Whole life insurance plans receive a whole lot of flak. Here’s a look at the value proposition they offer and why there is still reason to choose whole life insurance plans.
Whole life insurance plans can be pricey. While they provide coverage for life, they do come at a cost significantly higher than term life insurance plans.
For this reason, there are many people who think term life insurance should be the plan of choice for life coverage. This is because the savings you enjoy by choosing term over whole life, can be better channelled towards investments that would ultimately reap higher returns in the future.
If that sounds like you, read this article on the pros and cons of buying term insurance and investing the rest — affectionately known as BTIR.
In this article, we’ll look at the reasons why people choose whole life insurance plans and if they are what you need in your life stage right now.
- What’s whole life insurance all about?
- The good of whole life insurance
- The not-so-good of whole life insurance
- Is whole life insurance for you?
- Can you combine whole life and term insurance?
What is a whole life insurance plan?
Whole life insurance, quite intuitively, provides the life assured with insurance coverage for life. This could be up till 99 years old, or until death, giving your dependents lifelong protection.
Most whole life insurance plans also cover total and permanent disability (TPD), with some offering critical illness coverage to boot.
There are generally two different types of whole life insurance plans:
- Participating whole life: A participating whole life plan consists of guaranteed and non-guaranteed cash value upon death. This non-guaranteed cash value would depend on the performance of the participating fund.
- Non-participating whole life: A non-participating whole life plan does not pay out any bonuses, purely providing the sum assured that is guaranteed upon death.
You can buy a whole life insurance plan for yourself, or even for your children to provide them with lifelong coverage.
With a whole life insurance plan, your premiums are levelled — you pay the same premiums throughout the entire policy term. Whole life plans also offer a limited premium payment term option, also known as limited pay, where you pay for a predetermined number of years for whole life coverage.
Reasons why whole life insurance might suit you
|Pros of whole life insurance plans||Cons of whole life insurance plans|
|Peace of mind knowing you’re covered for life||More expensive than term life insurance plans|
|Accumulates cash value||Incur opportunity cost by not investing the savings|
|Limited premium payment terms available||Lower coverage provided compared to term life plans (for the same amount of premium)|
|Multipliers to enhance your coverage when it matters most|
|Riders available to provide well-rounded coverage|
#1 Peace of mind
One of the biggest draws of whole life insurance is the peace of mind you enjoy knowing that you are covered for your lifetime.
Term life insurance plans on the other hand, covers you for a specific term. Your coverage ends when you stop paying your premiums, or when the stipulated policy term is up. For example, you could be covered only until the age of 65 if you purchased a 30-year term plan at age 35.
Also, if you’re (touch wood) afflicted with a medical condition by then, the odds are against you in terms of a plan renewal.
#2 Cash value at the end
With a term life plan, the money you pay for coverage will not go back into your pocket. Conversely, a whole life insurance plan accumulates a cash value. In the event that you choose to surrender the plan in the future, there is money you can get back. However, this could be less than the premiums you paid leading up to the cancellation, especially during the early years of the plan.
This cash value can comprise both guaranteed and non-guaranteed returns, depending on whether the whole life plan is a participating or non-participating one. The non-guaranteed returns would depend on the performance of the insurance company’s participating funds. The cash value of the plan would also depend on how long you’ve been holding onto the plan, due to the effect of compounding interest.
This cash value can be more than just extra cash you have on hand upon surrendering the policy. It can help to supplement your retirement funds or even help you to leave a legacy for your next generation.
#3 Limited pay option
Whole life insurance plans can come with a limited premium payment option. You pay for a limited period of time and enjoy coverage for life.
Limited premium payment terms allow you to pay more during your higher income-earning years. It also means that you finish paying your premiums earlier and can focus on other goals such as early retirement. However, this also means that the premiums you pay are higher each month, as you condense your premium payments into a shorter time frame.
For example, the AIA Guaranteed Protect Plus (II) policy is a limited payment whole life plan that allows you to choose from three different premium payment options: 12 and 20 years, or till age 65 or 75. If you were to choose the 12-year option, you pay the premiums for the first 12 years of the plan and upon full payment of all 12 years, you enjoy coverage for life.
Find out more about the pros and cons of a limited premium payment term here.
#4 Multipliers to boost your coverage
One weakness of whole life plans is the low death coverage compared to term life plans. To counter this, multipliers can be built into your whole life plan to help increase your sum assured for a period of time. This could be during periods such as your prime working years, when your dependents are reliant on your income.
For example, you can opt to boost your coverage with a multiplier benefit of four times, whereby your loved ones will receive four times of the initial sum assured upon your death.
#5 Riders for holistic coverage
Whole life insurance plans can go beyond providing coverage for death and TPD. They can also offer additional benefits such as critical illness and early critical illness coverage. This comes in the form of riders that you can add to your whole life plan.
There are also premium waiver riders that allow your future premiums to be waived upon diagnosis of a critical illness to ease your financial burden.
When purchasing your whole life insurance plan, do check the riders offered by the insurer and add on riders that best suit your needs.
Cons of whole life insurance
#1 More expensive than term plans
Whole life insurance plans have higher premiums compared to term life insurance plans, when you consider the cost per sum assured.
There are obvious reasons why this is so. Firstly, the plan covers you for your whole life, or till you’re 99 years old, depending on the terms of the plan — that is a very long time. Secondly, when you purchase a whole life insurance plan, the premiums that you pay also goes towards accumulating the cash value you receive in the event that you choose to surrender the policy.
However, whether this higher premium is justified depends on your personal preference and life goals.
#2 Heavy opportunity cost
The additional dollar you pay for opting for whole life plans incurs heavy opportunity cost.
This money could have been better off invested in assets such as the stocks of leading companies, in Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs), robo-advisors or even your CPF. These investment options can reap higher returns in the long run and help to grow your portfolio which can be used for other life goals, such as a comfortable retirement.
This investment opportunity cost is the biggest reason that supports BTIR, especially because investment platforms have become so accessible for the common man on the street.
#3 Lower coverage
Term life is known to provide high coverage, at low cost.
Unlike term life plans, whole life plans provide lower coverage. You will need to pay additional premiums in order to achieve the same level of coverage a term life plan can offer.
For example, using CompareFirst, a 30-year old male non-smoker with a sum assured of $200,000 can get a term life plan that costs less than S$250 annually for 34 years, to provide coverage up till 65 years old. A whole life plan on the other hand, would already have annual premiums of more than S$2,000.
Is whole life insurance for you?
No two people are the same. When choosing between whole life and term life insurance, you will have to weigh what’s important to you and how you plan to spend your money.
Can you afford to pay the higher premiums a whole life insurance plan costs? Will you have the discipline to invest the difference in savings you enjoy by purchasing a term plan?
While term life insurance is the cheaper alternative, it only protects you for a specified period. Once the term is over, you can purchase another term plan. However, do keep in mind that premiums get hefty as you age. As such, a whole life insurance plan could provide the coverage you need for the later stages of your life.
Whole life + term life: For maximum coverage
You can combine the best of both worlds.
You can get a whole life plan for lifetime coverage, surrender cash value and basic coverage for components like critical illness. You can then supplement your whole life plan by getting a term life plan that helps to increase your death coverage, particularly during the years when you have dependents that are reliant on your income.
It’s best to read up on both types of life insurance plans before coming to a decision. Remember, these are not mutually exclusive options.
Read these next:
Buy Term, Invest the Rest (BTIR): The Complete Pros And Cons Breakdown
Buying Insurance: Pros & Cons Of Limited Premium Payment Term
ILP Versus Whole Life Insurance: What’s the Difference?
5 Best Term Insurance Plans in Singapore (2021)
5 Types Of Insurance You Can Get For Free In Singapore
By Ching Sue Mae
A flat white, an adventure-filled travel and a good workout is her fuel. This Manchester United fan enjoys sharing knowledge on personal finance while chasing the dream of financial independence.