Term life insurance and whole life insurance can provide protection against unforeseen occurrences, but they work in different ways. Here’s everything you need to know about two of the most common life insurance plans.
As two of the oldest varieties of insurance, whole life insurance and term life insurance share a common core function. Both these plans can offer credible protection to your family and loved ones against unfortunate events. They can also have riders added to them for additional coverage and benefits.
However, term life insurance and life insurance come with different features and characteristics, and will correspondingly impact your financial portfolio in contrasting ways. As such, knowing their unique characteristics is important in helping you determine which one you should choose.
In this article, we’ll be taking a look at term life versus life insurance, how they work, and the pros and cons of each.
Let’s dive in.
Table of contents:
- Term vs whole life insurance
- Term insurance
- Whole life insurance
- Do I need both?
- Which is better for you?
|Term insurance||Life insurance|
|Premiums||More affordable||More expensive|
|Premium increase||Premiums go up with age||Premiums can be locked in|
|Protection scope||Protection only||Protection plus savings|
|Cash value||No cash value to loan against||Can loan against accrued cash value|
|Surrender of policy||May be surrendered with no penalties||Early surrender can result in loss|
|Pay out||Upon death and/or total and permanent disability pays out sum assured||Upon death and/or total and permanent disability pays out sum assured|
|Availability of riders||May have riders added for other benefits||May have riders added for other benefits|
What is term insurance?
Term insurance is insurance in its simplest and purest form. It is a life policy that, while in force, guarantees to pay out the sum assured upon death.
Term insurance is so named because it offers protection for a specific duration. You can commonly choose five-, 10-, or 20-year terms - these types of plans are known as fixed-term policies.
Insurers also offer renewable term plans. With these, you can opt to keep on renewing your plan year after year - or until you hit the maximum age of cover allowed by your insurer.
In Singapore, you can find term insurance plans that are renewable up till age 100, making it possible for term insurance to last virtually as long as whole life plans - provided you continue paying the premiums, that is.
Pros and cons of term insurance
|Term insurance is more affordable to many||Premiums increase with age|
|Flexible, can be surrendered at any time||No cash value, hence get nothing back upon surrender|
|Straightforward and easy to understand||Can be prohibitively expensive at extremely advanced age|
Pros of term insurance policies
In a term insurance policy, you only pay for the cost of insurance. This makes it cheaper and more affordable, when compared to a whole life policy, assuming both offer the same sums assured.
Term insurance is also flexible, as you can choose the term of coverage you want. You will remain covered by your policy for the duration of the term, as long as you keep up with the premium payments.
Stopping your premium payments midway through will cause your term policy to lapse, ending your protection immediately. While you can terminate your term insurance plan early this way, you should consider carefully the implications of doing so.
Lastly, term policies are straightforward and easy to understand. It’s essentially a case of paying for a certain level of protection when you need it, and stopping when you don’t anymore.
Cons of term insurance
Term insurance that is automatically renewable will increase in premium as you get older, reflecting the higher risk your insurer takes on for continuing to offer you protection.
This means that while renewable term insurance plans can be very budget-friendly when young, they will also become significantly more expensive as you enter old age.
You can somewhat avoid this issue by signing up for a fixed-term plan, which locks in your premiums for the duration of the term. Note that your fixed premiums may still be higher than that of a renewable plan, depending on your age.
However, once the term runs out, renewing your plan will result in higher premiums, in line with the rest of your cohort.
There is one more disadvantage of term insurance that bears mentioning. Term plans do not accumulate cash value, as the premiums collected are solely used towards the cost of insurance. Hence, you will only receive the sum assured when triggered, or nothing at all when the plan ends.
Who should get term insurance?
Due to its characteristics, term insurance is more suited for those who wish to have insurance protection but have only a limited budget to work with.
Term insurance can also be useful in boosting your insurance coverage in the face of unexpected developments (such as an unplanned pregnancy).
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What is life insurance?
A life insurance policy (also known as whole-of-life, or whole life plans) is one which covers you until the end of your life (technically, up to the age specified in the terms and conditions, typically age 99), while also helping you to build up wealth along the way.
It can do this because a portion of the premiums you pay is saved up for you in a separate, interest-bearing account. This allows a life policy to accrue a cash value, which increases over time.
When triggered, a life insurance plan pays out the sum assured, plus the cash value that has been accumulated. Do note that the cash value is subject to relevant deductions, if any, as we’ll explain later.
Pros and cons of life insurance
|Premiums are fixed, and payable up till a certain age only||Requires a long and steady commitment|
|Cash value can be accessed via a policy loan||Early surrender may result in financial loss|
|May be eligible for non-guaranteed bonuses, which increase the total value of your policy||Premiums are significantly higher|
Pros of life insurance
Whole life plans are offered with ‘level premiums’, which mean the payment amount is the same each time. As such, you do not have to worry about paying more and more as you age.
In addition, life insurance policies only require premium payments for a fixed duration; once you reach that point, you no longer have to pay any more premiums but will still continue to be protected.
Another advantage of whole life policies is that policies designated as ‘participating’ are eligible for non-guaranteed bonuses. These can aid in raising their overall value.
Whole life policies also offer some financial flexibility. Policyholders have the option to tap on the cash value accumulated in their life insurance plans on an ad hoc basis. However, rather than a straightforward withdrawal, the amount is taken out from your policy as a loan.
You will be charged interest on this loan, and not paying the interest can cause your policy to lapse when the remaining cash value is exceeded. But otherwise, you are free to repay the principal loaned at your own discretion.
Be aware that any amount still owing when the policy payout is triggered will be deducted accordingly, which means that not repaying your policy loan will lead to you and your beneficiaries receiving a correspondingly lower amount.
Cons of life insurance
Now, on the flipside, whole life plans require a long and enduring commitment to unlock their full potential. The cash value is initially very small, and indeed, surrendering your plan in the initial few years will almost certainly result in a financial loss.
Whole life insurance is also significantly more expensive than a term life plan with the same sums assured, as the premiums you pay include both the cost of insurance, and the portion saved up in your policy. As a result, the cost per dollar of sum assured is higher in comparison.
While a life insurance plan accumulates cash value and may also accrue bonuses, these are not guaranteed. The actual amount you will receive may be impacted by economic downturns or other unforeseen factors, leaving you with poorer-than-expected returns.
For this reason, whole life policies are sometimes criticised as a long-term wealth building tactic.
Who should get life insurance?
Whole life plans are made for individuals who seek lifelong insurance coverage and are willing to adopt a slow and steady approach to building their wealth.
Life insurance can also be useful when included in a financial portfolio designed to benefit surviving family members and future descendants.
Due to the need for long-term premium payment, policyholders need to prioritise financial stability so as to ensure the ability to pay premiums on time and avoid forced terminations.
Although, if you have enough funds, you can opt for a single-premium life insurance plan. This variation requires you to pay the sum total of your premiums at one go, but frees you from further premium obligations.
Do I need both whole life and term insurance?
Having both term and whole life insurance will definitely help to increase coverage and help your dependents out financially if the unfortunate happens, but it really depends on your financial circumstances, goals and risk tolerance.
If you have short-term financial responsibilities, term life insurance is ideal to provide the necessary coverage during that period. Moreover, it's also cheaper than whole life insurance. On the other hand, whole life insurance can help to bridge the gap for long-term, especially if you have financial goals like leaving your dependents with inheritance or building up cash value for your retirement.
While it's great to have both insurance policies, some of us may not be able to afford both policies together.
Therefore, it's important to identify your priorities and assess your financial budget to see if having both policies is a viable option.
Hopefully, we’ve helped you to understand that term life and whole life insurance plans have very different characteristics.
Despite their contrasts, both these types of plans can provide crucial protection for you and your family.
Ultimately, which one you choose will depend on your preferences, goals and personal circumstances. It may be beneficial to speak with a certified financial adviser to help you arrive at the right choice.
Protected up to specified limits by SDIC.
Note: This is only product information provided. You may wish to seek advice from a qualified adviser before buying the product. If you choose not to seek advice from a qualified adviser, you should consider whether the product is suitable for you. Buying an insurance product that is not suitable for you may impact your ability to finance your future healthcare needs.
If you decide that the policy is not suitable after purchasing the policy, you may terminate the policy in accordance with the free-look provision, if any, and the insurer may recover from you any expense incurred by the insurer in underwriting the policy.
As buying a life insurance policy is a long-term commitment, an early termination of the policy usually involves high costs and the surrender value, if any, that is payable to you may be zero or less than the total premiums paid. You should seek advice from a financial adviser before deciding to purchase the policy. If you choose not to seek advice, you should consider if the policy is suitable for you.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
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