Whole vs Term Life Insurance
For anyone who has loved ones who depend on them financially, life insurance is a must. Life insurance ensures that your loved ones continue to be provided for should something happen to you.
But life insurance protection can take several forms, and the type of plan that is most suitable for you will depend on a number of factors.
The two main types of life insurance are term life and whole life insurance. Let’s find out more about these two types of life insurance to get an idea of which would be more appropriate for your needs.
How are they similar?
Both term life insurance and whole life insurance offer protection that helps to provide for your loved ones should you pass away or no longer be able to work.
For basic life insurance plans, you or your family will receive a payout if you pass away or are totally and permanently disabled. This payout can be used in any way, and is meant to offer financial support to replace the loss of your income. Depending on which life insurance plan you get, you may end up getting protection for other scenarios, including (but not limited to) if you are struck by terminal illness, critical illnesses and so on.
Both term life insurance and whole life insurance can be customised in some ways to suit your needs and budget.
You can adjust your whole life or term life insurance premiums to a level you’re comfortable according to your budget.
The level of protection you receive and sum assured are also often customisable, and you might have the option to add riders if you wish to receive more comprehensive protection.
Both term life and whole life insurance typically have a premium term during which you will make fixed payments. Some whole life insurance periods charge just one single premium at the beginning, which is suitable for those who do not wish to commit to a longer premium term.
Paying premiums over a premium term requires a certain level of commitment, so you should choose a premium payment structure that you are comfortably able to afford over the entire premium term.
Where are they different?
As its name suggests, whole life insurance is designed to offer protection for the rest of your life or until the age of 100, depending on the plan.
Term life insurance, on the other hand, protects you over a fixed period of time. You are given the flexibility to decide how long you wish to receive protection for, meaning you have to gauge at which point in your life you won’t need this life insurance coverage anymore.
For instance, if you’ve got young children and want to ensure your children their educations will be covered even if you should pass on, you might wish to receive protection only to cover until your kids are old enough to have finished university. Say you’re 30 and you estimate they’ll have completed their educations by the time you turn 55 years old. You can then purchase a term plan to cover you only to that age.
For whole life insurance, premiums are usually fixed and do not change throughout the premium payment period. You’ll pay the same amount each time it’s due, throughout the policy term.
Depending on the individual plan, you may also have a limited pay option, in which you regularly pay a fixed premium amount, but only for a fixed period of time, say until age 69, while protection continues for the rest of your life or until the age of 100, depending on the plan.
For term life insurance this depends on the specific policy. Some come with a level premium structure as well, which means your premiums will not increase. However, if your term cover is a renewable policy, each time you renew the policy, your premium may increase based on your age at the time of renewal.
For instance, if you have to renew your policy every 5 years, your premium will remain the same during those 5 years. However, after renewing, if might be higher from your 6th year onwards, as you would then be 5 years older than you were at the beginning. And then if you renew again in the 11th year, the premium might increase once again.
One way to compare plans is to look at the cost for each dollar of sum assured. This is essentially taking the total premiums you’ll pay divided by the sum assured amount – the total amount of protection you’re buying.
Term life insurance tends to cost less for each dollar of sum assured. If you’re looking for life coverage in the short-term and have constraints on your budget, this could make a term policy more attractive.
Whole life insurance policies tend to cost more per dollar of sum assured. This means that premiums will generally be higher, but that’s because whole life can serve other purposes besides offering protection on your life, such as enabling you to build up cash value (see next paragraphs for more on this).
While term life plans are primarily to offer protection when you think you’ll need it, whole life insurance plans can serve multiple purposes.
Other than just offering life insurance protection, they can also enable you to build up cash value. This is valuable as, once you’re older and you don’t think your dependents require protection against your death or disability, you can choose to surrender the plan and receive this cash value. This could serve as a great supplement to your retirement fund, or be passed on to your children should you wish to leave them a legacy (which would also occur on your death).
Lastly, whole life insurance policies with cash value come with the option to convert to a paid-up policy. A paid-up policy is paid in full, which means that you no longer have to pay any more premiums. This is typically only doable when you have accumulated a certain cash value, and is a way to keep the policy in force without having to continue paying premiums. Doing so will lower the death benefit but can be preferable to surrendering the plan.
With term life insurance policies, there is typically no option to convert to a paid-up policy.
Buying a life insurance policy is an important purchase and requires careful consideration of what is best suited to your budget, your goals and your family’s needs. Regardless of which plan you choose, life insurance is key to protecting your loved ones against life's uncertainties.