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. Which is best for you?
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, you can simply renew or buy a new plan.
Term life insurance offer 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 a lot cheaper than whole life. 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. (We usually recommend 10X your annual income as a rule of thumb.)
Pros of term life insurance:
- Affordable premiums
- Flexible & renewable
- Straightforward to understand
- Can add-on riders to cover critical illness, personal accident, 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. Typically, 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 a lot more expensive than term life. Your premiums go into your insurance coverage and into investments to build up cash value.
Pros of whole life insurance:
- Option to cash out
- Pay premiums during your working years only
- Covers you for life
- Can add-on riders to cover critical illness, personal accident, etc.
Cons of whole life insurance:
- Premiums are much higher than term life insurance
- Complex product to understand
- 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 (BITR)
“Buy Term, Invest the Rest” (or BITR) is a simple financial planning rule of thumb. According to this method, you should buy term life insurance to form the base of your portfolio, before investing the remainder.
BITR adherents believe that whole life insurance is not necessary, because life insurance is primarily meant for your dependants. Once your beneficiaries are financially independent, they won’t require you to pay for protection.
After buying term life insurance, the next step is to invest the rest (after setting aside a good emergency fund, that is). It is incredibly easy to invest money these days as there is no shortage of robo-advisors and online brokerages with low fees and easy-to-use interfaces.
Investing the rest is the really important part of BITR, 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 efficiently — all the while protecting your dependents with a good term insurance plan in place.
Check out term life insurance plans and get a quote on PolicyPal.
Option 2: Buy whole life insurance
If you do not have the time, inclination or confidence to invest your money yourself, whole life insurance is the way to go.
Whole life insurance may not be as optimal as BITR, but it’s likely better than buying term insurance and keeping the rest in your savings account (or not saving at all!).
With a whole life insurance plan, your insurance and investments needs are both addressed. Although the investment aspect is not a core function, whole life insurance plans do give you the option to cash out while you’re still alive.
Now, imagine if you had opted for a term life insurance plan. After outliving your policy term, your life insurance policy lapses, and you do not derive any further benefit from it.
Therefore, if you have a term life insurance plan, you must make sure to grow your own nest egg and emergency fund.
Also, should you wish to get another term life insurance policy after your old one expires, note that you might either be quoted high premiums or simply be deemed not insurable for term life.
Compare whole life insurance policies and get a quote on PolicyPal.
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. These include Great Eastern GREAT Term Insurance and Tokio Marine TM Term Assure.
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 medical assessment. However, there is usually a cut-off age for doing this, e.g. age 60.
Not every term life insurance plan comes with this option, however. Get in touch with us if you want more options!
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 best 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 Be honest with yourself about whether you can afford the premiums over the decades. 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 might make more sense.
Do you need to support your children when they’re grown?
Term life insurance plans are more suitable if you are confident that your children will be financially independent by the end of the 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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Get professional advice before you commit
At PolicyPal, it is our top priority to make sure you understand your options and select the best one for your budget and needs. Should you need advice, feel free to leave your contact details and we’ll get back to you to arrange a free video consultation.