Term Life vs Whole Life Insurance: Which Should You Get?

This was originally posted on Planner Bee.

Everybody knows you need to get life insurance, because of the financial security it provides in unforeseen circumstances. Except signing up for an insurance policy can be daunting, because it’s a long-term commitment that requires careful thought and research.

If you’ve decided to invest in a life insurance policy, you’ll need to first understand what exactly such a plan entails.

What is life insurance?

We last discussed what defines an insurance policy here. But what about life insurance? A life insurance policy is a contract between yourself and an insurance company, or your insurer.

In exchange for coverage on your life and benefits such as a lump-sum payout in case of your demise, you’ll pay premiums over an agreed period of time. Life insurance plans are often customisable, and in many cases tailored to your financial goals, spending habits and income. Here’s an overview of the key differences between term life and whole life insurance plans.

Read more: 10 Common Life Insurance Myths Debunked

Term life insurance vs whole life insurance: what’s the difference?

Here are some key features of term life insurance and whole life insurance.

Term life insurance

• Cost: You pay a lower premium over an agreed period (e.g. 25 years). Term life insurance is typically the cheaper option between the two, in terms of sum assured per dollar. No option to convert to a paid-up policy.
• Coverage period: Covers you for the length of your payment

• Returns: No cash value (i.e. coverage ends when you stop paying your premium)

Whole life insurance

• Cost: You pay a higher premium over an agreed period (e.g. 25 years). Whole life insurance is typically the pricier option between the two, in terms of sum assured per dollar.
• Coverage period: Typically covers you to the the age of 99 (or until surrender of policy)
• Returns: Has cash value (i.e. you receive a payout at the end)

• Types of insurance policies: Participating (par), Non-participating (non-par), Investment-linked

What is whole life insurance?

A whole life insurance policy offers coverage in the event of death and total permanent disability. This varies by insurer, so it’s important to check the terms before committing.

Premiums are often paid over a fixed period of time — say, 30 years — but post payment, coverage usually continues up to the age of 99, or when you choose to surrender your policy. You or your family are also guaranteed a lump sum payout under one of two circumstances:

• An unfortunate event, such as your death or a permanent disability
• Upon surrender of your policy

Surrendering your policy early is often a last resort, though. Doing so terminates your life coverage — and you’ll also likely end up incurring a loss.

Read more: What Happens When You Prematurely Terminate Your Insurance Policy?

On the other hand, choosing to terminate your policy in your retirement years could also be a means of income replacement, depending on the type of plan you’ve chosen. Which brings us to the next step – the types of whole life insurance policies.

Types of whole life insurance policies

There are three types of whole life insurance plans:

• Participating (par),
• Non-participating (non-par), and
• Investment-linked policies (ILP)

A participatory insurance plan (or par insurance plan) offers non-guaranteed bonuses at the end of your policy, in addition to a sum assured. That’s because your insurer places a part of your premium in investments to generate (non-guaranteed) returns over the course of your policy.

Conversely, a non-participatory insurance plan (or non-par insurance plan) gives you the basic sum assured, but no bonuses. Then there are investment-linked policies (ILP), which either pays you:

• The sum assured _or _value of your ILP units, whichever is higher
• Both the sum assured _and _value of your ILP units

ILPs have gotten a bit of a bad rep in past years, though, given they’re higher-risk.

Pro tip: We compared whole life insurance options here

What is term life insurance?

Unlike whole life insurance policies, term life insurance covers you for as long as you pay your premiums, or for a predetermined period of time — whether 15 years or 25 years, for example.

It’s also typically the more affordable option, though not necessarily a long-term solution. In fact, term life policies may be used to complement an existing whole life insurance plan, and essentially work to fill the gaps. For instance, starting a family may not be part of your considerations when signing up for a life insurance plan at the age of 25. You might, at a later stage, choose to get an additional 20-year term life insurance policy to ensure a continual payout for your child’s education, should unforeseen circumstances occur, such as your demise.

On that note, though, most Singaporeans _do _have a basic term life insurance plan in what’s known as the Dependants’ Protection Scheme (DPS), which sits under CPF. The auto-inclusion scheme commences at the age of 21, so long as you’re employed or self-employed. While you’re given the option to opt out, the DPS is an easy means of getting assured for a maximum sum of $46,000, up to the age of 60.

The downside of term life insurance, as we mentioned briefly in the table above, is that you _don’t _get a payout, regardless of how much you’ve pumped in. That’s precisely why these policies are more affordable.

Pro tip: We compared term life insurance options here

Is a whole life or term life policy better for me?

First, focus on your priorities. How important is getting returns from your insurance policy? Do you plan to eventually start a family or take a home loan, thereby significantly increasing your liabilities?

If you’re interested in learning how to calculate the real returns on your life insurance plan, we’ve come up with a geek’s guide here.

The other common predicament is this: whether you should surrender a whole life insurance policy in favour of a term life policy, on grounds of affordability. The painful truth is, insurers don’t actually want to risk making payouts needlessly. The older you are, the greater the likelihood of you developing a pre-existing condition — and with it, a lower chance of you securing affordable life insurance coverage.

Discussing your worries openly with a trusted friend or financial advisor is crucial.

You might also find Planner Bee’s insurance calculator helpful in figuring out exactly how much insurance you should be paying for.

Read more: How Much Life Insurance Do I Need in Singapore?