Why would my baby need life insurance? Which is the best life insurance? Shouldn’t I buy term insurance for my baby since it is the cheapest?
This article will address these questions.
Why would my child need life insurance?
The general purpose of insurance is to reduce the potential financial lost if the insured event occurs.
An integrated shield plan is sufficient to reimburse the financial lost due to hefty hospital medical bills.
However, should the illness requires long-term care, you may have to give up your day job to look after your child.
Many years ago, I have a friend whose son was diagnosed with leukemia at the age of 5. One of the parent stopped work for a few years to look after the child. In addition, as they have two children, they have to rent another property so that both children would be separated for the purpose of cleanliness and hygiene. My friend and spouse incurred the high cost of rental and the lost of earnings amounting to nearly half a million of dollars!
That is why insuring your child is so important.
Still, there could be other reasons why you need extra money.
Consider another case of a 13-year-old boy who was left a completely paralysed after being knocked down by a car in 2011. It was only four years later in 2015 that the high court awarded $1.64m payout to the boy. During these 4 years, his mother quit her job to look after her bedridden son who suffered irreparable brain damage. See $1.64m payout for boy left paralysed by road accident (Straits Times, 24 Oct 2015) . The lawsuit was quite lengthy as both sides appealed. A life insurance with critical illness coverage for the child would likely have made a payout because paralysis is one of the critical illness definitions. Such extra money would have come in handy as there was loss of mother’s earnings and payment for legal fees during these 4 years.
As it can be seen that an insurance that covers critical illness for your child is absolutely important.
Which is the best life insurance for my child?
There are two types of life insurance for your child. One is a whole life and another term Let's examine the whole life insurance first.
Comparing whole life plans in Singapore is a difficult exercise. This is because the comparison has to take into account of:
- The number of years the premium is payable.
- The amount of the Minimum Death Benefit (MDB).
- How long the MDB will last to which age.
- The sum assured and
- Whether the life insurance covers early and intermediate critical illnesses.
In order to compare, I have identified three whole life insurance products from three different insurers that are suitable for new born baby. In order to have a meaningful comparison, I have made all their MDBs to be equal to $350,000. Moreover, I have made all to be 25 years premium period. Below is the comparison table for a new born baby body:
| Product name | Product A | Product B | Product C |
|---|---|---|---|
| Sum assured | 175,000 | 175,000 | 175,000 |
| Minimum coverage before 70 | 350,000 | 350,000 | 350,000 |
| Coverage for death | Life | Life | Life |
| Coverage for Total & Permanent Disability | Until 70 | Until 70 | Until 70 |
| Coverage for Critical Illness | Life | Life | Life |
| Remarks for Critical Ilness | Capped at $250,000 for each Early CI $350,000 for Advance Stage CI | Capped at $250,000 for each Early CI $350,000 for Advance Stage CI | No cap |
| Annual premuim | $2,525.25 for 25 years | 2909.33 for 25 years | $2,023.50 for 25 years |
| Break even year (age) | Before 55 years old | Before 55 years old | Before 50 years old |
Product C is the best among the three because:
- It is the cheapest.
- The most important factor is the payout limit for its early critical illness at $350,000 respectively. For the other two products, the limit is lower.
Shouldn’t I buy term insurance for my baby since it is the cheapest?
In order to compare to a term, I use term insurance called Product D. Product D provides coverage until 70 years old. To cover $350,000 for death, total & permanent disability and early critical illness. The cost is $880.25 annually.
The total premium over these 70 years is 880.25 x 70 = $61,617.5. On the other hand, Product C total premium is $2,023.50 x 25 years = $50,587.5. This form of comparison ignores time value for money. Nevertheless you can have a good idea that the term insurance is not extraordinary cheap. Moreover, Product C has a surrender value equivalent to more than the premium paid at the age of 50 years old or earlier. That is why a term insurance is not competitive.
| Product C | Product D | |
|---|---|---|
| Type | Whole Life | Term |
| Coverage until 70 years old | $350,000 | $350,000 |
| Coverage beyond 70 years old | $175,000 plus declared bonuses | $0 |
| Annual premium | $2,023.50 for 25 years | $880.25 for 70 years |
| Total premium | $50,588 | $61,618 |
| Age which you get back all your premium if surrender | Before 50 years old (based on guaranteed value) | Never |
| Remarks | Early, Intermediate and Advance critical illness | Early, Intermediate and Advance critical illness |
Conclusions
- Whole life insurance for child is important so that you, as parents, will not suffer large financial lost if your child is critically ill; and
- Whole life is a better option because term is expensive on the long-run and whole life refunds that entire premium when your child is still relatively young.
Contact me if you are interested to find out more.
Disclaimer
All products mentioned in this article will be withdrawn before June 2021
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