For people with dependents, some form of life insurance is essential. In the event of death or total and/or permanent disability (TPD), the insurer will make a lump sum payout to your beneficiaries. This is especially important if you are one of the main sources of income for your household, be it for your parents or children.
But, having decided that you need life insurance, now there’s the question of whether you should get term life insurance or whole life insurance. What’s the difference?
What is term life insurance?
As its name suggests, term life insurance insures you for a period of time (e.g. 5, 10, 20 years) or to a certain age (e.g. age 65, 75, 99). Once your policy term ends, and depending on the type of term life plan, you can simply renew or buy a new plan.
Term life insurance offers protection only. If nothing happens to you during the term, your policy simply lapses. You don’t get money back or anything, nor are you able to cash out your policy.
However, term life insurance is cheaper than whole life insurance. Every dollar you paid goes into your insurance coverage, and you can adjust your coverage to an adequate level to provide for your beneficiaries without breaking the bank.
Pros of term life insurance:
- More affordable premiums
- Straightforward to understand
- Can add-on riders to cover critical illness, personal accidents, etc.
Cons of term life insurance:
- No cash value
- Need to pay premiums throughout entire term
- May be expensive to buy another term life insurance plan when you’re older
What is whole life insurance?
Whole life insurance, on the other hand, insures you for life. For some whole life plans, you pay premiums for your whole life insurance for a limited term (say for 20 years) and then enjoy the coverage for as long as you live.
Unlike term life insurance, whole life insurance policies have surrender value or cash value. You have the option to surrender your life insurance policy and cash it out at a later stage in life.
However, because of its dual function, whole life insurance tends to be more expensive than term life. Your premiums go into your insurance coverage and build up cash value.
Pros of whole life insurance:
- Option to cash out
- Covers you for life
- Can add-on riders to cover critical illness, personal accident, etc.
Cons of whole life insurance:
- Premiums are higher than term life insurance
- Long-term commitment
It’s a tough one, isn’t it? So if you need help, let us walk you through the options:
Option 1: Buy term, invest the rest (BTIR)
“Buy Term, Invest the Rest” (or BTIR) is a financial planning method some people may follow… With this method, you buy term life insurance to cover your financial liabilities, before using the rest of your available funds for investment returns.
BTIR adherents believe that whole life insurance is not necessary because returns for whole life insurance may be lower than pure investments plans and the insurance coverage may not be needed later on but continues due to the underlying cash value.
After buying term insurance, the next step is to invest the rest (after setting aside a good emergency fund, of course). It is incredibly easy to invest money these days, with different platforms such as robo-advisors and online brokerages with low fees and easy-to-use interfaces.
Investing the rest is the important part of BTIR, because if you simply leave your cash in a savings account, it will lose value over time due to inflation.
On the other hand, by investing your cash consistently, safely and passively, you can grow your wealth more efficiently — all the while protecting your dependents with a good term insurance plan in place.
Option 2: Buy whole life insurance
If you do not have the time, inclination or confidence to invest your money yourself, whole life insurance may be a good option.
With a whole life insurance plan, your insurance and investments needs are both addressed. Although investment is not a core aspect of whole life insurance, it still gives you the option to cash out while you’re still alive.
Also, after paying for your whole life insurance for a limited term, you can enjoy the coverage for as long as you live.
Option 3: Term life insurance with the option to convert
Here’s an option for those who can’t make up their minds just yet.
There are several term life insurance plans that offer the option to convert your plan into a whole life insurance plan at some point. This is a good solution if you are still young and learning about finances and don’t want to commit just yet. It allows you to pay affordable term life insurance premiums when you are not earning that much.
As you get older and your income increases, you may opt to convert the plan into a whole life insurance plan without having to undergo a medical assessment. However, there is usually a cut-off age for doing this, e.g. age 60.
Summary: Term life or whole life insurance?
Life insurance is not a one-size-fits-all kind of product. You need to buy the correct plan that suits your situation. Here are some questions to ask yourself before you make the decision:
Can you afford & commit to the premiums?
Whole life insurance tends to include hefty premiums. Consider if you need more insurance coverage at the start or if you can afford the higher premiums for a whole life insurance plan. If you do not think you can afford it at this point, you can opt for a short term life insurance plan (e.g. 5 years) to meet your short-term protection needs before committing.
Are you willing to invest your money yourself?
The cheaper term life insurance option makes financial sense only if you plan to grow your wealth on your own (through other products e.g. endowment plans, retirement annuities or investments). Once the term ends, you do not get further financial benefit and you will need to depend on your savings/investments. If you are not willing to do that, then a whole life insurance plan might make more sense.
How long would you need to have death coverage?
Term life insurance plans are more suitable if you are confident that your children will be financially independent by the end of the plan’s term. If your child has a health condition that might stop him/her being financially independent, then either opt for a whole life insurance plan or a term life insurance plan that covers the maximum age (usually age 99).
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