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On the surface, a term insurance policy is a simple insurance policy where the insured buys it for insurance coverage only. However, there are different types of term insurance policies that are used in different situations. With this in mind, this post is on the fundamentals of the six types of term insurance policies in Singapore.

1. Level Term

A level term insurance policy is probably one of the most straightforward term insurance policy available in the market. Prior to the start of the policy, the premium is determined. Thereupon, the insured will pay this premium throughout the coverage period.

To illustrate, I pay a premium of $500 annually for $1mil of insurance coverage for 10 years. At the end of the policy term, my total capital outlay is $5,000 ($500 x 10 years). If the insured event is triggered, e.g. death, my estate will receive $1mil. On the contrary, if nothing happens at the end of 10 years, I forfeit my entire capital outlay. 💸

An illustration of a Level Term Insurance Policy
An illustration of a Level Term Insurance Policy

2. Renewable Term

A renewable term insurance policy allows the insured to renew the policy at the end of the coverage period. During the renewal, the renewal premium is determined at the age when the insured renews the policy.

To demonstrate this, I am currently 30 years old and I pay $500 annually for $1mil of insurance coverage for 10 years. At the end of 10 years, I can renew the insurance coverage (sum assured of $1mil) based on the calculated premium calculated at age 40 (based on age last birthday; this criteria may differ across different insurance companies). Accordingly, this works out to be $1,000 annually (in a hypothetical scenario; in any case, the renewal premium will always be much more expensive than the initial premium).

An illustration of a Renewable Term Insurance Policy
An illustration of a Renewable Term Insurance Policy

3. Convertible Term

A convertible term insurance policy allows the insured to convert the basic policy into a whole life or endowment policy. In most cases, this feature is available so long as the policy is active. This type of term insurance policy may be suitable for an individual with a limited budget at the beginning of the policy term.

During the conversion process, I will be able to enjoy the same level of insurance coverage without further medical underwriting. In other words, I will still be covered on a standard basis for the basic policy even if I was diagnosed with a medical condition!

An illustration of a Convertible Term Insurance Policy
An illustration of a Convertible Term Insurance Policy

4. Decreasing Term

A decreasing term insurance policy works in a way where the insurance coverage decreases over time. This is commonly used to peg against an existing liability, e.g. mortgage. As the outstanding liability decreases over time, there exists lesser need for the same amount of insurance coverage.

An illustration of a Decreasing Term Insurance Policy
An illustration of a Decreasing Term Insurance Policy

5. Increasing Term

On the other hand, an increasing term insurance policy allows the insured to increase his coverage on a regular basis without medical underwriting. However, the insured will have to pay a revised premium for the new sum assured. For this purpose, the premium is based on the insured’s renewal age, which is likely to be more expensive.

An illustration of a Increasing Term Insurance Policy
An illustration of a Increasing Term Insurance Policy

6. Term with Return of Premium

Finally, there are some term insurance policies in the market that returns a portion of the insured amount or premium outlay after a stipulated period of time, or at the end of the coverage period. Such policies may be suitable for consumers who are concerned about their total loss if nothing happens at the end of the coverage period.

An illustration of a Term Insurance Policy with Return of Premium
An illustration of a Term Insurance Policy with Return of Premium

Conclusion

To sum up, there are different types of term insurance policies available in the market. Moreover, there are also term insurance policies that combine a few of such features into a single policy, e.g. a level term that is convertible. This is for the purpose of catering to different consumers’ needs. While each of these have their own merits, consumers should spend considerable time to understand their own needs and whether a term insurance policy fulfils their needs properly.

Share Your Thoughts 💭

1️⃣ Are all term insurance policies as useful as it is packaged to be?

2️⃣ Which type of term insurance policy do you have?

3️⃣ Buy term and invest the rest. Do you think it works the way you want it to be?


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