Crafting a Back-up Plan

The father is traditionally the breadwinner of the family. Till today, this is often still his most important role despite the rise of the dual income families.

Therefore, a dad’s biggest challenge is to ensure that regardless of what happens to him, the family will be able to carry on with life. This means he has to make sure that his future stream of income is protected so that even if he dies prematurely, becomes disabled, or is diagnosed with a major illness.

In other words, he needs to put together a back-up plan for the family.

As a breadwinner, he will need to protect himself against these contingencies:

a. premature death

b. disability

c. major illnesses/critical illnesses.

Premature death can have devastating effects on the surviving family members. The loss of the breadwinner means the family will be left cash strapped.

In the case of disability, the situation can be even more shattering as the family will not only suffer from the loss of income but will have to struggle to raise funds for medical treatment as well.

Major illnesses like stroke, cancer and heart disease have been known to strike at the most unexpected moments, affecting even people who maintain very healthy lifestyles. And, the occurrence of these diseases cuts across all people groups, regardless of age, culture, profession or income.

In spite of all the advancement in medical science, no one can tell us the exact causes. Doctors can only advise us to eat wisely and keep a healthy lifestyle so as to reduce the chances of getting these illnesses.

Most people fighting major illnesses such as cancer, kidney failure or heart disease will need a period of treatment, as well as recuperation and rehabilitation. And, most insurance companies have policies covering major illnesses that pay a lump sum upon diagnosis of a major illness. The money will provide for medical expenses and the loss of income during such times. These plans should be taken on top of hospitalisation plans which only reimburse for hospital expenses.

Essential Insurance Policies in Order of Priority

In view of these contingencies, here are the recommended life insurance policies in order of priority:

1. A Major Illness (Critical Illness) Policy. Dads need to take up sufficient coverage to provide money for medical treatment as well as to compensate the family for the loss of income during a period of recuperation or rehabilitation.

The recommended amount would be $50,000 for medical expenses (more if he can afford) plus at least three times his annual income.

He should take up a Whole Life Policy if he can afford it. If he is not able to, he can take a Convertible Term Policy first.

A Whole Life Policy provides coverage for a person’s whole life, rather than a specified term (period of time). Policy holders pay a premium that consists of a savings component called the cash value or loan value, which builds up over time and can be used for wealth accumulation. It is the most basic form of cash value life insurance. Upon the demise of the policy holder, a fixed death benefit is paid to the beneficiary along with the balance of the savings component. As it has cash value, the insured will continue to be covered even if he cannot afford to pay the premium for a period of time. This carries on until the policy lapses because the cash value/loan value is depleted. ⁽¹⁾

A Term Policy provides coverage for the indicated term. There is just a death benefit and it is given only if the policy holder passes away within the term. The policy expires at the end of the term. It is also terminated if there is a default in paying the premium. This is a cost-effective option when there is a need for life insurance protection but there is already a high financial burden. For example, there may be insufficient money to purchase a Whole Life Policy (which usually calls for higher premiums) because there are mortgage and home renovation loans to pay off.

A Convertible Term Policy is a Term Policy which can be converted to a Whole Life Policy when one’s finances are no longer so strained. This gives the benefit of being able to spend much less for adequate protection when on a small budget and the option of switching to another policy as soon finances improve. ⁽²⁾

Note however that while a Term Policy appears cheaper in the short term, it is more expensive in the long term. In addition, be aware that most insurance companies have limited payment Whole Life Policies; that is, the policy holder only pays premiums for 15 or 20 years. After that, the policy continues to cover him for the rest of his life.

With a Term Policy, he will have to continue paying premiums throughout life. Like the premiums on car policies, they are “expensed off” every year if nothing happens.

As major illnesses tend to strike when one is older, it is important to ensure coverage is for the whole life. Therefore, if he cannot initially afford a Whole Life Policy, he can take a Convertible Term Policy first and change it to a Whole Life Policy when his income situation improves.

2. A Mortgage Decreasing Policy. If there is an outstanding mortgage on the house, he should take up a mortgage decreasing policy. This will ensure that his wife will not be saddled with debt, and the family can continue to have a roof over their heads in case anything happens to him.

In Singapore, all Housing Development Board (HDB) flats are covered by this type of policy. It is known as the Home Protection Scheme.

3. A Policy to coverage for premature death or permanent disability. He should take up a policy that will protect his future stream of income in the event of premature death or permanent disability. This can be done with a term policy. The recommended amount is 10 times his annual income (more if you can afford).

4. A Major Illness (Critical Illness) Policy for wife and children. He should also take up major illness coverage for his wife and children because in the event of a major illness, he will have to bear the medical expenses. In a way, it makes sense for him to pass the risk to the insurance company. Start with $50,000 coverage and increase it when the financial situation improves.

5. Education Policies. If there are still resources, he can go on to take up education policies for the children.

Building Safety Nets

Life insurance is the back-up plan that all dads will need. It is the only way to ensure that "come what may", the family will be able to carry on with life.

Life insurance planning is not about being able to foretell the future or predict the unpredictable. It is about being prepared to face the future and building safety nets so that one can cushion the self against the shocks of events in life that are beyond control.

When buying life insurance, always ensure the breadwinner takes priority. Many parents purchase policies for their children without first looking into their own insurance needs. But, as they always say on board a plane – "Take care of yourself first and then look after your child."

References:

1. http://www.investorwords.com/5307/whole_life.html retrieved 22 February 2011

2. http://ezinearticles.com/?Term-Life-Insurance-Policy---Definition,-Pros,-Cons-And-Ways-To-Save-Considerably&id=1042245 retrieved 22 February 2011

About the Author: Lilian Ng is married and has two grown-up children She is the author of the book Put Your Money to Work. A business graduate of the then University of Singapore (now National University of Singapore), Lilian’s 30-year career in the financial industry spans banking, stockbroking, insurance and fund management. She has also fulfilled her dream of being a freelance journalist beginning in the mid 1990s.