Term vs Whole Life Insurance: Which should I get in [2021]?

“Buy Term, Invest the Rest” – if you’ve been researching life insurance policies in Singapore, you might have seen this phrase floating around on various forums and financial blogs related to the million-dollar question, “Should I get a term life or whole life insurance?”

For the uninitiated, this phrase recommends purchasing a term plan instead of a whole life plan and using the additional money that would have been spent on the whole life policy to invest in other investment instruments that can generate higher returns.

While there are merits in the above phrase, everyone’s circumstances and priorities differ, so you shouldn’t just take it at face value. To help you determine which is the right plan for you – term or whole life, we’ve prepared a few questions you can ask yourself.

But before we can even begin discussing these questions, let’s first understand the 2 types of life insurance and how they differ.

Difference between Whole and Term Life Insurance

	Term Life Insurance	Whole Life Insurance
Coverage offered?	Death, Terminal Illness, and Total and Permanent Disability (sometimes offered as a rider)
Accumulates cash value?	No	Yes
Affordability?	Affordable	Much more expensive
Policy term options?	For a fixed period of time, or up to a certain age (i.e. 85)	For the rest of your life, or up to age 100 for certain insurers
Premium term options?	Pay throughout your policy term	1. Pay throughout your policy term 2. Limited Pay – opt to pay off all your premiums within a fixed period of time (e.g. for 25 years) and enjoy coverage for the rest of your life
What happens if you surrender your policy?	Coverage ceases and you do not get back any money paid	Coverage ceases but you can redeem the cash value in your policy, which may or may not be more than what you’ve already paid (also known as surrender value)

Other than the basic protection coverage, the 2 types of life insurance differ by quite a bit. Most notably, is the ability to accumulate cash value and the policy term options, which would play a major part in your decision.

A whole life plan can cost up to 6 – 10 times more than a term plan offering the same coverage. This is mostly because part of your premiums goes towards funding the cash value accumulation and the high cost of insurance in your later years.

So…which is better: Term or Whole Life Insurance?

Here are some questions to help you find out which type of life insurance is most suited for you:

What are your insurance objectives?

Are you looking for pure financial protection for your loved ones if anything were to happen to you? Or do you also want to enjoy the added benefit of growing your money on top of your protection?

If you’re the former, a term plan allows you to fulfil that need at a much lower cost. But if you’re looking for a savings element, then a whole life plan might be more suitable.

On top of just increasing your wealth, the cash value in a whole life policy allows you to enjoy other features such as automatic premium loan, getting some cash back if you surrender your policy, and borrowing from your policy’s cash value.

With an automatic premium loan, if you face a situation where you’re unable to pay for your policy, your insurer will use the cash value to fund your premiums until your cash value runs out. Following this, your policy will terminate.

Unfortunately, with a term plan, there is no cash value for your insurer to draw down from. Therefore, if you don’t pay your policy before the end of the grace period, your policy will terminate. Getting a new insurance policy would entail higher premiums and requires underwriting, which might lead to certain health exclusions.

While your insurance objective is one of the main factors when choosing between term or whole life, it should not be the be-all and end-all. After all, insurance is a big-ticket item that requires a long-term commitment, and making the wrong choice could affect your entire financial plan.

Are you comfortable investing on your own?

If you were to get a term plan, what financial plans do you have in place to help you grow your money? Are you willing to put in the due diligence to read up on investing so that you can generate a higher return on your money than what is offered on a whole life plan?

And on top of that, can you ensure that you can generate better returns through your investments? Or do you have a low-risk appetite and prefer investing in low-risk instruments like government bonds?

If you have a plan to invest your money and earn a return that is higher than what a whole life plan offers, then getting a term plan is definitely the wiser option.

However, if your financial plan is essentially your bank’s savings account, or you’re not very disciplined with your money and tend to go from paycheck to paycheck, then a whole life plan would be a better choice.

It acts as a kind of forced savings plan and would at least allow you to beat inflation, even if you were to take on a passive approach.

Remember, the whole phrase is “buy term, and invest the rest”, not just “buy term”.

Will your dependents be financially independent in your later years?

One of the key differences between term and whole life is that the former only provides coverage for a fixed period of time (with the maximum age usually cutting off at 85), while the latter covers you until the end of life (or up to 99 in some cases).

If your dependents will be able to support themselves financially when you’re older, then a term plan would be a better choice.

With insurance, you should only get the coverage that you require. So, once your dependents are financially independent, you’ve paid off all your debts and secured your retirement needs, your insurance needs decrease significantly.

It should be around this time where your term plan terminates. Of course, this needs adequate forward planning on your part as well.

If you need to provide for them for the rest of your life, then it might be better to consider a whole life policy due to term insurance’s “expiry date”.

If you realise that you still need financial protection after your term plan terminates, getting another term plan will be more expensive and more of a hassle.

You might even face some health exclusions or be denied from purchasing another life policy due to pre-existing health conditions. If you’re still set on not purchasing a whole life plan, then a renewable term plan might be a good alternative.

Do you have a financial plan in place if you were to contract a critical illness (CI) when you’re older?

It’s unavoidable, as we get older, our health tends to deteriorate, and the likelihood of developing a serious illness increases.

If you’re one of the lucky ones who manage to stay healthy in your older years, then kudos to you. But more often than not, life gets to us and we may end up getting diagnosed with a critical illness, which can burn a big hole in your wallet and derail your dream retirement plans.

Your financial planning should cover financial protection for your loved ones, saving enough to afford your dream retirement, and ensuring you have enough to cover you in the event of an unfortunate event like a CI diagnosis.

The ideal scenario would be to get a term plan with a CI rider, and once it expires, have enough emergency funds set up in case your get diagnosed with a CI.

The Life Insurance Association recommends that a Singaporean have $316,000 of CI coverage, and with quality cancer treatment costing up to $100,000 – $200,000 a year, it’s no wonder why they recommend such a huge amount.

Unfortunately saving up this amount is easier said than done. If you have an investment strategy that sees you save up enough to cover this cost in your later years and you are confident that it will work, then get a term plan.

However, if you’re just leveraging on your life insurance plan for your critical illness coverage, then it might be a safer bet to get a whole life plan.

This is because, for term insurance, any add-on riders will expire along with your base policy, requiring you to dip into your hard-earned savings if you contract a CI after your plan’s term ends.

How life insurance comes into play for your children

What’s my legacy plan for my children?

Whenever we talk about saving, investing, and accumulating wealth, we tend to think about our retirement.

However, one thing that some of us might miss out on, which I am guilty of, is providing an inheritance for our children when we pass on, which might seem very far away in the future. But as the saying goes, it’s better to be prepared than not.

This is something a whole life plan might be able to help with.

Purchasing a whole life plan puts in place a legacy plan so that you can focus your investment efforts on building your wealth for your dream retirement.

Perhaps you’ve already factored in your children’s inheritance into your financial strategy? There might still be an instance where getting whole life insurance might be a better fit, especially when it comes to getting insurance for your child.

What type of insurance is best for my child?

If you’re getting life insurance coverage for your child for the sake of providing financial protection, my suggestion would be to not get it. Before you click off, hear me out. The purpose of life insurance is really to protect your loved ones if anything happens to you, but in this case, your children do not have anyone depending on them.

You’re better off investing this money in other investment instruments or even an endowment plan for certain milestones, like your child’s future education.

However, if you’re looking to get critical illness or early critical illness coverage, then a whole life plan might be more cost-efficient, and can also double up as a great gift when they come of age.

As mentioned, treatments for CI tend to be very costly. And unfortunately, it doesn’t discriminate by age. Therefore, it’s important to ensure that your child is sufficiently covered for CI.

One possibility would be to get a whole life plan with a CI rider, especially when they’re younger and their premiums are much cheaper with a low likelihood of facing any health exclusions.

Getting a whole life plan for your child when they’re young – even when they’ve just turned 1, might be the gift that they never thought they needed but would be grateful to have in the future.

You can opt for a limited pay whole life plan and pay off their policy’s premiums before they even come of age. Giving them the gift of lifelong protection coverage makes for a meaningful and useful gift.

Conclusion

While whole life insurance is not all bad, there are instances where it beats out a term plan – which boasts affordability, flexibility, and gives you the option to reinvest your money elsewhere to make it work harder for you.

Bundling your investment with your protection is not the wisest choice, as you don’t really get a transparent view of the portions of your premiums that go towards protection, wealth accumulation, and other expenses like sales commissions.

Generally, if you’re willing to put in the work to ensure that you have sufficient financial plans such that you’re financially secured when your insurance coverage expires, getting a term plan would definitely be a better option out of the 2.

Interested to understand more about term life insurance and how to select a term plan that is aligned with your needs? Check out our guide to term life insurance in Singapore.

If you’re still unsure which type of insurance would fit your needs, speak to one of our experienced financial advisors, who’ll ask all the right questions and offer their unbiased recommendations on what type of insurance is the best for you.

A common theme throughout this article is that there are many considerations to make when choosing your life insurance and it should not be a decision that is made lightly. So do ensure you do sufficient research or speak to an expert before making your decision.

References

https://www.investopedia.com/term-life-vs-whole-life-5075430

https://www.nerdwallet.com/article/insurance/term-vs-whole-life-insurance

https://www.fool.com/retirement/2020/02/10/heres-why-you-should-avoid-whole-life-insurance-li.aspx

https://www.lia.org.sg/media/1332/protection-gap-study-report-2017.pdf

source https://singaporefinancialplanners.com/blog/term-vs-whole-life-insurance/