Are Whole Life Plans REALLY Obsolete And Irrelevant?

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In the course of my career, one of the most heavily surfaced questions being posed is this: Should I opt for a Whole Life Plan or a Term Plan? It’s a very funny question because it sometimes feels akin to asking if I should add salt or pepper into my food. The quick answer to that, is to get both, at some point if you could afford it.

It’s a quick answer because there are strong points to prove for both and which to opt for (first) largely depends on your life stage, short- and long-term needs, preferences and budget. A term plan is a cost-effective way of providing high coverage to hedge against liabilities and a whole life plan offers lifetime coverage (usually up till age 100). For all the commendable benefits of a term plan, it's merely one of the many instruments to meet our insurance needs. If our insurance needs can be solved purely by getting a term plan, there really isn’t a need for insurer to be selling these whole life plans. If whole life plans are obsolete and irrelevant, insurers should, with all seriousness, remove it from their shelves.

Hence, this writing here isn’t to give quick, mindless answers to questions that have short and long term implications. Life is multi-faceted and unpredictable and insurance forms a form of progressive risk management as time progresses, not a blanket, one-step solution to everything. There is relevance in different products depending on what your objective and strategy is and this include whole life plans.

The benefits of term plans are highly obvious and it's features are quite straightforward so I’ll just talk more about whole life plans and how can it come into our insurance portfolio. So.. what is a whole life plan?

A whole life plan is a participating plan that often offers a limited premium payment function. That’s quite as mouthful so let’s unpack it slowly to get a better idea of how it works.

A whole life plan typically allows you to pay over a certain period of time in order to be covered for life. For example, I can choose to pay for 20 years only in order to be covered till the age of 100. This is what limited premium payment means. A term plan, however, requires me to pay all the way till the tenure of the plan is up. Using an example with my imaginary friend, Xiao Ming:

Assuming Xiao Ming is 27 years old this year. If he buys a whole life plan and chooses to pay for 20 years, he pays till he’s 47 and he will be covered till age 100. However, if he buys a term plan that covers him till age 100, he will have to pay for 70 years in order to stay covered. It sounds ridiculous but this is meant to prove a point: A Whole Life plan allows you to pay for a certain period of time to be covered for life while for a term plan, you pay for it all the way till the plan ends (or till the payout is given). Here are a few case scenarios:

CASE SCENARIO 1

Assuming Xiao Ming is a 27 year old, non-smoker/drinker with no pre-existing conditions.

If he chooses a term plan with a sum assured of $500,000 for death and total permanent disability (TPD) that lasts till age 65 (since that is the typical age someone’s liability is paid off), it’ll cost him merely $383/year. In total, he would have paid $14,554 in total till age 65. After that, your coverage ends and the plan is terminated.

CASE SCENARIO 2

Xiao Ming buys a 20 year payment whole life plan for the same coverage, he would pay $2,997/year. The difference by year is 800/year. That’s 3 dollars a day. It might then make more sense to opt for a 20 year payment period. In total, John would have paid $59,940 after 20 years. The price differential between that and the term plan is that the payments are compressed in 20 years. Also, the whole life plan does come with a cash value to it.

So herein lies one of the ways a whole life plan is relevant to your insurance portfolio: If you want to pay only for a limited period of time, then whole life plans are an option for you.

There is a legitimate concern for this because you never know whether you can continue financing the plan all the way. We do not know, for example, if Xiao Ming will be struck with a Critical Illness and lose his employment (and hence his ability to finance the term plan) as a result. We are also unsure if Xiao Ming’s insurability, and hence his ability to purchase further insurance, isn’t compromised after a particular age (usually from age 40 onwards) since health complications can potentially set in then.

The next assumption here is that even though Xiao Ming is currently single, we also do not know if Xiao Ming may get married with children and desire to leave behind a love gift for his family in the future when he dies in the distant (or if unfortunately, near) future.

This limited premium function also works well especially for parents who may want to give their children a head start. The whole life plan will be cheaper for the child as well since the insured is younger and this ensures that by the time the child hits adulthood, he/she will be covered for life and there will be a cash value the child can tap into at some point. In addition, the child can focus either more on the wealth accumulation side with his/her resources without having to divert more resources to his/her insurance in the future. This leads to the next benefit of a whole life plan: A whole life plan is a great way to give a head start for your child.

I mentioned earlier that a whole life plan is a participating plan. What this means is that the premiums you pay for a whole life plan are put into this fund called the participating fund. This fund is responsible for generating the cash value for a whole life plan, which a term plan doesn’t. It helps to know that a large chunk of the participating fund comprises safer asset classes eg. Bonds which explains why it’s able to churn out a guaranteed cash value to it and other asset classes, which is responsible for churning out a non-guaranteed cash value along side.

Let’s evaluate the cash value portion. Based on a projection of 3.25% and 4.75% return for the participating fund, your cash value generated would have amounted from $73,000 to $113,000 by the time you hit 65 years old. These are projections but a good gauge often will be the middle ground. Even if it was the lower tier projection, the cash value would have helped off-set the premiums you’ve paid and leave a sum to complement your retirement planning.

This leads us to the next reason why a whole life plan can be used in your insurance portfolio: If you want a guaranteed cash value that can off-set your insurance premiums and/or help to aid your retirement, then a whole life plan will be an option for you.

A large part of retirement planning is to have, key word, diversified ways to generate our retirement fund. Diversified here is referring to both guaranteed and non-guaranteed forms of income generation. The former provides certainty and stability, the latter provides higher upside returns for capital gains. Your retirement needs are guaranteed while your investment returns are not and whole life plans offer a guaranteed cash value that can complement whatever existing investment vehicles you may have. As the old adage goes, we do not put all our eggs in one basket.

The last rationale for understanding the benefits of a whole life plan is through the certainty of death. There are only two things that are certain: death and taxes and as morbid a thought it is, it’s true.

In no way is this a form of fear-mongering but it’s meant to highlight the opportunity of leaving a legacy behind for your dependents. We call this legacy planning. You’ll be hard up to find people who live beyond a 100 years old and even without the death benefit, the accumulation in the guaranteed and non-guaranteed cash value can be cashed out as a love gift too. Some people may argue that they do not want to leave behind anything for their dependents but who’s to say that stance won’t change with time? This leads to the last part of how a whole life plan can be included in your portfolio: With the certainty of death in mind, a whole life plan can be used as one of the tools for legacy planning.

So just to summarize, these are some of pointers. A whole life plan will suit you:

1. If you want to pay only for a limited period of time without being worried of your inability to finance it in the future

2. If you want to give your child a head start and lifetime coverage (in this case, your child is the insured and you/your child can tap into the cash value at some point)

3. If you want a cash value to act as a guaranteed form of retirement planning to complement other guaranteed/non-guaranteed vehicles

4. If you want a guaranteed way of leaving behind a legacy for your dependents

A common strategy often employed is to start with a basic whole life plan while complementing it with term plans as a way to hedge against the risk of a liability. There is no guarantee that one will die before their 60s but we can be pretty certain death can occur in the next few decades after that. The order isn’t fixed; the other way around works as well depending on one’s budget. I will highly advice the latter order if one has a higher initial cash outlay eg. Wedding, housing preparations etc since whole life plans are typically more expensive as payment is compressed within the limited period and it does come with cash value too.

Both term and whole life plans have a place in financial planning and both are equally important depending on what your objective is. It helps to understand insurance not as an isolated act but as a piece of puzzle in the whole journey of financial planning. The beauty behind financial planning is that the progressiveness of it allows for fluidity in strategy and employing different instruments to meet different needs while not just settling for a one-size-fits-all answer.

If insurance is as simple as just purchasing a term plan, is there still a need for financial planners to offer advisory services on the insurance aspect of financial planning?

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You can follow me @gethsemanefinance on Facebook or IG and reach me to find out more about why I do what I do.

Gethsemane is a word-play for Get-Some-Money. However, money should not be accumulated for accumulation sake. I hold onto this philosophy by Francis Bacon: Money is like manure, its only good if you spread it around.