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

This post was originally posted on Planner Bee.

Almost everyone regards life insurance as a non-negotiable and a must-have, because of the financial security it provides in unforeseen circumstances, including for those who depend on you. But signing up for such policies 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 discuss what defines insurance policy here. But what about life insurance? A life insurance policy is a contract between yourself and an insurance company where, in exchange for coverage on your life and benefits (such as a lump sum payout in the event of your demise), you 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?

What is whole life insurance?

A whole life insurance policy offers coverage in the event of death, total permanent disability and critical illness. A participating 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 returns over the course of your policy.

Premiums are often paid over a fixed period of time – say, 20 years – but post-payment, coverage continues up to the age of 100 and beyond, 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, permanent disability or critical illness
• 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 if you do so in the early years of the policy.

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

On the other hand, choosing to terminate your whole life policy in your retirement years could also be a means of supplementing your retirement income. Typically if you started the plan before the age of 40, you will likely earn a profit on this plan by then.

Pro tip: Sift out the best whole life options through our comparison

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 S$70,000, up to the age of 65.

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 compare term life insurance options here

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

Here are some considerations:

1. Period of coverage

What sort of duration are you looking at for coverage? Are you aiming for something that covers you for life, or do you have a predetermined stretch of time in mind (e.g., while you’re working or your children are going to school)? If it’s the former, a whole life policy would make more sense, while a term life policy would suit the latter.

2. Budget

If you’ve got a lower budget, a term life policy may be a better fit with its generally more affordable premiums. Nonetheless, whole life policies, while pricier, can give you a return on what you’ve paid, if you surrender it later in life.

3. Whether you are investing towards self insuring during retirement

Are you already saving and investing towards covering the expenses, including unexpected ones, of retirement? If so, whole life insurance may not be necessary. Taking up term insurance could allow you to channel money saved from the lower premiums towards your investments. However, if you don’t already have a financial plan in place for retirement, a whole life plan could be a way of securing a payout to support your living expenses then.

4. Total cost over time

Don’t forget that regardless of the premium, you’ll also need to take into account the number of years you’ll have to pay it to calculate the policy’s total cost. Adding this up can help you see whether you’ll be deriving a value that you feel is worth that price tag.

Here’s an example of a 21-year-old female with a need to insure herself for early to advanced stages of critical illness for the amount of S$300,000:

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 the grounds of affordability. The painful truth is, 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 needs calculator helpful in figuring out exactly how much insurance you should be getting.

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