanent disability or death.
- Term (duration)
This depends on how long you want the policy to protect you in the event of premature death. It is important to note that once your policy ends, the premium may increase significantly if you’d like to extend it or purchase a new term policy.
These are things you need to take into consideration when calculating the sum assured :
- Monthly commitments/cost of living (day-to-day expenses, loans for essentials such as housing and car) for you and dependents (if any).
- How many dependents require special care? (pre-existing conditions, long-term medications, frequent hospital visits, etc.)
- Future obligations such as the cost of tertiary education
- Outstanding non-essential loans (personal loans, credit cards, etc.)
Here is how you calculate the sum assured you need:
1. Calculate your yearly running cost
First, determine your household monthly commitment. This is the cost of living for you and your dependents (if any). This includes mortgages, car loans, recurring bills and daily living expenses for essentials. Take that number and multiply it by 12 months to get the yearly running cost.
2. Determine basic sum assured
So the coverage amount you’re looking for should be your yearly running cost multiplied with how long you expect the funds to last until your family can get back on their feet in the event of your death or total permanent disability.
3. Total sum assured
Take your basic sum assured, and determine whether you have other costs such as special care for yourself or dependents, other loan repayments or future obligations such as tertiary education that you’d need to include.
This final amount will be the minimum amount of what you will need to get insured for. Some may add 20% – 30% to this final amount taking inflation into account as term life insurance does not have inflation protection rider options.
How do I get term life insurance?
Applying for term life insurance can be done online or through an agent. Note that there are a few things that insurers will look out for before approving or rejecting your application:
- Medical history
- Family medical history
- Your job
- Lifestyle habits
Here are things you should avoid when applying for your insurance as they may be used against you to void the entire policy:
- Concealment of material facts
These are some riders that you can add to your term life insurance to get the most out of your policies:
- Critical illness rider – a lump sum paid to the insured upon a diagnosis of critical illness
- TPD premium waiver – pays all the premiums due when the policyholder is disabled during its term
- Accelerated death benefit – where the policyholder receives cash advances against the death benefit when he/she is diagnosed with a terminal illness during the policy
- Accidental death and dismemberment – provides an additional payout of rider sum assured in situations of dismemberment of accidental deaths
Term life insurance payout
Generally, most term life insurance pays out in a lump sum if you have chosen a level term insurance which is the most common type of term life insurance in Malaysia. However, there are two other lesser-known types that have different payout structures.
Decreasing Term Insurance/Reducing Term Insurance
This is a type of term life insurance that is purchased specifically to cover mortgages in the event of death or total permanent disability of the insured. This is one of the cheapest forms of term life insurance as the payout decreases over the term according to your outstanding mortgages/loans.
Family Income Benefit
This is where the payout is done monthly for a set amount of years in the event of total permanent disability or death of the insured. This is not a common standalone term insurance that is offered in Malaysia. However, options to add it as a rider on top of existing policies are available.
Read the fine print
Some insurers may have clauses or fine prints that they might not highlight. Some insurers have a clause whereby payments due to natural death will be subjected to a sliding scale.
Example: If you die from natural causes within the first 6 months of your term life insurance policy, your beneficiaries may only receive a payment that consists of the premiums you have paid to date.
Research & compare first!
Term life insurance is among the policies that people consider when they want to provide immediate financial relief for the ones they love after their death or total permanent disability.
Doing your research on other policies will help you make an informed decision on how best to protect the future of your loved ones and yourself.
We suggest reading more about life insurance, critical illness insurance and medical card before deciding on what kind of insurance you need to protect your future.
(Sources: Affinbank, Takaful, Great Eastern, Trusted Malaysia, AXA)