Seth’s Blog on Finance

“Dangers” of a Term Policy

I read another adviser’s article talking about the “dangers” of term insurance, specifically the non-payment of premiums, accidental or otherwise.

The writer tries to drive home the point by including anecdotes of term policy owners forgetting to pay premiums, and even a case of an “improper” GIRO arrangement leading to the term policy lapsing and dramatically just when the person needed it the most.

The solution the writer suggests is predictably a life insurance policy that comes with a cash value. This is such that the cash value can sustain the policy’s coverage if premiums are not paid.

The fragility of such an argument can be seen quite easily. The most important form of insurance a typical Singaporean should have is arguably an integrated Medishield policy, which rider and premium amount above the specified Medisave withdrawal limit are payable by cash. Non-payment of the premium will also cause the policy to lapse. Does that mean we should have an integrated Medishield policy attached to cash values?

There are also 101 other bills that need to be paid. It will be illegal to drive a car if the motor insurance is not renewed and a house may be repossessed if the mortgage is not paid. It is ludicrous to suggest attaching a cash value component to every essential bill to pay just to prevent an accidental oversight of non-payment.

All one needs is a GIRO arrangement with a bank account that one actively uses and has an adequate level of savings in it. Moreover, there is a 30-day grace period for outstanding premiums to be paid, so there is ample time for someone who misses a payment to make up for it.

Another argument put forth is that a person will likely not pay for his term policy if he loses his job. Would one be more inclined to stop paying for an affordable term policy, or an expensive whole life policy several multiples the premium of a term policy? What if it is a prolonged state of joblessness? How much interest has to be repaid on having the cash value sustain the policy? What if the cash value runs out? What if this happens 6 months after buying a whole life policy when there is no cash value yet?

You see, all these caveats have to be taken into consideration in a proper financial plan, as with any other policy – be it a term policy, a whole life plan, a hospitalisation policy or disability income insurance.

I have also read some other people in the industry describing term policies as “throwing money into the sea” and even an outright scam! With financial literacy of practitioners like that, one should instead focus on the real dangers of engaging a financial adviser who is unwilling, likely even unable, to develop a proper financial plan to take care of your financial needs and goals. Such an adviser can try to recommend an ILP to you, and then sell you a term because it is better than making no sale at all. Good luck with that, because dealing with sharks is indeed a real danger.