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Friday, January 27, 2006

Basic of Life Insurance (2) - Types of Traditional Life Insurance Plans

In the first part of this series about traditional life insurance, I hope that many of you would have understand roughly the 'mechanics' of traditional life insurance. How they work and where your money goes to when u buy life insurance.

Life insurance plans are to cover four key events which are Prematured death(excluding suicide in the first year), Total and permanent disablement (TPD), critical illness and medical expenses, Living too long. All these events are the risk each and everyone of us has to live with. Life insurance helps to transfer these risks to the insurers to give us a peace of mind that our liabilities and family are taken care of in any of these events.

There are other specific reasons for buying life insurance products. One reason is to pay your own final expenses (funeral, final illness, estate duty). Other reasons are to leave behind a legacy, saving for retirement and children education, donating proceeds to favourite charity and provide oneself with a guaranteed income for whole life after retirement.

Therefore, we must also understand the various types of traditional life insurance plans available in the market. Basically, there are four main types of life insurance, namely:

1) Term life
2) Whole Life
3) Endowment Assurance
4) Annuity

Term life insurance protects against Death and TPD for a selected period of time only. For instant, 10, 15, 20 years. The money paid for term life insurance goes only to the cost, like I explained in part 1. It doesn't have any cash value and it is called non-participating plan.

Some insurers include Critical Ilness into term life insurance. However, few provide critical illness as a standalone plan.

Normal whole life insurance protects against death and TPD for the whole of one's life. Normally, one has to pay premium until the age next birthday of 85 which is the last year of paying premium. But there are limited pay whole life insurance plans which require premium payment of a period of time only, eg. 12, 15, 20, 25 years for whole life coverage. However, these plans has higher premium compare to normal whole life insurance.

Unlike term life insurance, whole life insurance is participating plan. It has cash value building up because the premium paid goes to the 2 components of life insurance where part of your money goes to the mortality charges(costs) and another portion goes into the returns. The money that goes into the returns entitled you "reversionary bonuses" when it is declared every year. These bonuses add up every year and it increases the death benefit of a whole life policy.

Normal endowment assurance covers for death and TPD for a selected period (similar to term life). However, endowment assurance differs from term life and is mainly meant for savings purposes. Likewise whole life insurance, the money that you put in with this kind of plans goes into the 2 components of life insurance. Large portion of the money goes into the returns which builds up cash value and, on maturity, will give one a lump sum of money. Endowment plans offer much lower protection compare to whole life insurance. Therefore, only small portions goes into the costs.

Lastly, annuity protects one against the risk of living too long where one might used up all his or her life savings. Annuity requires one to put in a lump sum of money into the plan where he or she will get a certain amount guaranteed monthly income until death. Annuity plans continues to pay even though the total amount paid out after a period of time exceeds the amount invested.

Well, differentiating the types of life insurance gives us a good idea what is being offered in the marketplace by the insurers. It is often quite confusing to identify the types of life insurance where different insurers named their products differently. In addition, many life insurance nowadays are packaged different with many combinations of features and protections. I hope that this short article can help you to differentiate them.

Cheers.

Wednesday, January 18, 2006

Something unrelated...

On the 11th of this month, Mr. Miyagi's article title "Financial tips you can trust?" listed our ( KimWei and me) blog as one of the local (Singapore) blog which give financial tips. We are very grateful for that listing although nothing in particular was mentioned about our blog in his entry.

On the other hand, we would like to apologize to people who do read the earlier entries of our blog because of a long hiatus we went into. In a week or so, we would resume our normal write up of at least a article per week for you guys.

Thanks for your support. Only your support can inspire us to write more. Please be back for more. Cheers.
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