Buying a life insurance policy

For young working adults, the thought of purchasing a life insurance policy is one of the first things we will be approached in our working life. To help out, here are some things to note on life insurance.

What is life insurance?

Life insurance provides you a payout upon death or total permanent disability (TPD). The policy can vary from a limited period of time (20 year limited plan) to the entire insured's lifetime. There are 4 common policies which falls under the category of life insurance - Term, Whole life, Endowment & Investment Link Policy.

When should we buy?

This is the most common question young working adults will ask. To me, the idea of life insurance is simple: It is to provide for a dependent in times of unfortunate circumstances.

What is a Dependent?

A dependent is someone who rely on you. In financial/insurance context, it refers to an individual who is dependent on your income. Some examples are: a young child who rely on his parents since he can't work, a housewife who is dependent on her spouse income, aged parents who are really reliant on their child's monthly allowance because they do not have other sources of avenues (i.e. CPF Life payouts)

When should we buy?

This is when we should buy a life insurance - ONLY when we have dependents relying on our income. This is because should we be unable to work, it is an economic loss to them. This is basically what life insurance is meant for - to make up for this economic loss.

In addition, I will  not recommend individuals to buy a life insurance policy on their child. This is because should anything happen to a child, there is no economic loss experienced on the household. Remember a life insurance policy is to help dependents tide over an economic loss. Insuring a child's life is worthless unless your child is the one bringing in the dough and is one of the main contributor to the family finances.

Length of Insurance Coverage

Following from what I have written thus far, one can deduce a life insurance policy may not be necessary for your entire lifetime. For many of us, a life insurance insuring to the age of 65 should suffice.

This is because at the age of 65: 1) Your child is likely to have entered the workforce for a few years, found his footing and will not be relying on your for his livelihood, 2) unlikely to have aged parents who are still reliant on your income and 3) in modern day context, your spouse will likely be having CPF life payouts for their expenses.