Broadly speaking, there are two types of life insurance available on the market – term life and whole life.
Not only do they differ in duration, there are also many other features that affect how they work.
Here are the differences between term life insurance and whole life insurance that may help you decide which fits your needs.
|Term Life Insurance||Whole Life Insurance|
|Duration of coverage||Available in various terms, or until selected ages||Until end of life, or age 99|
|Cash value||No cash value, pays nothing upon surrender.||Accrues cash value which is payable upon surrender or maturity.|
|Underwriting||Depends on insurer||Depends on insurer|
|Benefits||Pays out benefits upon death, TPD or CI (if included).||Pays out benefits upon death, TPD or CI (if included).|
As you can see in the table above, there are four main differences between both types of plans. They are: duration of coverage, premiums, cash value and renewability.
Duration is one of the most notable differences here. A Term Life plan allows you to choose the duration of your cover. Typically, you can choose from fixed terms (such as 5, 10, 20 years, etc.) or opt for cover up to a specified age (such as age 65, for example). However, you may also come across term life plans that cover you up to age 99.
On the other hand, a Whole Life plan covers you for your entire lifespan (or until age 99, whichever is sooner). There is no way to end the coverage early, except to surrender your plan.
Cash value is the next big difference between the two. A Term Life plan carries no cash value (unless otherwise stated), and the premiums you pay are used to cover you against the insured events. A Whole Life plan carries some cash value which accumulates over time. This cash value is paid out upon maturity or surrender of the policy.
The cash value of your whole life plan didn’t come from nowhere – it comes from the premiums you pay.
In a whole life plan, a portion of your premiums go towards paying for protection, with the rest used to build the cash value of your policy.
Premiums are the third main difference. As mentioned earlier, Terms Life plans do not need to provide a cash value. Hence, their premiums are much lower when compared to a Whole Life plan – even when coverage and benefits are similar.
The fourth difference is renewability. Term Life plans are commonly renewable, without the need to go for further medical checks. However, premiums will increase as you age. Meanwhile, Whole Life plans usually do not carry a renewal clause, given that they are designed to last the entirety of your lifespan.
Term Life Offers Flexibility and Affordability
Term Life plans can offer the same level of protection as Whole Life plans, but at much lower premiums. This means that Term Life plans are more affordable than their Whole Life counterparts.
The lower premiums also mean you can have more savings to meet other needs, or to invest to build up your wealth.
Additionally, a Term Life plan offers you greater flexibility – you can discontinue your Term Life plan once you feel it no longer suits your purposes, allowing you to more easily tailor your financial portfolio as you encounter changes.
(There’s nothing to stop you from purchasing Term Life protection in your golden years, although premiums do tend to go up quite significantly by then.)
Whole Life is More Expensive, But Can Help Meet Savings Goals
A Whole Life plan offers coverage for life, which may or may not suit your purposes (you may only want to be covered until your children come of age, for example).
This type of plans will also require a much higher level of commitment, as the cash value during the initial years are usually lower than the premiums you have paid to that point.
Another consideration is the higher budget required – depending on the coverage you need, a Whole Life plan may be too expensive.
Although, there is one advantage a Whole Life plan has over its term life counterpart: the cash value that accrues over time.
You can opt to surrender your Whole Life policy in exchange for this cash payout, especially when it approximates or outstrips the death benefit. In this way, a Whole Life policy can help to meet your savings or retirement goals.
Singapore Life does not provide Financial Advisory services.
We recommend getting financial advice from a licenced financial adviser to provide you a comprehensive assessment of your protection needs. You may also visit credible websites such as www.moneysense.gov.sg for an understanding of the various type of insurance plan and its’ purposes. To determine the amount of insurance cover you can use financial planning calculators from www.cpf.gov.sg/members/tools/calculators.